What challenges will confront DOE loan program for energy retrofits?

Canary Media’s Down to the Wire column tackles the more complicated challenges of decarbonizing our energy systems.

In our previous Down to the Wire column, we walked through the basics of a new federal loan program aimed at transforming old and dirty energy infrastructure into new and clean energy infrastructure. The Section 1706 program, aka the​Energy Infrastructure Reinvestment Program, authorized by the Inflation Reduction Act, enables the U.S. Department of Energy’s Loan Programs Office to make up to $250 billion in loans to companies for qualified projects. The program holds enormous potential to remake the U.S. energy landscape — but in many cases, it won’t be simple.

Jigar Shah, head of the Loan Programs Office, has spent the past two months talking about the wide array of projects that could be eligible for loans under the new program. Examples range from repurposing refineries and pipelines for clean hydrogen or captured carbon dioxide, to less certain but possible applications like replacing backup generators with batteries or developing solar farms on decommissioned mining lands.

Some of the Section 1706 loans could be expected to go toward retooling infrastructure controlled by utilities — including state-regulated investor-owned utilities, publicly owned utilities and electric cooperatives — and independent energy companies and unregulated arms of larger utility holding companies that operate in competitive markets. Today it can be hard for utilities and independent energy companies to secure cost-effective financing for such projects as repurposing coal plants for clean energy, upgrading old transmission corridors to carry more power, and restarting shuttered nuclear plants.

But lack of financing is not the only reason these kinds of projects have been challenging to pull off. Simply put, there are a lot of moving parts to coordinate in making large-scale changes to long-standing energy infrastructure — and conflicting motives among the players.

Can Section 1706 loans help turn coal plants into clean energy centers?

Take the concept of using Section 1706 loans to reduce the cost of closing down and repurposing coal power plants.

Most U.S. utilities aren’t moving as quickly to close coal plants as needed to forestall the worst impacts of climate change. One big reason is that many utilities are still recouping the cost of building those plants from their customers, even if the power the plants produce is more expensive than power from renewable sources.

Over the past decade or so, coal-closure proponents have centered around the concept of ​“securitization” as a way to overcome this utility preference for keeping old coal plants running. In simple terms, securitization gives utilities a way to raise low-cost debt financing to cover some of the losses they’ll incur by shutting down those plants before they’ve earned back the entirety of the cost of building them. Laws enabling securitization have been passed in a handful of states, but they have led to only a few coal plants being closed in Michigan and Wisconsin and none so far in other states such as Colorado and New Mexico.

The Section 1706 program would not offer securitization of debt for such projects but rather ​“repurposing of the asset,” Shah said. ​“It can’t be, ​‘We want to shut down this coal plant.’ It has to be, ​‘We want to turn it into a nuclear plant, or a hydrogen facility, or a solar-storage site, or a manufacturing facility,’” to name a few of the potential redevelopment options.

Under Section 1706, the Loan Programs Office could create a nationwide structure to do this, offering low-cost financing to cover the more than $100 billion in coal-plant asset value that customers of U.S. utilities are still paying off via their monthly power bills, according to nonprofit think tank RMI, and replace that coal capacity with clean alternatives. (Canary Media is an independent affiliate of RMI.)

That could reduce electricity costs for utility customers. ​“Over 20 years, we could save over $300 billion for ratepayers, if it was used for retiring and recycling” coal plants, said Ben Serrurier, a manager on RMI’s carbon-free electricity team.

Loans for coal-plant redevelopment projects would also spur economic development in coal communities. Community reinvestment is a critical component of any coal-closure scheme that purports to enable a just and equitable energy transition, Serrurier said.

The Section 1706 program should be a good tool for doing this. It requires that projects benefit both the community that historically has been supported by a facility and the ratepayers who will rely on the project that retools or replaces it, Shah said.

But what investor-owned utilities want, what their regulators will allow and what communities need often are not aligned. 

