Billions In Just Transition Funding For Coal Communities

Michelle Solomon is a co-author of this article.

The Inflation Reduction Act (IRA) is the most significant climate legislation in United States history. Energy Innovation Policy and Technology LLC® modeling finds the IRA’s $370 billion in climate and clean energy investments could cut U.S. greenhouse gas (GHG) emissions up to 43% below 2005 levels by 2030.

Combined with state action and forthcoming federal regulations, the IRA puts the United States within reach of its Paris Agreement commitment to cut emissions 50% to 52% by 2030. The IRA will strengthen the U.S. economy by creating up to 1.3 million new jobs and avoid nearly 4,500 premature deaths annually by reducing air pollution, both in 2030.

In this series, Energy Innovation® analysts showcase the IRA’s benefits in the power, buildings, and transportation sectors of the U.S. economy. This article is one of two covering the power sector, detailing the IRA’s provisions to transition the U.S. power sector from coal to clean.

The IRA provides a full suite of tools to move us toward clean electricity, including critical clean energy technology tax credits. By coupling these tax credits with financial support to pay down uneconomic fossil plants, the IRA opens the door to new cheap and clean generation resources. And it does it all with an eye toward the energy-dependent and rural communities that need it most.

Coal is declining – but a just and speedy transition is not guaranteed

The U.S. coal industry is in irreversible decline, with 2022 coal consumption expected to be lower than 2021 despite sky high gas prices for much of the year, as economics and clean air standards persistently drive coal’s decline. Economic competition from gas took coal’s market share first, and now renewables will most likely outcompete coal going forward. Eighty percent of existing U.S. coal plants either cost more to continue operating compared to replacement by local wind or solar, or are slated to retire by 2025. Impending Environmental Protection Agency pollution standards for both new and existing plants will likely worsen coal’s financial outlook.

Though the clean energy transition is happening, coal retirements must be accelerated to reach our climate goals. The IRA will speed the shift from coal to clean and support a just transition by providing $5 billion to back $250 billion in low-cost loans for utilities to reduce coal debt and reinvest in clean technologies. Another provision provides $9.7 billion in financial assistance for rural electric cooperatives to move toward clean energy sources.

Between this financial assistance, expanded clean energy tax credits, and more, Energy Innovation finds the IRA’s power sector provisions will drive about two thirds of its GHG emissions reductions, expanding 2030 wind and solar capacity by 2 to 2.5 times pre-IRA projections. By accelerating coal retirements and clean energy deployment, the IRA could also reduce retail electricity costs up to 6.7%, saving consumers up to $278 billion over the next decade.

Undepreciated assets create a huge barrier to coal plant retirement

As of 2021, 93% of coal capacity was still owned and operated under long-term contracts or “cost of service” regulation. This financial incentive for utilities keeps coal plants running, despite the expense to their customer’s wallets and lungs.

Under cost of service regulation, monopoly utilities can recover capital investment costs, plus a healthy return, via the rates they charge to their captive customers. Typically, the utilities recover those costs over the entire lifetime of a coal plant and will continue charging their customers and receiving investment returns until the plant is fully depreciated and retires.

Early plant retirement creates financial uncertainty, as regulators and consumer advocates can argue that cost recovery is no longer justified. On the other hand, if utilities are allowed to continue earning their expected profits, customers may pay for idle coal plants for years to come—needlessly increasing the cost of a coal-to-clean transition.

Refinancing may be the most equitable and palatable option regulators have to deal with retiring uneconomic coal plants, as it can reduce interest rates on the remaining value and pass fewer costs onto customers without major utility balance sheet disruptions.

Refinancing or “securitizing” stranded asset costs has been used since power sector deregulation in the 1990s when monopoly utilities were forced to divest from power plant assets, often at a loss, which left customers on the hook. Securitization leverages consistent cashflow from captive customer electricity bills to achieve AAA bond ratings. These bond ratings, on par with U.S. government bonds, unlock much lower refinancing interest rates.

