Securitization could be used to retire coal plants in Kansas. Now, Evergy is backing it.

Titus Wu
Topeka Capital-Journal
The Lawrence Energy Center is a coal-powered plant operated by Evergy.

Environmentalists have been urging Evergy, the state's largest utility, to do away with its coal plants and transition more quickly to renewable energy. 

This year, the financial pathway to do that could see a breakthrough. After many years of opposition, the company is now pushing a state bill allowing utilities to use securitization to retire aging and expensive coal plants. 

Evergy didn't favor securitization in the past, as previous legislation had mandates to what utilities could transition to. Its support this time around could mean unprecedented progress for the bill, given the utility's large influence among Kansas lawmakers. 

"We're seeing more demand from our corporate customers, whether that's universities, whether that's large manufacturers and others who are all demanding more access to renewable energy,” said Jason Klindt, government affairs director at Evergy, on the change in stance. “The ability to do that depends on retiring old coal generation."

Securitization, also known as ratepayer-backed bonds, would make those retirements easier. But what exactly is this financing mechanism?

What securitization does

For context, the maintenance of aging coal plants has become expensive relative to other energy sources, such as renewables. However, utilities are incentivized to stick with the plants, because many have been retrofitted several times with upgrades such as pollution control equipment.

In other words, large coal plants are still being used because Evergy doesn't want those additional investments to not be recouped. 

"As those assets continue to age, you have to continue to invest in them. Maintenance cost goes up ... fuel costs go up. And as a result, that appreciable life just keeps getting tacked on and tacked on and tacked on until a 30- or 40-year asset can be running for 50, 60, 70 years," said Evergy executive Chuck Caisley. 

An early retirement of a coal generator would mean those costs and returns from investment would not be financially prudent to recover. But securitization would take the unrecovered costs and sell it as bonds to be repaid by ratepayers ― in the form of monthly bill payments made by customers called an "energy transition charge."

While the utility would get back its investment, it would have to give up on any future returns on investment. But that recovered money can be immediately freed up to be used for other purposes, such as potentially renewable energy.

It's not a traditional bond, where a company pays back through its own cash flow an investor who has taken on the organization's debt. Instead, Evergy users would be paying for it.

More costs for the customer?

That brought some concerns on what it would mean for regular Kansans' energy bills.

"What I've heard this past week, emails I've received, phone calls, etc., have been concerns about the coal plants closing, and also what I've heard is that it's going to raise their rates because of the bonds," said Sen. Beverly Gossage, R-Eudora. "This seems rushed."

Evergy sought to assure Kansas lawmakers that consumers would indeed see savings in their bills. If the company retired a plant with $300 million in debt without securitization, it would cost close to $39,500,000. With the bonds, it would be $15,683,000 less ― and that's around $15 million not passed onto rates. 

Customers would also see savings compared to just operating aging coal plants as is, as one "interest rate" gets swapped out with a lower one, said Klindt. 

Bonds backed by ratepayers tend to have very low interest rates of around 3%, given repayment is virtually guaranteed. If Evergy continues operating the coal generators, it would be paying off the investment with a return as high as 9%, eventually passed onto ratepayers.

"The costs that are currently in rates for that facility, which are based on our utility-weighted average cost of capital ... will be higher than the costs associated with the bonds," said Darrin Ives, Evergy's VP of regulatory affairs. 

Smoke stacks at Jeffrey Energy Center in Pottawatomie County, Kan.

Further savings can be seen with the cost of running the retired plant being taken out of the equation, such as less fuel, less operations and less maintenance, Klindt told The Topeka Capital-Journal.

Regulators at the Kansas Corporation Commission will have oversight over the process anyway, and KCC said it wouldn't approve of a securitization application unless there were substantial benefits to consumers.

If that wasn't enough, lawmakers added to the bill a clause guaranteeing that ratepayers saw savings.

"The amendment makes it clear ... that the customers will be credited with the benefits of the retired generating assets, at the same time as the energy transition charge begins to appear on their bills," said Sen. Jeff Longbine, R-Emporia, who chairs the committee overseeing the bill. "So you're going to have an energy charge or transition charge, but you're going to have reduction of the retiring asset."

Furthermore, the long-term transition from expensive coal to cheaper alternatives, such as renewables, will also decrease energy rates in the long run.

No complete win for renewables, either

The current securitization bill makes it explicitly clear that the utilities have sole discretion over how they use the proceeds that come from the energy transition charge.

It's a big reason why Evergy came to support ratepayer-backed bonds this time around. Previous securitization legislation, largely initiated by environmentalists, had mandated a push toward renewable energy.

"What we don't want to have happen is interests that have one goal and one goal only in mind, which is carbon reduction, drive the process through a financing mechanism," said Caisley.

But some clean energy advocates were not convinced of the reasoning and feared natural gas would instead be mainly replacing the aging coal plants.

Evergy's plan calls for a total of $8.9 billion in investments in Kansas and Missouri to upgrade its grid, fix aging infrastructure and move to renewable energy, such as solar and wind energy.

"Unfortunately, there is no mention of renewable energy in this bill," said Dorothy Barnett, of the Climate and Energy Project. "The question will be whether Kansas utilities will continue their investments in the lowest-cost resource or try to retire coal assets in favor of more expensive gas plants."

The majority-GOP Kansas Legislature, however, would have found such pro-renewable language unappealing. Some asked Evergy if this financing method would mean the elimination of coal.

"This bill really is about creating an option for a way to move forward with retirements. It doesn't require retirements, it doesn't require transition," answered Ives. 

The company doesn't want to be mandated, but that doesn't mean it's not going to commit to renewable energy, Caisley said, adding that about 50% of electricity being delivered now is carbon-free. The goal is 80% carbon reduction by 2050 or potentially sooner under Evergy's Sustainability Transformation Plan, said a spokesperson.

Green energy advocates could still have a say in the securitization process, as stakeholders during proceedings held by the KCC.

Regardless of whether there are mandates, the bill is an improvement if passed, said Zack Pistora, of the Kansas Sierra Club.

Sen. Jeff Longbine, R-Emporia, right, talks alongside Sen. Kristen O'Shea, R-Topeka.

And this legislative session, state lawmakers seemed to have given Senate Bill 245 special attention, despite many being confused by the complexity of the issue. The bill's been "blessed" by political leadership, exempt from normal procedural deadlines.

Longbine even thinks it could be a solution to the artificially high natural gas bills caused by the rolling blackouts earlier this year, with informational briefings in the Legislature on that matter, and its relationship with securitization, scheduled for this week.

Securitization could also be a tool in the toolbox, and one of many factors, to overall prevention of such rolling blackouts in the first place.

"Just with the events we've seen in recent days, it's pretty clear to me that there's a fundamental need that we need to prepare for extreme weather events in the future and harden our electrification system going forward," said Pistora. "The time and place is here and now."