When utilities’ interests conflict with communities’ interests

“The utility is most concerned with getting its return on investment back and being done with liabilities” such as the costs of environmental remediation, Serrurier said.

Regulators, on the other hand, are supposed to represent the interests of utility customers and state residents at large. If they’re doing that job right, they will be concerned about minimizing costs to customers, remediating the environmental damage the coal plants have caused, and providing economic-transition funding to communities that have depended on the plants for jobs and tax revenue.

But for an investor-owned utility, every dollar that’s dedicated to cleanup or economic redevelopment is a dollar that can’t go toward investments in new projects that would earn the company money. This is one of the key holdups that turns every discussion about coal-plant securitization into a tug-of-war between utilities, regulators and other stakeholders.

So while the Section 1706 program could create a nationwide framework for financing that works similarly to securitization, including in states that haven’t passed securitization laws, it doesn’t resolve the underlying tensions that make this process a challenge.

Ron Binz, former chair of the Colorado Public Utilities Commission who now advises on energy-transition matters, points out that utilities benefit under the current status quo and might not have enough motivation to close down coal plants early via securitization or a similar new process under Section 1706.

“Right now, utilities pretty much have their cake and eat it too when it comes to transition from coal or natural gas to solar or wind,” he said. Without regulator pushback, utilities would prefer to have their customers continue to pay off the balance of unrecovered coal-plant costs even after they’ve closed while getting approval to earn rates of return from their customers for new clean energy investments as well.

Utilities could be motivated to seek out DOE loans if they fear that regulators won’t approve their proposals to push up customers’ costs, Binz said. But it’s hard to predict how utilities and regulators might reach a consensus on whether they’re ready to try Section 1706.

In Arizona, for example, utility Arizona Public Service has proposed that its customers pay for a $144 million economic-transition plan to help tribes and other communities that have depended on soon-to-close coal plants. Ratepayer advocates argue that the utility’s shareholders, rather than its customers, should pay for the bulk of the plan. Staff at the Arizona Corporation Commission, the state’s utility regulator, recently sided with ratepayer advocates.

Tapping the low-cost financing from Section 1706 could provide a path for Arizona Public Service to reduce costs for customers as well as shareholders, Serrurier said. But that process could be complicated by the fact that some of the coal plants being targeted for early closure are partly owned by other utilities in the Southwest, which ​“raises questions about how DOE treats loans to multiple participants” and multiple owners, he noted.

Harriet Moyer Aptekar, a longtime clean-energy researcher who played a role in the 2019 passage of Colorado’s securitization law, noted that Xcel Energy, the state’s primary investor-owned utility, is still sparring with state regulators over how to structure its coal-plant closure plans. It’s an open question whether the federal loan program could be tapped to move the closures forward, she said.

The challenges for reconductoring transmission and resurrecting nuclear power

Similar challenges lie ahead for projects that target other assets owned by regulated utilities. One example is proposals to ​“reconductor” swaths of the U.S. transmission grid by installing advanced cables that can carry more power than standard aluminum-and-steel cables.

Reconductoring is one of a number of ways to expand the capacity of high-voltage grids that aren’t ready to support the amount of clean energy needed to achieve the Biden administration’s goal of zero-carbon electricity by 2035. Various estimates peg the cost of needed grid expansion in the hundreds of billions of dollars, and typical projects can take up to a decade to move from concept to completion. So technology that can make use of existing transmission rights-of-way may be a vital way to more quickly and easily expand the grid’s capacity.

The costs of reconductoring transmission lines across the country could add up to tens or hundreds of billions of dollars on its own. But the benefits could be well worth the cost. According to a recent study by consultancy Grid Strategies for the American Council on Renewable Energy trade group, reconductoring just one-quarter of the transmission lines scheduled for renovation by 2030 could allow an additional 27 gigawatts of clean energy to be connected to the grid and save consumers at least $140 billion in energy costs.

The problem is that today’s regulatory constructs reward utilities for spending more money on building new transmission lines even while they encourage regulators to limit upfront capital costs. Neither party is incentivized to invest in making existing transmission lines more efficient.

