Sierra Club analysis: Utilities should embrace securitization to speed up coal retirements, ease cost burdens on customers

CHARLOTTE, N.C.— Securitization is a key financing tool that can help electric utilities accelerate the retirement of uneconomic polluting coal plants and move more quickly toward a grid powered by clean, safe renewable energy, according to a new report from the Sierra Club.

“Harnessing Financial Tools to Transform the Electric Sector: A Deep Dive into the Solar Investment Tax Credit,” examines how the cost of keeping outdated coal plants online is a bad deal for both utilities and for customers, and how securitization can alleviate that financial burden. 

Today’s coal fleets were typically built with an operating expectation of about 40 years and, in many cases, initial depreciation was set based on that expectation. There are many coal plants currently in operation that were built well before 1980, largely because utilities have refurbished or replaced original equipment such as boilers and turbines, or added high-cost pollution control equipment to try to guard against toxic releases into the air, water and land. 

But every time such a capital investment is made at a coal plant, the plant’s rate base is increased, and the expected operational use of the plant may also be extended. So, while a 50-year-old coal plant may have depreciated its initial capital balance, its presence in the rate base today may still be substantial.

For example, right now, nearly 90 percent of Duke Energy’s coal fleet is likely unprofitable, according to an analysis by Carbon Tracker, independent financial think tank that follows the energy industry.

Securitization, however, would let ratepayers refinance the amount still owed on a plant balance, swapping out a high return on capital in exchange for low-interest bonds to be paid back over decades. By refinancing with lower cost bonds, paid for over a longer period of time, securitization avoids the rate spike associated with accelerated depreciation. 

Securitization also allows a utility to get its undepreciated capital balance back immediately. This capital can be returned to shareholders and corporate debt holders, or geared toward smart investments in clean, renewable resources like solar.

On the release of the report, Dave Rogers, Southeast deputy regional campaign director for the Sierra Club’s Beyond Coal campaign, issued the following statement:

“A large amount of Duke's coal fleet in North Carolina is uneconomic, and Duke's unwillingness to consider retiring these costly plants is largely because they've got billions of dollars tied up in them. As our analysis shows, smart policies like securitization and market indexed solar can create a win-win that lowers customers' rates, shifts our energy from dirty fossil fuels to clean sources, and gives the utility the opportunity to earn revenue on the clean energy investments that communities support.”