WICHITA, Kansas — Utility companies in Kansas will soon have a new accounting tool that could speed the closure of coal-fired power plants — and save customers money.
The financial tool is known as securitization. It’s not a new idea, but it is complex. The Kansas Legislature passed a bill approving the use of the tool after more than two years of discussion.
Here’s what you need to know about the change, and how it could remake how utilities generate electricity in Kansas.
What is securitization?
It’s a way for a utility company to refinance what it owes on some of its large investments — think mostly coal plants — at a much lower interest rate.
Instead of paying off an old loan at a higher interest rate, a utility can clear the debt from building a plant off its books, replacing that cost with a lower-interest bond backed by bill-paying customers.
And while the debt is paid off through the new bonds, the utility has new freedom to switch to cheaper sources of energy like wind, solar.
How will this save customers money?
One key is how the sort of return utility shareholders are promised by state regulators. Without the refinancing, they’re promised about a 9% return on the money they invested in an old power plant. With the refinancing, the company no longer makes a return on the plant and customers only have to pay the interest from the bond — about 2%.
Closing a plant also eliminates operational and maintenance expenses. If replaced with renewable energy, a closure also eliminates fuel costs. A utility company doesn’t make money on that fuel, but does pass the expense on to customers.
Ashok Gupta, an energy economist with the Natural Resource Defense Council, said replacing coal with renewable energy is better for the environment, less expensive to operate and provides utilities with new investment opportunities.
“That’s what creates this win-win-win for utilities, their customers and the environment,” he said.
State regulators won’t sign off on any plan unless utilities can show that the total costs of retiring and refinancing a plant and any new investments won’t increase customers’ bills.
What could go wrong?
Some environmental advocates worry that the tool won’t be used to replace aging coal with renewable energy. They wanted rules demanding that new investments go toward renewable energy.
“We do a disservice to our state, to our citizens and to the environment if what happens is we retire the coal plants and instead build a whole bunch of gas plants,” said Dorothy Barnett, the executive director of the Climate and Energy Project.
What incentives does a utility company have to use the tool?
It’s all about money. Operating aging coal plants is expensive, and increasingly unprofitable. As long as those investments are still on the books and running, there’s only so much new investment regulators will let a company make.
Evergy lobbyist Jason Klindt said without access to this low-cost type of financing the best course of action for the company would be to keep coal plants running. That’s because it would be the only way to provide the return its shareholders expected.
So if everybody wins, why didn’t regulators let utilities play with the books like this before?
Before the effort to transition away from fossil fuels started to gain steam, utilities didn’t have much reason to think about shutting fossil fuel plants down early. The coal plants were essential, cheap and working the way the utilities thought they would when they made the original investment 40 - 50 years ago.
But the transition is happening. Renewable energy is cheaper and cleaner than coal.
Is anybody else doing this?
Some states have also used the tool to help pay for repairs when natural disasters destroy infrastructure. In Kansas, natural gas companies have said they’re interested in using the tool to cover costs that came with when natural gas prices spiked during the February cold snap.
Brian Grimmett reports on the environment, energy and natural resources for KMUW in Wichita and the Kansas News Service. You can follow him on Twitter @briangrimmett or email him at grimmett (at) kmuw (dot) org. The Kansas News Service is a collaboration of KCUR, Kansas Public Radio, KMUW and High Plains Public Radio focused on health, the social determinants of health and their connection to public policy.
Kansas News Service stories and photos may be republished by news media at no cost with proper attribution and a link to ksnewsservice.org.