This concept has been recently applied to accelerate coal plant retirement and save consumers money. In New Mexico, the San Juan Generating Station was closed via refinancing, and will save customers nearly $80 million in 2023 alone. However, because this type of transaction requires new legislation in many states, it cannot easily be scaled up to encourage a nationwide economic transition from coal to clean energy.

How will the IRA speed coal retirements?

Two IRA provisions are designed to unlock low-cost financing for utilities across the country, vastly reducing the cost of retiring all existing coal generation by 2030, lowering electricity costs for customers, and enabling a just transition for fossil fuel communities.

The first provision creates a $5 billion fund for the U.S. Department of Energy’s Loan Programs Office to facilitate low-cost loans up to $250 billion in principal. The government backing provides security needed for utilities to access financing at the lowest possible interest rates, the role previously played by ratepayer-backed securitization. This means customers will no longer have to pay high premiums for coal plants after they’ve been shut down, and utilities will not need legislation to enable this transaction in each state.

With over $176 billion still on the books from fossil plants around the country, this could make a serious dent in zeroing out coal-powered emissions.

The IRA unlocks refinancing for two types of projects—either replacing energy infrastructure or reducing emissions from energy infrastructure that will remain operational. Because the refinancing program is not simply for retiring old fossil plants but instead requires reinvestment, it creates maximum benefits for communities and utilities. These projects may also include remediation of the old fossil fuel sites during refinancing, ensuring timely clean up while providing additional local jobs.

To truly provide long-term economic development we will have to think even beyond energy industry alone, but this is a good start.

To access funds under the first type of project, utilities will need to “retool, repower, repurpose, or replace” retiring energy infrastructure rather than simply shutting the plants down. This will provide a lifeline to workers in those communities who would otherwise risk losing their livelihoods, and ensure a new source of tax revenue for public services.

But this reinvestment requirement is also good for business—as utilities refinance, they can build new infrastructure to maintain a healthy balance sheet.

The second use of the funding, to “avoid, reduce, utilize, or sequester” emissions from fossil plants, is also central to a just transition. Some plants will not be able to retire immediately due to specific roles they may play in maintaining reliability. However, refinancing these plants will free up capital for utilities to build new, clean resources even as they reduce generation from old fossil plants before they ultimately retire.

While the newly created Loan Programs Office authorization can be used across the energy industry, a second IRA program specifically targets rural electric cooperatives through the U.S. Department of Agriculture. Rural electric coops provide electricity to more than 40 million people, with disproportionately coal-heavy generation – coal provided 28% of their generation in 2020 compared to 19% nationwide. Because of their small size, many rural cooperatives can be financially vulnerable, and a single coal plant may make up a sizeable portion of their overall debt burden, making federal financial assistance particularly crucial.

Surrounding rural communities also bear a disproportionate burden of coal-related pollution, though shutdowns could mean the loss of jobs. To address these challenges, the bill provides $9.7 billion in flexible financial assistance for rural electric coops to reduce power plant emissions. Energy Innovation modeling finds that this funding could result in up to 20 GW of incremental coal retirements, providing rural communities support to reduce coal generation while ensuring new income sources.

These two provisions can clearly cut emissions by 2030, but questions remain about how much they will actually speed coal plant retirements given decision making is still left up to utilities.

One of the most crucial uncertainties surrounds how much of the funding will go toward zero-emissions technology, particularly with expanded tax credits for carbon capture and storage (CCS). To date, the majority of commercial CCS projects have been focused on enhanced oil recovery, while CCS remains unproven and risky in the power sector.

Despite the lack of viable CCS projects in the power sector to date, IRA modeling from the REPEAT project finds that power generation with CCS could increase significantly. To guarantee emissions reductions while providing maximum benefits to customers and energy communities, utilities leveraging these two programs should focus on replacing existing coal with new clean energy projects.

With barriers torn down, it’s time for clean electricity to shine

Without mandating fossil fuel reductions or clean electricity targets, the IRA is largely an incentive bill. However, it goes beyond simply making wind, solar, and storage cheaper than gas and coal. By pairing clean energy tax credits with these refinancing programs to pay off remaining plant balances, we finally have a more level playing field for clean resources to compete, while also bringing new economic opportunities to fossil-dependent communities.