State has ‘enormous opportunity’ to transition from coal

Sheila McGuire, Herald Reporter
Posted 7/24/20

Third of four webinar coverage

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State has ‘enormous opportunity’ to transition from coal

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EVANSTON — The third of four webinars hosted by the Powder River Basin Resource Council on Reclaiming and Growing Wyoming’s Future held earlier this month focused on securitization as a finance tool for energy transition. Presenters at the webinar were Rocky Mountain Institute economist Uday Varadarajan, who has previously overseen projects for the U.S. Department of Energy and the Stanford Sustainable Finance Initiative, and Max Backlund, senior research associate with the Kem C. Gardner Institute at the University of Utah.

Utility securitization can be a difficult concept to understand, but, according to Varadarajan, it is a financial tool that may be able to help Wyoming coal communities deal with the decline of the dominance of coal in energy production and the associated early retirements and closures of coal-fired power plants.

Varadarajan provided some context, similar to that shared in previous webinars, on the importance of coal in energy production in the United States.

“Coal, of course, has been the dominant source of electric power for most of our history and has been the engine that drove the post-war development that we have seen and the incredible economic expansion, but we have seen a substantial decline over the last decade to two decades and in 2020 that decline is seeming to accelerate, with the possibility that it might provide less than half as much as it did during its peak of the electricity across the country,” he said.

One factor in coal’s decline has been the “explosion” in the use of natural gas due to the decreased costs associated with that resource, while another is the expanded use and declining costs of renewable energy sources, including wind and solar.

“As a result, what we’re seeing is that utilities are now finding it cheaper to buy energy from renewable plants than it is to keep burning coal in their existing plants,” said Varadarajan.

However, the economic transition away from coal, which possibly reduces electricity costs for people in some areas of the country, can result in significant economic harm to coal communities due to direct economic impacts of lost wages in what are typically well-paying jobs, property taxes, sales taxes paid by employee spending and more, as well as indirect impacts rippling through the labor force and decreased regional economic activity.

In addition to those significant harms to coal communities, however, Varadarajan said customers and people in those communities often end up paying even higher costs for electricity because of the traditional model of regulated utility financing that ends up shifting most of the near-term costs and risks of transition to customers.

He explained that with older power plants, customers are paying for fuel, operation and maintenance costs, as well as capital construction costs, all wrapped up in electricity costs. When a new non-coal power plant opens, it might be assumed that the increased costs associated with coal plants would go away, but that is not what happens in reality. What actually happens is that any outstanding capital costs associated with the old plant are added to the costs of the new plant, utilizing a rapid amortization schedule and an 8-10% return, which results in increased consumer costs — even though the costs of electricity generation with the new plant have decreased.

“Even though a replacement of a resource in the long run may make a lot of sense for customers, in the near term, customers don’t necessarily do better with this replacement,” said Varadarajan. Simply put, coal communities can be hit with the loss of jobs and income, tax dollars, spending, etc., plus be stuck with increased power bills.

Securitization is a financing tool Varadarajan said could be used to help coal communities deal with several of those problems related to coal plant closures and “reduce the burden on those paying for power as well as the communities that host the coal plants by basically bringing forward some of the benefits of lower-cost power in the future back to today to help those who currently would be negatively impacted by a transition like this.”

In addition to helping consumers and coal communities, securitization can also make utility investors “whole,” which Varadarajan said is important to ensure the utility companies themselves aren’t completely resistant to the idea. In order to utilize and implement securitization, he said all stakeholders have to be on board in a complex and lengthy process that requires state legislative action. Securitization is not new, Varadarajan said, and has been utilized for decades in numerous states to deal with closures and unforeseen costs.

“The basic idea behind securitization is if you’re paying for a plant that’s no longer going to be in operation … there’s no reason to pay an 8-10% return on those costs or to pay it back as rapidly as a utility is able to generally get. What you do is instead, use bond financing and go out and get cheap bond financing. You refinance that obligation to repay the utility with lower cost debt,” he said.

“When you do that, you’re able to continue to pay off those old plant capital costs on the original time frame that plant would have operated,” he continued. “You’re able to take that 8-10% return … and replace it with a 3-4% return on a bond. That creates some savings for customers in the near term from that transition. As a result, if you are willing to also increase the size of that bond, you can also finance transition assistance.”

The result, he said, is that electricity costs could decrease for customers, and coal communities could see some type of “meaningful benefit.”

