Hey #energytwitter! Been a while since I rapped at ya. How about a thread on how the securitization of undepreciated coal plant capital can accelerate the greening of the electric grid? (Honestly, if that doesn't keep you to keep reading, I can't help you.) Here we go:
1. Triggered by this piece this morning about efforts to do so in Wisconsin. energynews.us/2021/02/25/mid…
2. To understand why this is necessary, you need to understand that under the traditional regulated utility construct, a utility invests capital in exchange for a guaranteed rate of return, earned through kWh sales.
3. Whatever one thinks of that approach, as a matter of contract law, if you invested the capital to build the plant (and subsequent upgrades) subject to that understanding, you have a reasonable expectation to earn the return.
4. The problem arises when those plants are no longer economic and can't compete in a deregulated electric grid. Much of the nations' coal fleet is - shall we say - half-pregnant with deregulation. Built in one paradigm, but operating (sort of) in another.
5. (I say sort of because even if they are still earning regulated rates, they are connected to grids with actors who are not and affect supply/demand balances. Too much detail to go into there...)
6. But if you'll accept the simplification, you now have plants that are earning revenue per kWh in excess of what is available from cleaner sources, but they haven't yet amortized all their capital.
7. This creates a challenge for utility regulators because if those plants were shut down in response to economic, competitive forces, all that non-amortized capital would be "brought forward" and charged to the next year's kWh revenue, rather than being spread out over time.
8. In other words, a big rate spike that will be blamed on coal plant retirement but is actually the result of a contractual obligation that prevents them from writing down that investment (as players in the unregulated world must do when their assets can no longer compete.)
9. This is goofy. It's complicated. It 'taint right. But it is the existing law, and we must play the cards we are dealt. Enter securitization.
10. The securitization essentially creates a bond issuance that pays down that capital per contract, but spreads the cost to consumers (ideally) over the same time period as the prior capital.
11. Thus, all economic actors are equivalently situated, but we've shut down a polluting source of expensive energy to free up space for cleaner, cheaper sources to come on line.
12. The devil is of course in the details. And it's purely a transitional policy. But the hardest political challenge with the clean energy transition is how to deal with the wealth transfer from energy producers to consumers.
13. Politically speaking, losers always cry louder than winners cheer. So this is a way to ease that pain and accelerate the transition. And on balance, a good thing. You may now return to your regularly scheduled programming. /fin
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