The Green New Deal is high on tweets and low on details. The general idea is that the U.S. government would decarbonize the world's largest economy "as much as technologically feasible" through solutions such as upgrading all existing buildings to meet energy efficiency criteria, replacing most air travel with a nationwide network of high-speed rails (really), and going all-in on renewable energy in the power sector. That wholesale transition away from fossil fuels would occur in just 10 years, according to the proposal. No cost estimates have been tallied, nor have any politicians held discussions on how to persuade the multitude of stakeholders involved to take the Green New Deal seriously.
Simply put, the Green New Deal is a little too vague and idealistic, even if the outcome of rapid decarbonization is desirable. That doesn't mean intelligent and ambitious climate change policies should be off the table, but it helps to view the problem through the correct lens. Any policy with the goal of transitioning away from fossil fuels will inevitably run into financial obstacles -- and navigating them will require financial solutions.
A new proposal in Colorado shows what a promising first step might look like.
Reducing the financial burden of aging coal-fired power plants
Coal is the dirtiest fossil fuel, which makes it a good place to start any climate policy. For instance, coal comprised 26% of total energy-related carbon emissions in the United States in 2017 (and the country's coal-fired power plants alone comprised 3.8% of total global emissions from any source). It's also becoming increasingly uneconomical as natural gas, wind, and solar run down the cost curve in more geographies.
But as Xcel Energy (NASDAQ:XEL) investors recently discovered, retiring even uneconomical coal-fired power plants isn't always easy. Utilities must receive regulatory approval to retire old assets or build new ones. Last summer the utility proposed retiring 660 megawatts of coal-fired power years ahead of schedule and replacing the lost generation with 380 megawatts of natural gas and nearly 2,000 megawatts of wind, solar, and energy storage. The Colorado Public Utilities Commission (CPUC) nearly rejected the plan. The uncertainty weighed heavily on the usually steady utility stock.
The primary hold up: a financial obstacle in the form of an accounting rule called accelerated depreciation. Since depreciation is an expense, and must be recouped by regulated-utilities, regulators assume ratepayers will be stuck with the bill. The CPUC wasn't so sure cheaper electricity from renewables would offset the financial burden of accelerated depreciation placed on customers.
Check out the latest earnings call transcript for XCel.
While Xcel Energy had its ambitious Colorado Energy Plan approved in the end, the financial burden of sending two coal-fired power plants to an early retirement remains. That's why state representative Chris Hansen introduced the Colorado Energy Impact Assistance Act.
The idea is very simple: shift the financial burden of old power plants from ratepayers to bondholders. When coupled with refinancing the debt associated with the asset -- dropping the interest rate from 7% to just 3% -- the bonding process would significantly reduce ratepayers' exposure to old power plants still on the books. Households could save as much as 20% over the next two decades, while large energy customers could see their electricity bills drop by 1% to 2% for each coal-fired power plant that goes through the bonding process. Colorado has six coal-fired power plants nearing that fate.
If the bonding and refinancing plan works, then it would make it much easier to transition away from coal power in Colorado -- perhaps much sooner than anyone predicts. It would significantly de-risk the portfolio-shuffling activities of Xcel Energy and other utilities, which often have to keep uneconomical assets online years longer than intended to whittle down the expected level of accelerated depreciation included in energy proposals submitted to the CPUC. Since that whittling is paid by shareholders before the burden is shifted to ratepayers, investors that own electric utility stocks should be closely watching the success of the Colorado Energy Impact Assistance Act.
Successful climate policy will provide financial solutions
As the old saying goes, money can't solve all of your problems. But what that saying fails to encapsulate is that money can solve all of your money problems. That shouldn't be overlooked for those wishing to take action against climate change, especially considering the overwhelming financial component of decarbonization efforts.
It may not look good on a bumper sticker or get much action on Twitter, but the latest under-the-radar plan proposed in Colorado is a simple and elegant financial solution to the financial problem presented by retiring coal-fired power plants early. There's no reason it couldn't become a tool used by other states, or adopted years down the road to retire natural gas-fired power plants early as part of a larger plan to decarbonize electric grids as quickly as possible.