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Winter 2023: The Future of the Energy Grid

Securitizing the Just Transition

Mark Anthony James and Jack McGowan


  • Examines how to create a just transition for coal power communities and workers by integrating just transition principles in utility securitization orders.
  • Discusses how states are using securitization to support a just transition for coal power communities and workers.
  • Looks into how regulators and utilities have been using securitization for decades to lower costs and reduce risk.
Securitizing the Just Transition
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Coal power is in terminal decline. Coal’s share of the U.S. electricity supply peaked in 2007 and has since fallen by more than 50%. In the United States, where 91% of coal production is used to generate electricity, the dramatic drop in coal consumption is a sign of an energy system in transition. This transition has the potential to significantly and disproportionately affect the communities and workers that rely on the coal power industry. In this article, we examine how to create a just transition for coal power communities and workers by integrating just transition principles in utility securitization orders. The historical securitization of utility assets also creates an untapped potential to accelerate the retirement of coal-fired generation. As part of this analysis, we consider what is a “just transition,” how it leverages fairness and equity to accelerate the pace of the clean energy transition, and what states can do to ensure that their securitization statutes can seize this opportunity.

The Decline of Coal-Fired Generation

Why is coal-fired electricity generation’s market share decreasing? The dramatic decline is attributable to changing economics, changing regulation, and changing preferences. In the last decade, coal’s economic advantage has been eroded by cheap natural gas and plummeting renewable energy costs. At the same time, an aging coal fleet has had to spend billions of dollars retrofitting plants with pollution controls to comply with more stringent environmental regulations. Furthermore, additional regulations are coming. While the Supreme Court’s decision in West Virginia v. EPA, 142 S. Ct. 2587 (2022), constrained the U.S. Environmental Protection Agency’s (EPA’s) authority to regulate greenhouse gas emissions (GHG), it has not derailed the EPA’s plans for new GHG regulations, stricter oversight of coal ash impoundments, newly revised cross-state air pollution rules for power plants, and its proposed reaffirmation of its Mercury and Air Toxics Standards rule. Finally, 17 states and territories have passed or adopted 100% renewable or clean energy goals, further shrinking coal’s available market share.

The Energy Information Administration reports that more than 72 gigawatts (GW) of coal-fired generating capacity retired in the last decade with almost no new additions. Nearly 30% of the total remaining fleet capacity, 59 GW of capacity, is planned for retirement by 2035. Many of the retiring facilities are closing before reaching the end of their operational lives. Early retirement can bring a hefty price tag if a facility still has unrecovered capital investments on its books. Although the average age of a coal plant in the United States is 45 years, many of them made significant capital investments in maintenance and environmental compliance technologies in the last decade. Newer facilities are retiring early too. In 2010, Xcel Energy added Unit 3 to its Comanche Power Plant with plans to operate it until 2070; however, in April 2022, Xcel agreed to close Unit 3 by January 2031.

So why aren’t utilities just operating the plants until they are paid off? The short answer is risk management. An uneconomic plant today will be even less economic in the future. According to recent research, 80% of coal plants in the United States either are more expensive to operate than building and operating new local wind and solar generation or are slated to retire by 2025. Energy Innovation, Coal Cost Crossover 2.0, at 7 (2021). Utilities face the real risk that they will not make sufficient revenue from energy markets to cover their capital and operating costs. Continuing to run those plants is a great way to lose more money. Utilities in cost-of-service states could also be subject to a prudency review by a state utility commission that could lead to the disallowance of all or a portion of their unrecovered investment.

In a cost-of-service regulation state, cost recovery is not connected to being competitive in the marketplace. Capital investments are rate based, which means they earn a rate of return paid on the undepreciated investment. State utility commissions evaluate the prudency of a utility’s capital investments before placing them in the rate base and setting the rate of return. Facility capital costs plus the approved rate of return are recovered from ratepayers over the expected lifespan of the facility. A prudency review can be conducted after the investment is placed in the rate base to assess whether continued operation is in the best interests of ratepayers.

Climate realities are magnifying the economic pressures squeezing coal power plants. In 2022, the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) stated that a massive early retirement of coal-fired power plants is needed to keep warming below 2°C. The remaining carbon budget to keep global warming at or below 1.5°C is already exceeded just by the cumulative potential CO2 emissions from existing developed fossil resources. Kelly Trout et al., Existing Fossil Fuel Extraction Would Warm the World Beyond 1.5 °C, 17 Env’t Rsch. Letters 064010 (2022). Despite the closure of more than 290 coal power plants since 2010, there are still more than 178 operating coal-fired power plants in the United States. Sierra Club, Beyond Coal Campaign (2022).

