POWER March 2023 - 32

FINANCE
Understanding How
Securitization Can Help with
Power Plant Retirements
Power companies across the nation are being pressured to retire fossil-fueled
power plants and transition to cleaner energy resources. But many existing fossil
plants have not been completely paid off or depreciated, which means potentially
big losses to shut them down. A tool called securitization may be able to help
some companies manage the costs.
Aaron Larson
P
ower companies have always had
to plan for the future. They have
always conducted research to
better understanding how load on their
power system might change in the short
and long term, and then, developed a
strategy for meeting that demand. This
is necessary because power plants can
take many years to engineer, procure,
construct, and commission. There are often
land purchases and infrastructure upgrades
required, in addition to permitting
and financing hoops to jump through. It's
not a quick or easy process.
Furthermore, money spent on power
plants is a long-term investment. Often,
power companies expect the useful life
of plants to be 30 to 50 years or more.
In fact, some nuclear power plants have
now had their licenses extended out to
80 years. It's unlikely anyone involved
in planning those facilities thought that
would happen when the plants were first
conceived in the 1960s and 1970s.
Prior to pulling the trigger on a project,
power companies spend a lot of
time evaluating alternatives. These goodfaith
efforts lead to what are always
hoped will be smart decisions. Yet, the
landscape is constantly evolving. New
technology and changes in cost curves
for alternative resources can make what
seemed like a great investment in one
decade, much less appealing in the next.
Unfortunately, managers can't go back
in time and make different choices. The
best they can do is attempt to find the
least-cost way to alter course.
Why Plant Retirement Can Be
Financially Challenging
One of the tools that electric companies
in some states have available to them
is called securitization (Figure 1). " Se32
curitization
is really just the process of
refinancing an asset, and in effect, restructuring
that asset into debt, " Brad
Viator, vice president of External Affairs
with the Edison Electric Institute (EEI),
said during a presentation hosted by the
Missouri Energy Initiative.
Viator explained how securitization
works with an example. He suggested
the year was 1990. The local electric
company serving parts of Kansas City is
working with the Missouri Public Service
Commission (MPSC) and leaders are
evaluating if more power generating capacity
is needed to supply the expected
future demand from the growing population
in and around the metropolitan area.
The company proposes building a 1,000MW
coal-fired station and financing it for
40 years. The MPSC agrees and the project
moves forward. The plant will be paid
for and fully depreciated in 2030.
In Viator's example, the electric company
pays for the resource to be built immediately,
in effect, financing that cost to
customers. " They're pushing these costs
on to customers on a monthly basis, even
though the cost of the asset was paid
up front by the electric company, " he explained.
The electric company is working
much like a bank in this case, with the utility
often authorized to receive a return on
equity of from 7% to 9%.
In the first couple of decades after
construction, everything goes smoothly.
The plant operates well and provides
cost-effective power to the region. However,
customer expectations change over
time. People become more climate conscious
and decide they don't want coal
plants to be part of the energy future
because of the carbon impact they have.
The problem is, by 2020, with 10 years
remaining in the financing of that asset,
there may still be 60% of the cost of the
www.powermag.com
1. Michigan-based Consumers Energy used
securitization to pay off the remaining balance
it had on its books for D.E. Karn Units 1 and
2. The plant will be retired this year, saving
customers a reported $126 million per year.
Courtesy: America's Power
asset remaining to be paid back by customers.
That's because when you look
at an amortization schedule, most of the
money paid in the first 30 years is interest.
Principal doesn't exceed interest until year
32 of a 40-year loan. Therefore, to close
this particular plant, the electric company
would need to move the plant from an asset
to a liability on its balance sheet.
What Is Securitization
One possible way to restructure the financing
is using the securitization tool, if
the state and PSC allow it. Continuing his
example, Viator explained how securitization
could be used. " We would restructure
all of the remaining cash flows and create
a debt instrument or a security, and then
we would sell those securities to investors.
So, in fact, that asset gets eliminated
from the electric company's books that
owned it, and it becomes owned by investors,
who purchased the bonds. And those
bonds are secured by future payments for
the remaining 10 years, " he said.
The bonds are often backed by what
is called the " securitization property, "
which most importantly includes the
rights granted by the commission to collect
the bond principal and interest payPOWER
| March 2023
http://www.powermag.com
POWER March 2023

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