Explore this article and audio – a glimpse into FORESIGHT's depth

Join our global community of experts, contribute your insights in commentary and debate, and elevate your thought leadership. Get noticed, add value – be part of FORESIGHT's engaging discourse. Join us today.

New finance model swaps coal for renewables

A finance mechanism that retires coal power stations and replaces them with new renewable energy capacity is gathering steam in the United States. But challenges remain in making this seemingly simple solution mainstream

Audio
: Listen to this article

Early successes with a market-led financial innovation that stimulates the displacement of coal by renewables could turbo-charge the energy transition everywhere

FINANCIAL SENSE Replacing fossil fuel power supply with renewables can help lower costs for consumers otherwise stuck with increasingly expensive electricity from dirty sources

HUGE POTENTIAL The model can facilitate the removal of large numbers of coal power stations in a way that is responsible, affordable and provides money for job retraining

KEY QUOTE It is not as simple as walking into someone’s boardroom and saying you can save them money by doing something that is also good for the world—that doesn’t get you as far as you would think

Debate around the energy transition has focused heavily on the relative cost of fossil fuels to renewable energy. But even as renewables have reached cost parity or become cheaper than fossil fuels in many markets, it does not necessarily mean that fossil fuel power stations will automatically be taken offline as a result. In the US, even though 179 GW of coal capacity was more expensive to operate than to build new solar projects in 2018, annual retirement rates amounted to just 10 GW, reports Energy Innovation, a US policy research group. The data demonstrates that even in money-driven markets in the US, renewables need more help in displacing market incumbents than just being cheaper, says the group. Now a possible solution to that problem has arrived in a new financial model currently finding its feet. Dubbed “solar for coal swaps”, the model has removed several coal power stations from the grid in Colorado and New Mexico. In its most basic form, it involves a third party paying the owner of a coal plant to retire the facility and build a renewable energy project in its place. The coal plant purchase costs and renewables investment is then repaid through a fixed rate on customer bills. In return the customer gets cheaper electricity as lower cost solar energy replaces more expensive coal on the grid. Solar projects built close to retired coal stations can take advantage of the existing physical infrastructure, such as electricity wires and access roads, lowering the renewable energy project’s capital costs. They can also partially replace the tax and employment base provided by the coal plant, according to Energy Innovation. Cash received by coal plant owners can help them clean up environmental liabilities and be used to help local communities in the transition.

SUCCESS IN PRACTICE

One of the first to benefit from this type of deal was the Kit Carson Electric Cooperative (KCEC), a utility with 29,000 members in New Mexico. Until 2016, it had been buying power from Tri State Generation and Transmission Cooperative, a wholesale power supplier that generates most of its power from coal, oil and gas. Between 2000 and 2016, Tri State’s electricity rates charged to customers had doubled from $39.06/MWh to $79.17/MWh. Guzman Energy, a utility and an early user of this type of deal, helped the cooperative to finance a $37 million exit fee to Tri State. KCEC now procures energy from a new, local solar plant, which also provides jobs to the area. The cooperative predicts that ending its deal with Tri-State will save its members $50-70 million during its ten year contract with Guzman, which will charge around $75/MWh from 2019 to 2022 while the exit fee is paid off, after which electricity rates will fall to $47/MWh. Similar deals have been carried out in Colorado. Holy Cross Energy, another cooperative with 43,000 members, sold Guzman Energy its share of electricity bought from a coal plant owned by the utility Public Service Company of Colorado in exchange for Guzman supplying it with the output from a new 100 MW wind power plant. Also in Colorado, Guzman Energy agreed in spring 2020 to pay $62.5 million to Tri-State for the right to take over the power supply agreement with the Delta-Montrose Electric Association (DMEA) cooperative and its 28,000 members. The cooperative and Guzman Energy will develop local renewable generation, starting with at least 10 MW of solar capacity. Under its deal with Tri-State, DMEA’s local generation supply was capped at 5%. The deal with Guzman will see DMEA eventually bring its local generation above 20%—and from cheaper renewable energy.

They have plants sitting there on their books at high values that could not be written off, even though their plants had no market value—if anything they have negative market values

UNTAPPED POTENTIAL

Deals so far have involved rural electric cooperatives, which are common in the US. These not-for-profit entities answer primarily to their communities rather than shareholders and for this reason have a strong focus on community benefit. They also tend to be burdened with long-term contracts for coal power plants, mines plus other legacy and polluting energy infrastructure. Energy Innovation estimated in 2018 that some 15 GW, or 34% of coal power stations owned by municipal or cooperative-owned coal assets were uneconomic to operate compared to local wind or solar energy. It also predicted that by 2025 the proportion of uneconomic capacity would rise to 59%, or 26 GW. Since the 2018 report, however, the economics of renewables have improved dramatically. The group now believes the 59% threshold has already been reached. Guzman’s Chris Riley says his firm saw the potential for rural cooperatives who wanted lower prices and to decarbonise, but were unable to make the necessary investment on their own. “They have plants sitting there on their books at high values that could not be written off, even though their plants had no market value—if anything they have negative market values,” he says.

This is the beginning of what we think is a big movement and a big opportunity. There is a huge swathe of the country that can be decarbonised just using economics and we think that that is a hugely promising proposition

MORE THAN ECONOMICS

The economics of the deal are simple to calculate, Riley says. It is viable in cases where the value created by switching from coal to renewable energy outweighs the liability of the coal plant. But the economics is only half the battle, he adds. A cultural conservatism among utilities, along with unfair perceptions that renewable energy is unreliable and concerns over jobs can get in the way of deals, he says. “In almost all cases, you need some other forcing function, whether it is politics, or shining a light on the cost for people who are paying the rates. It is not as simple as walking into someone’s boardroom and saying you can save them money by doing something that is also good for the world—that doesn’t get you as far as you would think,” he says. Michael O’Boyle, from Energy Innovation, agrees that owners of coal plants might not see anything wrong with continuing business-as-usual, and may be sceptical about renewable energy and the ability to integrate it cost-effectively, even where that has been successfully proven by other utilities. “There are a lot of moving parts to make it work for all parties involved,” he says. Matt Preston, at Wood Mackenzie, a market analyst, believes nervousness on the part of cooperatives about moving away from coal-fired power stations that provide power to cover baseload 24 hours a day is a reason why this type of transaction has not become more common. “[There may be a] reluctance on the part of the boards that run the cooperatives to contract away their responsibility to provide energy because they will not be able to do anything about it if it does not work out,” he says. O’Boyle believes, however, that the model has the potential to take a lot more coal offline in the US in the right circumstances. “Right now, the prevalence of the model is low, but the potential for the maths to work out is much higher than just those small situations. The financial mechanism itself proves that private markets are willing to support this kind of transition and take on that type of risk,” he says.

MARKET COMPETITION

Other investors are now starting to see the opportunities and compete with Guzman to find innovative ways to take coal generating capacity off the grid and replace it with renewable power, Riley says. He believes there is potential for using financial architecture to replace coal with renewables outside the US where similar economics exist, though the catalyst to achieve that would be different, depending on the regulatory constructs and barriers of a particular country. “This is the beginning of what we think is a big movement and a big opportunity. There is a huge swathe of the country that can be decarbonised just using economics and we think that that is a hugely promising proposition,” he says.

TEXT
Catherine Early