by Allen Best
The Comanche 3 coal plant began generating electricity in May 2010, and it was expected to continue operations until 2069. The cost of coal compared to renewables several years ago made that problematic.
Based on several recent sessions at the Colorado Public Utilities Commission, Xcel Energy may have to explain why it shouldn’t be closed far, far sooner.
Xcel Energy, the primary owner, may have already reached that conclusion. Xcel is scheduled to play its cards with state regulators on March 1, the deadline for filing its required four-year electric resource plan. That plan will give the Colorado Public Utilities Commission a clearer idea of how Xcel intends to comply with the state law requiring it to achieve an 80% reduction in emissions compared to 2005 levels.
March 1 is also the date that an investigation ordered by the PUC last week must be completed. The investigation must delve into what the cost of energy produced by Comanche 3 has actually been, when all the expenses of repairs are considered, and what it is costing ratepayers today based on a levelized cost. The investigation must also determine the warranties that Xcel had and so forth.
PUC commissioners Meghan Gilman and John Gavan suggested tweaking of the scope of investigation and, along with Jeff Ackermann, approved the study.
They had conceptually approved the study in May. See Retire Colorado’s newest coal plant?
Comanche 3 appears to have been an expensive lemon, at least so far. It’s been idled again—as has frequently been the case in the last 10 ½ years—for much of this year, and right now is not scheduled to begin operations again until Thanksgiving or Christmas.
A new financial tool
The PUC’s investigation should be seen in tandem with another discussion at the PUC in mid-October, this one about a financing device called securitization.
The information meeting called by the PIUC commissioners should best be understood as a message to Xcel Energy that it needs to seriously, seriously consider using the financial tool of securitization as it contemplates the future of Comanche 3 but also other remaining coal plants.
Comanche 1 and 2 are already scheduled to close in the next few years. But that will leave two units at Hayden and Pawnee, located near Brush, plus Comanche 3. Securitization could conceivably be used to hurry up the retirement of all those units, if the means is found to ensure reliability.
Two things are going on here—and this stuff gets wonky. But remember, the wonky stuff is really about trying to avert a planetary crisis caused by accumulating greenhouse gas emissions.
First, consider the rules under which Xcel, but also other privately owned utilities, operate. The rates they charge customers are based on their investments, what is called the rate base. This gives the utility incentive to want to “own” a lot of property that is being depreciated over long time periods. Colorado, as state policy, has an interest in getting these “assets,” i.e. coal plants, closed.
Second, Colorado has a policy of wanting to provide a “just transition” for those who work in the coal sector, both mines and thermal units, during this transition. There’s a law, even an office (of one employee, as of August), but no money to help provide new training for coal workers and tax relief for coal-dependent communities. Securitization is being studied as a way to help provide benefits in the communities where Xcel operates.
What is securitization? Uday Varadarajan, a principle at the Rocky Mountain Institute and Precourt Energy Scholar at Stanford’s Sustainable Finance Initiative, gave a meaty, four-course presentation to the PUC in October. He sketched a broad national picture. Utilities have been slow to retire their coal plants—and since 2004 have actually increased their investments in coal, partly through improved emissions control equipment.
Colorado falls in line with that national trend when you consider that Comanche 3 came on line in 2010 and the costly upgrades to the plants at Pawnee and Hayden plants.
Xcel ranks among the top 10 utility holding companies in both coal capacity and unrecovered coal investments,” Varadarajan said. He went on to say that Xcel’s coal units account for a “significant fraction of its rate base and earnings—and weigh down customer bills.”
In Colorado, Xcel has unrecovered costs of over $700 million now in its coal plants. This compares with $200 million in 2005 inclusive of possible future costs of decommissioning and reclamation, he said.
In other words, Xcel still owes a lot on that coal plant. (Holy Cross Energy owns 8% and Intermountain Rural Electric Association owns 25%, but their economic models do not depend upon having “rate base.”)
“These historic investments have a direct impact on the utility’s earnings and rates today,” he said. “To retire them quickly, while debt remains, would result in what he called “rate shock.”
Funds for Just Transition
That’s where securitization comes it. Colorado lawmakers in 2019 authorized the tool. The concept is often compared to refinancing a house to take advantage of lower interest rates. Instead of paying 8% to 10% on its debt at Comanche or other plants, Xcel would pay 3% to 4% over the same time period. The new, lower-interest money is secured by surcharge on customer bills. Early retirement of an asset using securitization without capital recycling would be unattractive for utility shareholders, but better than most other options, said Varadarajan.
Securitization, said Varadarajan, is a “foundational policy of the energy transition” because it allows utilities to more rapidly retire uneconomic coal plants, benefitting utility shareholders but also customers.
But securitization can also deliver funds to other needs in the transition—including for community and worker benefits.
New Mexico adopted securitization as part of its Energy Transition Act in 2019. The Albuquerque Journal last week explained that the law requires Public Service Co. of New Mexican, or PNM, to replace all its coal with carbon-free generation but also allows PNM to recover its investment through bonds that would be paid off by ratepayers, or securitization.
This allows PNM to exit from the Four Corners Power Plant. The bonds could include about $10 million in economic development assistance for the Four Corners area to offset the region’s loss of jobs and tax revenues.
This potential deal involving the Four Corners plant is similar to the $40 million in local economic development assistance in PNM’s plan to exit the San Juan Generating Station in 2022. Both plants are near Farmington.
At the PUC meeting, much attention was given to securitization as a way to deliver funds to communities impacted by closures of Xcel’s plants.
(And why not Craig, where Tri-State is the primary owner of coal plants? The simple answer is that because Tri-State already has access to low-cost money, because of its status as an non-profit, securitization is less attractive).
State Sen. Chris Hansen, the Denver Democrat who was the key driver of the securitization provision in 2019 legislation, said he thought it was appropriate to carve out a portion of proceeds for community and worker assistance. The figure of 15% was mentioned.
This would cause Xcel ratepayers to pay for community assistance, but that’s appropriate because they benefited from the assets in question, Hansen said.
“Yes, it would be wonderful if there were some big federal grants,” he said. “but there is some direct responsibility by ratepayers who benefited from the asset to help pay for the transition.” And he then pointed to the state’s covid-depleted general treasury.
Allen BestAllen Best is a Colorado-based journalist who publishes an e-magazine called Big Pivots. Reach him at email@example.com or 303.463.8630.