When President Obama announced the EPA’s new Clean Power Plan on Aug. 3, 2015, he set off a fierce public debate about the economic ripple effects of the controversial proposal. Naturally, much of this discussion has centered on what the plan, which seeks to accelerate America’s transition to cleaner sources of energy, could mean for obvious stakeholders such as power companies and consumers. However, one critical stakeholder is rarely mentioned in the headlines about the Obama administration’s alternative energy push: asset-based lenders.
Banks have loaned billions of dollars against coal-fired power plants and related infrastructure over the past years and decades. If the Clean Power Plan goes through as currently written, the value of this collateral—particularly with respect to the oldest plants currently online—could be decimated. Lenders with disproportionate collateral investments in heavy coal-producing states such as Wyoming, West Virginia, Kentucky and Pennsylvania are at greatest risk. At the time of this writing, in fact, some banks were already huddling with counsel to formulate legal strategies geared toward protecting their interests in the wake of the Clean Power Plan. While lenders are not necessarily going public about this activity, some of them privately express deep concern and are asking hard questions about how to model new loans going forward, as well as how to address their embedded costs in the existing energy market.
Assuming that the Clean Power Plan becomes a reality in something resembling its present form, these changes stand to affect all three sectors of the utility business: investor-owned utilities, municipally owned utilities and electric cooperatives. While financing specifics vary in each of these sectors, all three tend to involve long-term energy loans. A typical arrangement would be to finance a coal-fired power plant for 30 years, with refinancing occurring periodically during that interval. In other words, the risk analysis conducted prior to lending against such an asset assumes 30 years of continuous operation. If that asset is taken offline 15 years earlier than planned thanks to the onset of unforeseen regulations, what will happen to the remaining 15 years of revenue and debt service? For banks with major energy investments, this is a particularly disquieting scenario to contemplate.
Risk analyses are certainly sophisticated enough to take into account the need for periodic upgrades and changes required to keep pace with the inevitable evolution of environmental regulations. For lenders, in fact, this can represent an opportunity for more financing, not less. However, having a plant pulled completely offline is simply not part of the typical risk calculation. (Because of the uncertainty created by the plan, interim-financing models will need to be revised as well.)
Which plants will be most affected? Generally speaking, the older and smaller facilities—plants in the 300 megawatt range that are roughly 20 years old—will be squarely in the EPA’s crosshairs. Many of these plants were financed over a 30-year amortization and still have ten or so years of debt service left on them. However, the useful life of a power plant can be extraordinarily long: When one company recently took its oldest plant offline, it had been in continuous operation since 1952. Of course, newer plants, which tend to be cleaner, will be less affected. But the value of some of these assets could be diminished amid the clean-energy push.
Clearly, the asset-based lending community should act as quickly as possible to defend its interests against the unintended consequences that will accrue from the plan. Among other things, that might involve launching a reappraisal process for existing assets in light of the proposed changes. On the lobbying front, lenders could consider joining forces with other interest groups currently working to understand and manage the likeliest effects of these proposed changes. Major coal-producing states happen to have larger populations of low- and fixed-income consumers, and so consumer advocates in these areas are potential allies. Likewise, a coalition of at least 17 attorneys general has already filed suit in the Court of Appeals for the District of Columbia Circuit on the grounds that the EPA plan will amount to an excessive tax on American consumers.
Fortunately, over the summer the administration delayed the start of the interim compliance period until 2022 in a bid to give states (and, by extension, lenders and power companies) more time to prepare.
As mentioned, the effects of these changes will be anything but uniform due to the Clean Power Plan’s varying impacts by state. Lenders with significant collateral in clean-energy states such as California, Arizona, South Carolina, Georgia, Tennessee and, to a lesser degree, Florida (one of the hardest hits will be to Seminole Electric Cooperative in Tampa), are more likely to have diversified holdings and therefore will be less exposed to risk. According to the administration, goals for the plan include achieving an economy-wide target to reduce emissions by 26% to 28% below 2005 levels in 2025; increasing the share of renewables (beyond hydropower) in their respective electricity generation mixes to the level of 20% by 2030; installing 300 megawatts of renewable energy across federally subsidized housing by 2020; and doubling energy productivity by 2030.
This highlights the upside of the Clean Power Plan for lenders: If the United States makes massive investments in new energy supply resources such as solar, wind and other forms of alternative energy, along with associated transmission/grid upgrades in coming years and decades, asset-based lenders will be an integral part of the process, to be sure. Indeed, one could see the prospect of these new markets as “a glass half full” for the ABL community.
Thus, in addition to defending its interests as required, the ABL community should simultaneously explore new and creative ways to leverage the clean-energy trend, which is likely to gather additional momentum with every passing year.
Here are some facts to consider: There are about 19,243 individual generators with nameplate generation capacities of at least 1 megawatt (MW) at about 7,304 operational power plants in the United States. A power plant may have one or more generators, and some generators may use more than one type of fuel. As of 2013, there were 518 coal-fired (along with 1,101 petroleum and 1,725 natural gas) electric power plants in the United States. Other categories include nuclear, hydroelectric and various renewables.