Ep. 3: Uday Varadarajan of RMI talks about the challenges and opportunities of shutting down America’s remaining coal-fired power plants

SEASON 01, EPISODE 03

[INTRODUCTION]

[0:00:07] ANNOUNCER: This is Financial Climate. Can innovations in finance help the world decarbonize? How can trillions of dollars of assets be redirected to catalyze a net zero economy? We explore these questions through conversations with innovators, experts and investors from around the world. Here's your host, Alex Roth.

[OVERVIEW]

[00:00:34] AR: One of the most remarkable things that's happened in the world of energy in the last 15 years, is that there's been a staggering drop in the cost of solar and wind power, and that's made solar and wind power more economical, even then many existing coal plants. But what's really strange is that a lot of these coal plants continue to operate, even though basic economics would tell you that they shouldn't. And that's even without a price on carbon pollution.

Between 2010 and 2019, about 300 coal fired power plants in the US closed, yet there are still more than 200 and operation. They produce about 22% of American Electric Power. To get the earth back to a stable climate, it goes without saying that one of the things we have to do in the US is stop burning coal.

One person who's done a lot of really important thinking about closing coal plants, and has a tremendous grasp of the financial nuances is, Uday Varadarajan. Uday is a Senior Principal in the carbon free electricity practice at RMI. He's also an expert on the issue of how to achieve a just transition for communities threatened by some of the economic side effects of coal plant closures and other changes.

I sat down with Uday to talk about America's remaining coal plants, the challenges and opportunities of getting rid of them, and how to ensure the future wellbeing of the communities that depend on them. Here's that conversation.

[INTERVIEW]

[00:01:57] AR: Uday Varadarajan, welcome to Financial Climate. You work for RMI and for those who are unfamiliar with it, can you just briefly describe what RMI is and what it does?

[00:02:10] UV: Sure. So, RMI is a global think-thank. We focus on trying to address some of the thorniest challenges that we face in achieving a rapid and equitable transition to clean energy.

[00:02:23] AR: I understand that today in the United States, about 22% of our power still comes from coal.

[00:02:29] UV: That's right. And that's obviously a huge challenge. But at the same time, if you look back as recently as 2005, it was probably more than twice that. So, that's also an amazing amount of progress. So, can you talk a bit about what has led to that dramatic decrease in coal in the last 15 years or so.

[00:02:47] AR: So, the significant decline that we've seen in coal generation can be attributed to a couple of different significant factors. One is that starting in about 2008, and 2009, there was a tremendous revolution in our ability to access otherwise inaccessible natural gas resources. Fracking unlocked a supply of gas that has absolutely turned the coal or the fossil fuel story in the United States upside down, or at least had until very recently.

Natural gas, which had previously been a very expensive fuel, suddenly became abundant as a result of this new technology. At the same time, we had two other very important factors. One was the coal was coming under increasing pressure under the Obama administration especially but also before that, because of Clean Air Act rules that made it difficult to continue operating a lot of coal assets without further investment in pollution control equipment, to control NOx, SOx, and particularly mercury and air toxics.

There was a choice that really had to be made by utilities across the country, whether they wanted to double down on their existing coal plants, or whether they wanted to move in a different direction, and gas was starting to become extremely attractive as a substitute. Coal was becoming potentially if they made the decision to continue using coal, they would have to make a significant investment in their existing coal assets.

What most utilities across the country chose to do was to really focus on the coal plants that were the most economic, that were really difficult for even very cheap gas to approach. They kept those, they reinvested in those, they put a lot of money, actually, invested a fair bit of money in the existing coal fleet. And one of the interesting notes I will kind of add from a finance perspective is the coal utilization and the generation from coal has fallen. But if you look at the regulated utility space, the actual capital that has been invested in coal units, that is unrecovered in rates has actually doubled. While utilization of that coal has significantly gone down.

The reason for this is exactly this pollution control equipment. They shut down all the coal plants that they didn't really want to invest in that were older and they kept the newer ones, the ones that were bigger, the ones that they chose to sort of upgrade, update and largely with pollution control equipment.

And then the third trend, and the one that has been increasingly important, particularly in recent years, is, of course, the emergence of solar storage and wind as low-cost resources with federal tax benefits. And that has also contributed to a significant shift in the landscape. That, combined with the imperatives around climate and the pressure from investors, I think has really made utilities gun shy from keeping their existing coal. And this is kind of a combination of investor pressure, and the price pressure from renewables, along with the pressure of possible future climate regulation.

