Today’s changing economic realities are significantly boosting renewable energy’s potential to lower utility costs for consumers. In Colorado, Ron Lehr and a team of financial analysts revealed the stunning results of a two-year study of clean energy generation potential.
Renewable Energy Realities in Colorado
At the end of 2013, following a planning process started five years ago, the Colorado Public Utilities Commission (PUC) approved an acquisition portfolio that included 620 megawatts of wind and solar resources. It turned out that renewable energy resources were entering the Public Service Company (PSC) competitive bid process at prices that would reduce costs to consumers. Not only that, but wind and solar bids were also coming in at costs lower than the average costs of the existing generation fleet.
This new economic reality is wrecking havoc on utilities’ investment strategies everywhere, not just in Colorado. But, luckily for Colorado residents, in 2004 voters passed a renewable energy standard (RES) initiative through a popular vote. This initiative specifies that renewable energy should be developed “to the maximum practicable extent” in order to save Colorado consumers and businesses money.
Colorado’s 2004 RES sets a mandate requiring utility compliance. While renewable energy’s cost-competitiveness came as some surprise, the subsequent economic realities are not making everyone happy. The question taking center stage is, “Why not retire old coal powered plants now that cheaper, cleaner energy is economically viable?”
As outlined by Ron Lehr at Greentech Media, Lehr and a team of financial analysts took up this challenging question and have spent two years in search of an indisputable answer.
With a team of financial analysts from California and clean energy advocates from Colorado, Lehr affirms that the time is right to retire coal in Colorado. Lots of coal. 6,000 Gigawatt-hours of dirty, polluting, climate-changing coal, to be exact.
Two gigawatts of cheap, clean Colorado wind power, Lehr reports, is now able to cost-competitively replace 6,000 GWh of coal-based generation without impacting energy reliability.
Colorado’s PSC, and it’s holding company, Xcel Energy, has a proposal before the PUC to build and own a new 600-megawatt wind farm. With a broad RES compliance program, Xcel is the state’s largest utility and leads the nation in renewable energy integration.
It should be a no-brainer to retire the state’s older coal plants, but there are significant reasons why utilities all across the country are reluctant.
The main problem is that utilities continue profiting from old plants for as long as they can hold onto them. This is because utilities are incentivized to invest capital into their power plants (and transmission and distribution, as well) through long-term depreciation schemes.
Regulators allow utilities to earn up to a set, authorized rate of return on the equity portion of capital invested. Depreciation should, theoretically, reduce the account balance over a set term, and a zero balance should flag the plant for retirement. But, by continually reinvesting equity back into the old coal plant’s operations via expenditures for new repairs, new pollution control equipment, etc., depreciation schedules are continually revised and extended.
This means that, as long as the plant is in service, utilities are earning the maximum return on their equity investments for every penny that is not yet depreciated. The rate that customers pay for their electricity is then allowed to rise, in order to cover the costs of generation as well as new expenditures, and any leftover revenue is just that much more food for the golden goose.
No one gives a flying pig about what dirty, polluting, climate-changing coal plant emissions are doing to our lungs, our planet, or our children’s future. Utilities are incentivized to care more about spending money on the golden goose.
Retiring an old coal plant “early,” meaning before it is depreciated down to zero, would result in lost returns, as well as “stranded” equity. Without a financial rescue plan compensating a utility for the loss of its golden goose, any change in “business as usual” is doomed to inevitable, foot-dragging failure.
How to Financially Incentivize Retirement?
From “Why not retire old coal powered plants now that cheaper, cleaner energy is economically viable?,” the real question became more focused: “How can fossil plants that raise the cost of service to consumers be shut down or retired in favor of new wind and solar to support, rather than oppose, the utility’s financial interests?”
Under the 2010 Colorado “Clean Air Clean Jobs” Act, a round of early coal plant retirements found a workaround for the stranded assets situation. The un-depreciated amounts were simply left on the books (and in customers’ rates) as though the retired plants were still in service. With customers effectively subsidizing the retirement, utilities were allowed both the return of their equity and their return on it, too.
One alternative Lehr and his team suggest is refinancing the depreciation amount with lower-cost debt by paying the utility with proceeds of a bond issuance. This would more effectively remove the asset from the books and (more fairly) save consumers money. Additionally, new, more productive investments could be immediately considered.
Another alternative suggested is allowing utilities to own more wind. Without this option, a utility must incorporate renewables by signing power-purchase agreements (PPAs) with wind and solar developers. There is little incentive for a utility to simply buy and sell energy on which they don’t profit.
However, Lehr reports, “our assessment shows new wind investments provide attractive earning potential for the utility, much more effective per dollar invested than old coal plant investments they now carry on their books.”
Replacing Colorado Coal Plants with Wind Power
“Since wind and solar costs are continuing to decline,” notes Lehr, “other utilities and states could eventually encounter the situation described in our financial analysis of the PSC, where new wind can beat operating costs of old fossil generation.” He continues, “As other stakeholders look into financial impacts of crossing the threshold where new renewable energy costs less than old fossil fuels, we hope Colorado’s experience encourages similar analyses in other places.”
Financial modeling revealed that “Seven of 10 remaining PSC coal plants have variable operating and maintenance (O&M) and fuel costs higher than new wind, assumed to be available in Colorado with the Production Tax Credit (PTC) at $25 per megawatt-hour (MWh).” Lehr explains, “While the actual costs of new wind and solar being added to the PSC system right now are confidential, we believe the PSC can build new wind at these prices.”
Public documents filed by one of the PSC’s sister companies at New Mexico’s Public Regulation Commission listed wind costs for three projects at $19, $20, and $21 per megawatt-hour. Lehr and his team of analysts also found costs in the same range from Lawrence Berkeley National Laboratory analyses on wind costs around the country, “including costs for wind in the ‘interior’ section of the country.”
Lehr offers additional important points to consider. “Wind in Colorado has to provide its own transmission to connect with utilities,” he explains, “so these wind costs include lines necessary to deliver power. Also, no carbon or other emissions values were included in the financial analysis, so if these real costs were added to the evaluation, additional old coal plants would cost even more to run than new wind.”