Securitization: a way to fairly finance coal plant retirements

We've talked about why coal ash cleanup costs should be paid by Duke Energy shareholders rather than the public, and how Duke Energy’s uneconomic coal plants are a continuing burden for North Carolina ratepayers.

Now let's discuss a tool that Duke Energy can use to cover those costs. This financing method is called ratepayer-backed bond securitization. Securitization would allow Duke Energy to transition to cleaner energy and provide a financial way for coal communities impacted by closures to transition their economies.

The N.C. Sierra Club supports authorizing securitization to pay for retiring coal plants as 24 other states have done, even though not all of them are using it for these specified purposes.

As we related previously, the Sierra Club’s expert witness from Synapse Economics recently testified before the N.C. Utilities Commission that, if North Carolina’s uneconomic coal plants remain in operation until 2029, ratepayers will continue to pay billions of dollars for their operation.

The conundrum is how to move forward now with clean energy investments without making current ratepayers pay for coal assets that no longer benefit them. Because Duke Energy is expected to recover its investments over the full life of its assets, any early coal retirements may leave undepreciated capital, known as a “stranded asset.”

With securitization, ratepayers essentially buy out Duke Energy’s debt on its non-economic coal plants. Securitization cuts out a utility’s traditional financing role as the middleman between ratepayers and investors.

In the ratepayer-backed securitization scenario, Duke Energy would be authorized to issue a bond on behalf of ratepayers, and the bond would be used to cover stranded asset losses. In turn, the customers would pay the bondholders through a bill surcharge, but at a lower overall cost than paying the utility directly.

Effectively, the ratepayers buy out the utility’s debt on a non-economic asset. The extra savings from securitization can help provide a just transition for communities most affected by coal plants. The Sierra Club released a report in 2018, “Harnessing Financial Tools to Transform the Electric Sector,” that explains this process in more detail.

This sounds complicated, but it's essentially like refinancing a home. For a securitization to yield the lowest-possible cost of debt, the N.C. General Assembly must pass legislation to create a “securitization company,” issue the bonds, and repay the bonds from ratepayer charges. The 2019 legislature authorized securitization for storm recovery costs; that authorization should be broadened to include coal plant closures.

North Carolina may be at a standstill on closing coal plant retirements if we debate whether or not shareholders should be held liable for regulator-approved investments. A better path forward is to do what almost half the United States have done and pass legislation permitting securitization of utility assets. Current ratepayers should not be saddled with rate spikes for coal retirements. The financial sector - through securitization - offers an opportunity to ease the transition, so why not take it?