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One Way to Retire Coal Plants: Buy Out the Owner

In 2016, New Mexico’s Kit Carson Electric Cooperative left its long-standing power supply relationship with Colorado’s Tri-State Generation & Transmission Association behind.

Kit Carson paid nearly $40 million to sever its relationship with Tri-State, after realizing it could save its customers even more money — $50 to $70 million — and get access to more renewables by contracting with Guzman Energy, a wholesale power provider. Since Kit Carson made a run for the door, numerous Tri-State members have considered the same.

Think tank Energy Innovation, in a new analysis released Tuesday in partnership with energy modeling company Vibrant Clean Energy, is elevating Kit Carson’s flight as a model for coal retirement that allows third-party, private financiers — including energy providers such as Guzman, investors or renewables developers — to push municipal and co-operative utilities toward more renewables.

Under their model, a financier would buy out a utility’s investor obligations in an existing coal plant and pay for the plant’s decommissioning plus the costs of new solar generation (environmental remediation costs generally stay with the utility). The financier wins by securing returns associated with a long-term supply contract, while the utility gets to reduce its costs. When packaged together in a single process, Energy Innovation and VCE say as much as 22.5 gigawatts of muni and co-op-owned coal could be retired in favor of more economic new solar in 2025.

“Kit Carson is clearly not the only cooperative customer … that is looking for a better deal and a cleaner power source,” said Mike O’Boyle, director of electricity policy at Energy Innovation, and an author of the study. Indeed, Guzman has already contracted with another Tri-State defector, Delta-Montrose Electric Association.

Tri-State G&T is a cooperative comprising more than 40 electric distribution cooperatives and public power districts in four Western states, accounting for more than 1 million customers.

Why uneconomic coal plants are kept online

According to the analysis, even more coal plants could likely be retired if replaced with solar sited at wider distances (wind is also a viable alternative but is generally more location-specific than solar). And that capacity ripe for retirement may grow if solar costs fall more rapidly than currently forecast, as solar costs have been known to do.

Though investor-owned utilities could also pursue what Energy Innovation calls “solar-for-coal swaps,” the model is likely most viable for publicly-owned municipal and co-operative utilities, said O’Boyle, because they aren’t beholden to shareholders. While a utility counts on a return on equity throughout the life of a coal plant — even if it costs more to run than new renewables — publicly-owned utilities are more focused on benefits for their customers.

“There’s not an opportunity cost to the publicly-owned utility of retiring the coal early. If they can refinance and have a healthier balance sheet and also cleaner, cheaper power for their customers, that’s just a win-win,” said O’Boyle. “With the regulated utility that’s investor-owned, you have the additional layer of ‘what’s in it for the shareholder?’ If the answer is ‘nothing,’ it’s kind of a non-starter.”

“Advocating for the early retirement and securitization of these assets is not aligned with maximizing shareholder returns,” he added.

Investor-owned utilities that have been pushed to retire coal plants, such as Public Service Company of New Mexico and the Northern Indiana Public Service Company, have pursued other financing options such as securitization and accelerated depreciation. The former process relies on assets from bond sales to fund retirements, while the latter pushes costs onto customers.

Coal consumption has been steadily declining in the U.S. since 2007. Yet while more utilities are being dragged away from it by state-mandated renewable portfolio standards and climate goals, and many utilities are establishing their own targets due to the favorable economics of new renewables, coal remains a persistent part of the U.S. energy mix.

In 2018, the United States closed down 13 gigawatts of coal plants, second to only 2015 for coal capacity shuttered, according to the U.S. Energy Information Administration. But the U.S. was still home to 179 gigawatts of coal plants in 2018 that were less economic than new-build solar, according to Energy Innovation.

EIA has forecast 90 gigawatts of coal retirements between 2019 and 2030, citing low natural gas prices and “efficiency of the natural gas generator fleet” as the reason for many of those anticipated closings.

Energy Innovation wants renewables to step in. Tri-State now seems to see that opening, too. After watching several members eye the door, Tri-State in January of this year pledged to abandon coal altogether by 2030. The G&T plans to reach 50 percent renewables by 2024.

Source: Greentech Media