Clarification of thought about fossil fuel plants and stranded assets
In any conversation about the transition to a renewable energy economy, solar and wind advocates will eventually come up against the term “stranded assets,” which is usually deployed in defense of legacy fossil fuel power plants (and their owners). But as times change, “stranded assets” could become a powerful tool for thinking about how we shift to a 100% renewable energy future “without delay” as Pope Francis says.
Defining a Stranded Asset
An asset is something you have of value, like a house or a car. In the power sector, it can mean a power plant, a substation, or a power line. “Stranding” an asset means shutting it down either a) before the end of its scheduled life or b) before you’ve finished paying for it, like scrapping a 5-year old car. Under threat of scrapping power plants built 5, 15, or even 50 years ago, utilities warn regulators of the cost of “stranded assets.”
But defending old, dirty power plants as “stranded assets” uses accounting terminology to paper over the tension between the interests of a utility interests and its customers.
Shuttering Old “Assets”
- 7,200 Btu of wasted heat
- 3.9¢ in health damages just in Appalachia,
- 13.3¢ in air pollution, mercury, and climate damage
- 0.8¢ in damages from destroyed land, abandoned mines, mercury emissions, transportation fatalities, and subsidies
Cumulatively, the Harvard School of Public Health estimates the environmental and health burden adds 18¢ per kilowatt-hour of power—$345 billion per year in total—far outstripping the cost to produce the electricity. For comparison, a new coal power plant produces electricity alone for a minimum of 6.5¢ per kilowatt-hour, while wind power (with none of the health and environmental damage) produces power for 4-8¢ per kilowatt-hour.
In other words, the full cost of energy from a coal power plant far outstrips the value of its electricity. In accounting speak, a power plant that produces more costs than benefits could be characterized as a “liability.”
Uncovering Old Liabilities
Utilities defend these liabilities with arguments that millions (maybe billions) of dollars were spent to build and upgrade these power plant to be marginally more efficient and marginally less polluting. And recovering those costs requires running that coal plant until the end of its scheduled life (40, 50, 60 years or more). Debts were incurred, suggest utility executives, and today’s electric customer is bound to pay them or risk stranding these power plant “assets”.
Of course, utilities don’t pay most of the costs mentioned above, so in their narrow view a coal plant can be considered an asset even as it remains a major liability to the average electric customer.
Furthermore, the assumption that electric customers should be on the hook for these legacy costs assumes that they were rational at the time. But there’s plenty of evidence to suggest that investments made in coal power plants, even decades ago, were bad bets. The evidence includes:
- The availability of less expensive expensive power from energy efficiency.
- The growing body of scientific knowledge since the 1970s showing that climate change is near and present danger.
- The 1970 Clean Air Act and its 1990 amendments reducing the amount of allowable pollution from power plants.
- Economically competitive clean energy alternatives like large scale wind power that has been price competitive with fossil fuel generation since the late 1990s (p58).
- Economically competitive large and small scale renewable power generation in the past 10 years (including wind and solar) that costs less in pennies per kilowatt-hour but also billions less in environmental and health damages.
Decisions to invest more customer dollars in these power plants in the past 20 years were irresponsible in light of the available alternatives.
In other words, legacy fossil fuel power plants are not assets, but liabilities, and electric customers are better off if utilities close them down and replace them with inexpensive, less polluting energy sources.
The Sierra Club’s Beyond Coal campaign has been very successful by getting utilities to admit that their old coal fired power plants are liabilities that should be shuttered.
Building New Fossil Fuel Liabilities
Unfortunately, in the past fifteen years, utilities have largely replaced this coal-fired power with natural gas.
While marginally cleaner to burn than coal, these new power plants are at risk of becoming liabilities just as their coal-fired predecessors, in 4 ways.
For one, the total carbon footprint of natural gas power plants may be the same, because methane leakage during extraction may eliminate the relatively lower carbon emissions during combustion. New laws restricting carbon emissions will result in compliance costs that power plant owners will pass on to electric customers.
Second, the cost of renewable energy resources has been falling rapidly (wind by 61%, solar by 82% since 2009) and wind is already less costly than new baseload natural gas power. If utilities have to sell this power in competitive markets, their power plants will be unable to compete. If not, they are being poor stewards of their captive customers’ resources when they have less expensive generation options.
Third, new gas power plants put the risk of fuel price volatility onto electric customers, who have these costs passed through directly onto their bills. Natural gas prices are at historic lows, but there’s little guarantee that will last the 40-year life of the power plant.
Finally, as the world moves toward meaningful action to combat climate change, the 80% reduction in carbon emissions by 2050 will cut off the useful economic life of new fossil fuel power plants. After 2050, it will be nearly impossible to meet emissions targets and still be operating any fossil fuel electricity generation. A natural gas plant approved in 2016 might come online in 2017 at the earliest. The 33 years between then and 2050 are already seven years less than utilities typically plan for a “useful economic life.” In other words, a new proposed fossil fuel power plant is already a stranded asset if the utility has not shortened the useful economic life (a calculation that would likely make the power plant uneconomic).
This issue is coming up all across the country as monopoly utilities file their 15-year resource plans. A perfect example is Xcel Energy in Minnesota, seeking to replace much of the generating capacity from two old coal plants with new natural gas plants. (We’ve already sent their president an open letter asking them to identify a better replacement option).
For existing power plants, “stranding” assets may make the utility balance sheet look worse, but it can be the best thing for the health and welfare of the public. For financiers of new power plants, it’s unlikely to be economical to finance a new fossil fuel power plant ever again.
This article originally posted at ilsr.org.