As the pressure to retire coal power plants grows, what options do utilities have? First, the facility can remain in operation, with ratepayers paying more for their electricity. In the Midwest, it is estimated that the uneconomic operation of the existing coal fleet adds $60 per year to each household’s electricity bill, a total of $350 million per year. Joe Daniel et al., Used, but How Useful? at 7 (May 2020). This option may pay back the capital investment, but it does not eliminate the risks discussed above. Alternatively, the utility could close the plant and seek recovery of its investment from ratepayers. Again, recovery of the undepreciated investment could be subject to review by the state utility commission. A third option, growing in popularity, is to securitize the asset.


Securitization is a tool gaining attention for its ability to manage uneconomic assets. Securitization can provide certainty in recovery of the undepreciated investment and reduce the financial obligations placed on ratepayers. Securitization is like refinancing your mortgage; it swaps a higher rate of return for a lower rate of return. As discussed above, in cost-of-service regulation states, the utility gets a rate of return on its capital investments. The rate of return is a mix of the cost of debt and the return on equity paid to shareholders. Historically, returns on equity rate have averaged between 9% and 12%. Edison Elec. Inst., 2021 Financial Review at 72 (2021). Securitization creates a debt instrument in the form of a bond that is secured against future ratepayer bills. By shifting to a bond rather than a debt and equity blend, investment risk is reduced, which brings down the rate of return. In short, securitization creates a difference between what was owed and what will be paid. Utilities trade this difference for certainty in cost recovery for utilities, ratepayers accept this difference against the risk of paying the full cost of an uneconomic asset, and this difference creates an opening to build a more just transition away from coal.

Regulators and utilities have been using securitization for decades to lower costs and reduce risk. Twenty-seven states, the District of Columbia, and Puerto Rico have securitization laws on their books, and since 1997, utilities in these jurisdictions have issued almost $63 billion of securitized bonds to pay for wildfire damage costs, extreme weather event damages, nuclear power plant retirements, and coal-fired power plant retirements. Sabre Partners, List of Investor-Owned Utility Securitization Transactions 1997–Present (2022). Every securitization process has common elements. First, the state must have or pass a statute allowing a utility to request approval from its state utility commission to securitize an asset. Second, the utility issues the securitized bond or creates a special purpose entity to issue the bond. Third, the utility has the right to impose and collect a dedicated non-bypassable charge on ratepayer bills. Fourth, the financing order issued by the commission is nonrevocable, with the state agreeing to never impair the rights of the bondholders. Fifth, there is an adjustment mechanism in the securitization charge to ensure full recovery of the bond. Nat’l Regul. Rsch. Inst., Managing Electricity Rates Amidst Increasing Capital Expenditures: Is Securitization the Right Tool? An Update, NRRI Insights, 2019, at 2–4. What every securitization process does not have is the same treatment of the savings produced, and in that difference lays that just transition opportunity.

Why Securitization and the Just Transition?

Before diving into the details of what a “just transition” is, we must answer the question of why these coal power communities deserve support when other industries have not. Our answer is fairness and equity, and the chance to speed the pace of decarbonization. For decades, coal power communities served as what President Nixon termed “energy sacrifice zones.” They became dependent on coal power for their economic vitality and community identity. They shouldered higher environmental and public health costs so that society could enjoy low-cost energy and improved energy security. It is estimated that the environmental and public health externalities of coal power are three to four times greater than the value of the electricity produced. Paul R. Epstein et al., Full Cost Accounting for the Life Cycle of Coal, 1219 Annals N.Y. Acad. Sci. 73, 91 (Feb. 2011).

While the economic and environmental arguments for transitioning away from coal are clear and convincing, community and worker opposition can be significant obstacles. No community voluntarily chooses the disruption to public finances and community identity that happens when a power plant closes. Fossil fuel power plants generate more than $2 billion in annual property tax revenue for local and state governments. Daniel Raimi et al., The Fiscal Implications of the US Transition Away from Fossil Fuels 6 Res. for the Future, Working Paper No. 22-3, Jan. 2022. Getting to 1.5°C or 2°C would require forgoing coal’s tax revenue contributions without a guarantee that they will be replaced. Moreover, coal plant jobs often have high wages, good pensions, and excellent benefits, and are in areas without comparable employment opportunities. Uncertainty about transition outcomes can delay the retirement of a facility and the transition planning.

Whether a transition perpetuates inequities or produces new, fairer relationships is often determined by if and how the transition is managed. As directors of the Rapid Transition Alliance have observed, “Transitions are not organic and non-linear, but have to be imagined, designed, financed, constructed and socially accepted. All this requires political work which can set and support the direction of change.” Peter Newell & Andrew Simms, How Did We Do That? Histories and Political Economies of Rapid and Just Transitions, 26 New Pol. Econ. 907, 914 (2021). While the uncertainty surrounding coal plant closures is significant, it is manageable. Securitization can provide critical management tools.