Could the Section 1706 program help make reconductoring of transmission lines more appealing to utilities and regulators? ​“Reconductoring could be a great application of DOE’s loan authority,” said Rob Gramlich, president of Grid Strategies. But he says he fears that ​“utilities may not opt to go through the administrative requirements, and state regulators may not be aware of the opportunity. It is hard for state regulators and their small staffs to know about transmission options.”

Binz too noted that the potential for using Section 1706 loans ​“will be unfamiliar to many state policymakers and regulators. They don’t usually think in these terms. So it’s going to require some education of regulators and governors and state energy offices.”

Section 1706 loans could also be used to restructure the finances of nuclear power plants struggling to stay open in the face of shifting energy market realities — but again, it would be tricky.

Nuclear power provides about 19 percent of the country’s electricity, and it’s the largest source of carbon-free electricity. But over the past decade, 12 commercial nuclear reactors in the U.S. have shut down, and several more are facing imminent closure, pushing states including Illinois, New Jersey, New York and Ohio to pass laws offering financial incentives to keep remaining plants open.

Last year’s infrastructure law included $6 billion in federal credits available to nuclear power plants that states are seeking to keep open, like the Diablo Canyon nuclear plant in California. DOE’s Jigar Shah noted that Section 1706 loans could be another way to finance the continued operation of struggling nuclear plants or even to restart those that have shut down, like the recently closed Palisades plant in Michigan. But that would depend on nuclear plant operators reaching agreements with state and federal regulators on financing structures that give those plants a viable pathway to earning enough money to keep operating.

Could the Section 1706 program work better for independent energy developers? 

All of these regulatory complexities are less of an issue for independent energy developers. These companies compete in regional energy markets and own ​“merchant” power plants, transmission assets and other energy infrastructure. They don’t rely on regulatory structures that pass their capital costs on to utility customers for decades into the future, and that means they don’t require state regulatory approval before being repurposed for other uses, such as being sold to renewable energy developers, Shah said.

This could give independent energy developers a leg up on regulated utilities in tapping into the Section 1706 lending, according to Binz. 

“There are no limitations on who can apply for these loans. It could be the independent power producer community that comes forward,” Binz said. ​“I’m going to guess that some of the large solar players — I’m thinking NextEra, something like that — why would they not take this cheap money?”

But the path for independent power producers to make use of DOE loans isn’t necessarily a simple one, said Robin Lunt, chief commercial officer of Guzman Energy, one such company based in Colorado. Guzman Energy is focused on assisting rural electric co-ops in transitioning from coal-fired power to lower-cost renewable energy.

Her company has partnered with co-ops including Kit Carson Electric Cooperative in New Mexico and Delta-Montrose Electric Association in Colorado, but it hasn’t been easy, Lunt said. Guzman spent years working with these cooperatives to reach settlements to free them from the obligation to keep buying coal-fired power from Tri-State Generation and Transmission Association, one of a number of larger-scale generation and transmission cooperatives that own the central power plants and transmission lines serving many smaller distribution cooperatives.

As part of the extended negotiations over exiting those contracts, ​“we made an offer to Tri-State early on to buy their coal plants and replace them with renewable energy — to buy them to shut them down,” she said. Tri-State rebuffed that offer, ​“but I think that that seeded some ideas,” she said. About a year later, Tri-State set its own goals for coal closure and renewable energy.

Since then, Guzman Energy has ​“had plenty of conversations with the Loan Programs Office to access securitization-like tools” on behalf of its current and prospective customers, Lunt said.

At the same time, ​“there’s a lot of complexity there, and it requires expert advisers to navigate through it,” she said, to deal with issues including environmental remediation of polluted sites and the shifting of grid-interconnection rights from old coal plants to new clean energy facilities.

Section 1706 could certainly ​“expand the tool set for entities that are not in that regulated realm,” she said. ​“But it remains to be seen how it plays out.”