That transition assistance could take the form of job retraining or other investments, including potentially utilizing existing infrastructure to take advantage of resources unique to Wyoming. Varadarajan said Wyoming has world-class on-shore wind resources that have been largely undeveloped, many of which are located “reasonably close” to old coal plants, so that existing transmission infrastructure could be converted using transition reinvestment funds. He said this could be particularly beneficial because many of Wyoming’s surrounding states have passed legislation requiring a transition to renewable energy, yet those states don’t have the wind resources that are available in Wyoming.

To pursue securitization, state legislators must pass legislation allowing for bonding and a bond surcharge to be added to power bills, as well as specifying how transition assistance would be utilized. The process is easier if the regulated utility operates entirely within the borders of one state; however, Varadarajan said it could still possibly be pursued in Wyoming even though Rocky Mountain Power/PacifiCorp operates in six western states. As an example, based on financial modeling, he said, “If PacifiCorp were able to use securitization across states and allocate just 15% of financial savings for coal communities, it could raise $150 million for coal communities across its service territory,” although it would certainly be possible to allocate more than the 15%, while also saving customers about $650 million annually in reduced financing and energy costs.

Backlund, the University of Utah researcher, then presented information on the Utah Coal Country Strike Team to provide an example of a regional initiative in Utah’s Carbon and Emery counties to help those communities handle an economic transition away from coal. The Coal Country Strike Team came together to respond to a competition by the State of Utah entitled the American Dream Ideas Challenge, which challenged communities and regions to develop ideas to help raise middle-class incomes in economically struggling areas and then awarded funding to help those communities act on their ideas.

Both Carbon and Emery counties have traditionally been heavily reliant on coal and are therefore also facing losses due to retirement of coal-fired power plants. While as a state, Utah has been booming economically in recent years, the state’s coal country has not enjoyed the same growth. The Utah Coal Country Strike Team exemplifies what Backlund said are crucial pieces of any economic development projects — namely that the processes and plans need to be locally driven, utilizing a large group of diverse stakeholders with varying viewpoints and backgrounds.

Backlund said the Utah group started out by identifying common ground and recognizing and honoring the benefits that coal has historically provided to communities, both economically and in terms of cultural identity. Backlund said those discussions and open dialogues are key in establishing a unified team that is able to honor the past, recognize the present and move toward the future with a shared vision of economic diversity.

The group was very mission focused and relied heavily on data, he said, while critically looking at the area’s strengths and challenges to develop a strategy. Identified strengths included broadband availability, educational opportunities and the beautiful natural environment. The strike team opted for a four-pronged strategy of initiatives instead of focusing on just one area, with the thought being that having multiple areas of focus would lead to greater diversity and community resiliency.

The four prongs were split into two areas — job creation and investment. Job creation focused on what the team labeled “Silicon Slopes East” and “Red Rock Gateway.” The idea behind Silicon Slopes East was to utilize the area’s broadband to focus on remote work opportunities in the tech industry that has grown exponentially along the Wasatch Front, an idea that has been bolstered during the pandemic as remote work has exploded. Red Rock Gateway focused on the recreational opportunities in nearby communities where tourism has exploded and encouraging people to visit less popular areas. Tourism, however, must be pursued carefully, he warned, because of a tendency for tourism-heavy communities to develop an abundance of low-wage service jobs combined with a very high cost of living and expensive housing, creating new challenges for those communities.

Investment ideas included a focus on affordable housing opportunities, while a focus on custom incentives included tailoring specific incentives to specific employers to lure them to the area. Backlund said part of his work through the University of Utah is helping groups in communities understand they’re “not competing in a bubble” and must look at context and unique localized assets. His hope was that sharing the Utah example could help communities in Wyoming use a similar model to address local challenges.

Both Backlund and Varadarajan stressed the opportunities available in Wyoming despite coal’s downturn, saying the opportunities in Wyoming are “enormous.” The two said the national and global challenges accompanying the pandemic are also creating new opportunities, including financial assistance for communities.

“I think Wyoming has a bright future ahead of it,” said Backlund. Varadarajan said, “I completely concur with Max. There’s an enormous opportunity with Wyoming to transition in a way that transforms it from one of the sources of power that allowed for the development of the West to a bright future where it allows for the continued development of its own communities and the rest of the West as a center for the technologies that I think will power this next century.”