What Is Just Transition?

Just transition may be a new topic to climate change mitigation, but it has a long history in the labor movement. The term emerged in the 1990s and is often attributed to union leader Tony Mazzocchi, who argued that workers and communities deserved to be protected because of the sacrifices they have made for the benefit of society. In 2015, the term was included in the preamble of the 2015 Paris Agreement and in 2021, COP26 issued a Just Transition Declaration.

A just transition includes procedural, distributive, and restorative justice elements. Policy makers and stakeholders must work with communities to ensure that their concerns and needs are fully identified and incorporated into the plan. Funding must be distributed to support short-and long-term strategies that protect workers’ social safety net, compensate for economic losses, and develop new economic opportunities. Historical harms incurred by communities and workers must be addressed in the decision-making process and incorporated into transition strategies.

To succeed, a just transition needs two things that securitization can provide: governance and finance. Power plant retirements are planned events, which creates time to proactively put in place governance structures before the financing order is executed. Early and transparent short-and long-term planning are critical to creating a comprehensive strategy for transitioning away from fossil fuels. Workers and communities must be engaged in the development and implementation of the plan before any jobs or tax revenues are lost. Centralizing planning within dedicated offices can facilitate the necessary multistakeholder engagement and outreach to underrepresented groups.

A just transition must have dedicated, stable funding that meets the scale of need that communities and workers will experience. Transitory, temporary, or unstable funding will not supply the short- or long-term support that workers and communities need. Securitization can provide short-term and long-term transition funding. The difference between what is owed and what is paid after an asset is securitized creates a potential funding stream if a portion of the savings are reserved for transition programming. It would mean that ratepayers could pay a slightly higher price for the retired asset, and shareholders could have their dividends reduced, but communities and workers would gain transition funding for the lifetime of the securitized bond. With estimates of the unrecovered investments in currently operating cost-of-service regulated coal plants topping $100 billion, there is a large potential source of support for communities and workers.

Is this fair? We believe it is. Shareholders have been compensated for their investment in the facility and ratepayers have enjoyed the benefits of cheap power. Internalizing the environmental and public health externalities caused by the plant would have reduced returns on capital and increased customer rates. Ignoring those costs now would perpetuate existing inequities. Tying some of the securitization savings to the community and the workers ensures that capital is retained where harms have been and will be incurred. Importantly, reserving a portion of securitization savings should supplement, but not displace, the need for public funding. Government funding is still critical in the early stages of transition planning before a facility has closed, to support economic development initiatives, replace lost tax revenues, and leverage private sector investment.

What Are States Doing?

As the pressure to retire coal plants ramps up, many states are turning or returning to securitization. Our research found significant inconsistencies in how states are using securitization to support a just transition for coal power communities and workers. In Michigan, Kansas, Missouri, and Montana, securitization laws are not being used to support a just transition. In contrast, New Mexico and Colorado are leveraging the securitization of retiring plants to support affected communities and workers.

The difference between states is grounded in the design of their securitization processes. Securitization laws passed in the 1990s and early 2000s often lack the flexibility to incorporate just transition principles. Many laws mandate that utility commissions maximize ratepayer savings and do not allow savings to be shared with affected communities and workers. For example, Michigan’s 2000 securitization law requires that the proceeds of the securitization bonds only be used to refinance or retire debt or equity. Mich. Comp. Laws Ann. § 460.10i(2)(a) (2000). There is no allowance for other expenditures like work and community support programs. In 2020 and 2021, the Michigan Public Service Commission approved more than $750 million in financing orders for the state’s two investor-owned utilities, but the state still relies on the utilities to develop worker retraining and economic development programs. Other state statutes are issue specific. In Wisconsin, utilities can only securitize environmental compliance investments, and in Florida, utilities can only securitize abandoned nuclear power plant investments. Wis. Stat. § 196.027(1)(f) (2015); Fla. Stat. § 366.95 (2015).

Even some newly passed securitization laws prohibit or limit the inclusion of just transition costs. In 2021, Kansas and Missouri passed securitization statutes that do not allow for the inclusion of worker and community transition costs. Securitization charges can only recover “energy transition costs,” which are defined as undepreciated investment, decommissioning and site restoration costs, and other facility-related costs. Kan. Stat. Ann. § 66-1240(b)(9)(A) (2021); Mo. Ann. Stat. § 393.1700.1.(7) (2021). Montana’s 2019 securitization law is similar. When approving the issuance of energy impact assistance (EIA) bonds, the public utility commission must achieve the maximum net present value savings for customers. Mont. Code Ann. § 69-3-1606(1)(c)(ii) (2019). Furthermore, collected funds can only be used for listed purposes, which include investing in least-cost generation resources and electricity storage capacity located in Montana but not investments in workers and communities. Id. § 69-3-1623(1)(a)–(d) (2019).

