Clean Up: Financing the retirement and remediation of coal-fired power plants
December 1, 2012
Utilities and regulators are pushing to meet evolving green energy requirements, and securitization offers a cost-effective way to finance the cleanup.
The coal-fired power plant industry is one of the most obvious candidates. The Environmental Protection Agency (EPA) has proposed or finalized four regulations affecting coal-fueled electricity generating units, which provide almost half of the electricity in the United States: the Cross-State Air Pollution Rule, the Mercury and Air Toxics Standards, the proposed Cooling Water Intake Structures Regulation and the proposed Disposal of Coal Combustion Residuals Regulation.
All are designed to measure, control or limit the effects of global warming and overall climate change. Complying will cost the industry upward of $20 billion a year.
There is also a role for securitization to play in financing the construction of more energy efficient buildings and public works projects, the production of renewable energy and the lowering of greenhouse gas emissions, although there have been fewer of these kinds of deals to date.
There are still some kinks to be worked out. Energy use is a function of many things that a structure must adjust for. Even in the deals that have had reasonably sophisticated methodologies, too much time is spent monitoring the measurement and verification. In most cases the opportunity for savings is relatively finite, and the amount of money and value being captured is quickly overwhelmed by the difficulty of documenting and finalizing a deal.
Nevertheless, climate-change legislation and regulation and renewable portfolio standards are compelling issuers to find long-term financing solutions, and the securitization market has proven adaptable in the past.
For coal-fired power plants, the choice is to either retire or refurbish; each comes with its own costs that if financed through rates alone, could significantly impact the ratepayers' bill. Coal plants are very dirty, and even if they are shut down, the property has to be remediated to clean standards. "Older coal plants are often substantially contaminated and if you are going to shut them down and you want to reuse property then it's going to cost a lot of money," said J. Paul Forrester, a securitization partner at Mayer Brown based in Chicago.
Forrester noted that remediation is particularly important in places like the Windy City, where older coal-fired plants are often located on prime real estate. For example, the Midwest Independent System Operator is looking at more than 50-plus giga-watts of generating capacity from its coal-fired plants that are likely to be retired over time, and by 2016, many of these plants will be shut down.
A July 2012 report by the U.S. Government Accountability Office breaks down some of the costs associated with retrofitting a typical coal-fueled unit with a capacity of 700 mega watts (MW): installing a scrubber (a device used for removing impurities or pollutants) can range from $287 million to $351 million; installing a catalytic reduction unit can range from $116 million to $137 million; installing a fabric filter can range from $97 million to $114 million.
It remains to be seen exactly how many plants will be retired and how many refurbished, but the Union of Concerned Scientists estimates that the equivalent of 288 coal-fired generating units supplying 3.8% of the electricity used in the United States in 2009 (the most recent year for which such data are available) have been scheduled for closure.
Either way, utilities must find long-term cleanup financing that will not affect their customers, and Forrester believes securitization provides a solution. "Utility companies have a persuasive case - they are being told to retire the plants, so those retirement charges should be securitized and paid for by ratepayers to minimize the rate impact of the closure and clean-up," he said.
Ronald Borod, a securitization partner at law firm DLA Piper, said that some of the securitizations that have been "talked about" to provide revenues for retrofitting aging power facilities are modeled on stranded costs securitization techniques.
"You pretty much have to be able to add a line item to the utility bill to help pay for that retrofit, just like in a stranded cost. You add a line item to help pay for costs that are not going to get recovered by the utility," he said. "When the payment of that line item comes through, it is captured in a lock box and it is dedicated to the retirement of the stranded costs bond, or in this case, retrofit bonds. It would also have to be done by a statute that would allow the utility to impose that additional cost on the customer."
Saber Partners, a financial advisory firm specializing in the power industry and municipal finance, has moved away from calling the structure a stranded cost, according to chief executive Joe Fichera. Instead the bonds that the firm has worked on over the past decade have been rate payer obligation charges (ROC) bonds.
Beyond Stranded Costs