New Mexico’s 2019 Energy Transition Act directly incorporates just transition principles into statute. Utilities can securitize more than just their undepreciated investments in and decommissioning costs for New Mexico’s two remaining coal power plants. A utility can include up to $20 million per facility for severance and job training for displaced employees. N.M. Stat. Ann. § 62-18-2.H(2)(b) (2019). Additionally, upon issuance of the securitization bonds, the facility must transfer a specified percentage of the bonded amount to three state-administered energy transition funds (known as Section 16 payments): 0.5% to the Indian Affairs Department for the Energy Transition Indian Affairs Fund, 1.65% to the Economic Development Department for the Energy Transition Economic Development Assistance Fund, and 3.35% to the Workforce Solutions Department for the Energy Transition Displaced Worker Assistance Fund. Furthermore, the Energy Transition Act creates community advisory committees for each affected community to provide recommendations on how to use the funds available to the community. Advisory committee members must represent different sectors of the community, including local governments and tribal communities with at least four appointees who represent the diverse economic and cultural perspectives of the affected community and one appointee who represents displaced workers. N.M. Stat. Ann. § 62-18-16 (2019).

In April 2020, the New Mexico Public Regulation Commission approved a financing order allowing Public Service Company of New Mexico (PNM) to issue $361 million in Energy Transition Bonds upon the closure of San Juan Generating Facility Units 1 and 4. The bonds include $20 million for displaced worker support, and an estimated $19.8 million in Section 16 payments. However, implementation of the financing order has proven to be contentious as PNM is actively seeking to delay the issuance of the bond and credits to ratepayers until more than a year after the units are shut down.

In 2019, Colorado passed SB 19-236, a securitization statute, and HB 19-1314, a just transitioning planning statute. SB 19-236 authorized utilities to apply to securitize retiring coal power plants and for the Public Utilities Commission to attach conditions that maximize the benefits and minimize the risks of the transaction to customers, directly impacted Colorado workers and communities, and the electric utility. Colo. Rev. Stat. § 40-41-107 (2019). All financing orders must include costs of projects, approved by voters of a local government or school district, expected to be paid from property taxes that are directly impacted by the retirement of the facility. Id. § 40-41-104. HB 19-1314 explicitly acknowledged Colorado’s “moral commitment” to ensure that the clean energy economy assists coal workers, coal communities, and communities disproportionately impacted by coal power pollution. A Just Transition Office and a Just Transition Advisory Committee were created to lead the planning effort. Id. § 8-83-503(1), (6). A Just Transition Fund was also created, but no monies were allocated for the fund. Id. § 8-83-504(1). Another 2019 securitization bill, HB 19-1037, would have allowed utilities to transfer up to 15% of the net present value of operational savings created by the retirement of a coal power plant for use as transition assistance. HB 19-1037 did not make it out of the Senate Transportation & Energy Committee.

Consistent funding in Colorado remains elusive. In 2020 and 2021, the legislature authorized only $15 million in disbursements from the general fund to pay for economic development and support for transitioning coal workers, even though the estimated costs for recommended investments in infrastructure and income support programs for transition communities and displaced workers was over $100 million. The Advisory Committee has stated that funding concerns caused it to postpone decisions on higher-costs items.

Framework for States

To meet U.S. climate goals, every coal plant in the country must retire or sequester its CO2 emissions by 2035. Managing this transition can accelerate the pace of decarbonization, protect communities and workers, and avoid perpetuating existing inequities. Securitization is a tool than can assist in meeting those goals, but it will require a conscious effort to integrate just transition principles. There are several steps that states can take to improve the use of securitization as a just transition tool, including (1) ensuring that securitization statutes address the needs of utilities, ratepayers, communities, and workers; (2) mandating that a portion of securitization savings are set aside to support affected communities and workers; (3) planning for a just transition by engaging communities and workers in transition planning, program implementation, and program monitoring; (4) ensuring that the just transition strategy addresses the short- and long-term needs of communities and workers; and (5) matching the amount and availability of funds to the scope and scale of need.

A just transition for coal power communities and workers can accelerate the transition away from coal power generation. However, a just transition for these communities and workers is only available if it is planned and managed. Securitization is a key management tool that states can and should use to support communities and workers; but tapping into the potential of securitization as a just transition tool will only happen if state laws permit it and state policies encourage it.