[00:05:49] AR: Before we move on, I just wanted to hold on something you brought up. You mentioned investor pressure. There's a growing effort today, to pressure University endowments and public pension funds and others, to divest from fossil fuel assets or to influence corporate management in a green direction. And there's also controversy over whether divestment by asset managers is a good idea, or whether it even doesn't eat good from a climate perspective. So, did you mean that this kind of ESG meaning environmental, social, and governance-oriented investing is actually effective and causing coal plants to shut down? Or were you talking about conventional investment pressure from more traditionally oriented asset managers?

[00:06:29] UV: So, I think the answer is both in a really interesting way. I do believe that ESG risks are real risks to financial outcome via to achieving an optimal risk adjusted returns. So, I have little sympathy for the argument that we shouldn't have, that if clients are asking in the financial sector context for ESG, that somehow, we shouldn't be able to give it to them.

On the other hand, if clients are asking with different pieces, we give it to them for different pieces, we have all kinds of investment vehicles that have different PCs, for why they think why they exist and what they're trying to do. I see no reason why the financial community cannot meet this demand. That being said, the real reason why I think even if this demand didn't exist, ESG is a reasonable thing to do is that indeed, it is a real risk. There are indeed firms that are subject to this risk, and there is a real question as to whether the financial sector has done an adequate job incorporating financial risk associated with climate change both the physical climate risk and the transition risk.

This risk can be material. It can impact evaluations of different firms and interesting ways it comes from policy. It is ultimately a real risk. Transition risk is a real risk tied to the changing policy environments and regulatory environments. That is a perfectly rational set of risks to be worried about. And certainly, execution risks on other. Similarly, again, any firm is going to have to operate under political, economic and regulatory risks. And ESG issues, generally speaking, are tied to firms that are particularly susceptible to such political, regulatory and financial risks. 

[00:08:16] AR: Gotcha. So then, going back to this issue of coal plants and coal plant retirements, and you mentioned the reasons why many of these have been retired over the last 15 or 20 years, but we still have this long way to go. So, I think a lot of people are used to the idea that often socially responsible choices are more costly than conventional choices, and the organic lettuce cost more than the regular lettuce and that sort of thing.

But a lot of the research that you have done and your colleagues have shown that there are situations where many of these coal plants are actually uneconomical, and even though they've been built already, that it would be actually more economical for the utility or owner of that plant to switch to renewable energy. So, can you explain a bit as to why that is that these plants would continue to operate?

[00:09:06] UV: I think one of the insights that has driven our work now since almost 2015, is exactly this insight that we were seeing of what seemed to be a lot more opportunities for reducing utilization of existing coal and other fossil assets, and replacing them with cleaner energy resources. And that these opportunities did not seem to be pursued as rapidly as you might guess that they would be from the economics.

What we realized is that there were other barriers that were not necessarily tied to the economics alone, but had to do with contractual, regulatory and political barriers that made this transition, a lot less attractive for the stakeholders involved, than the naive economics would suggest alone. In some cases, these barriers were tied actually to the structure of the incentives that we've been using to make clean energy, so attractive, compared to existing fossil. It turned out, that for example, 80% of the coal, remaining coal in the country is owned by utilities, for which the tax incentives that we've been using that make this economics look so attractive, really just don't work. They can't use the tax incentives. They either don't have tax capacity, or they're municipal cooperative, or government entities that literally can't use tax incentives.

So, for most of the entities that actually have operated this, even though, apparently would be cheaper, to build the clean energy, it isn't necessarily cheaper for them to – they didn't have access directly to the incentives that allowed them to make that transitioning.

Now, that isn't 100% true. They could get third parties to invest, instead of them doing it themselves. But that really erodes their business model, erodes their balance sheet, and is unattractive from that point of view. And so again, there's a situation where the economics looks right, but the structure of the policy, the regulation, the types of contracts that were in place make this unattractive. That's another important point to note. Even though it may have been attractive, the way that rate regulation works and that the majority of regulated or municipal or cooperatives or other utilities work, if you try to shut down a plant early, your customers are still on the hook for paying off that plants financing costs. And even if it makes sense, just from an operating cost point of view, to reuse it less, you often can't shut it down, or you end up having a huge cost that's sitting on your books that make that transition look a lot less economically attractive than it otherwise would.

In fact, sometimes if you shut it down, you have to actually accelerate recovery of those assets, in order to avoid balance sheet challenges that you might face, financial challenges that you might face, and make it more expensive, even though it would have seemed to have been less expensive to make that transition. So, the reality of those is that very often, for the utility itself, or for its customers, even though the economics, long term economics suggests that the transition makes sense, the short-term challenges associated with moving off of an existing plant, and the challenges associated with the structure of those incentives made that transition unattractive. 

Finally, of course, there's the political challenge of communities that would have been decimated. Often very rural communities that are dependent on the coal plants or mines. A lot of those folks don't have other options immediately and those communities often depend on the coal plants or the mines for their property taxes.

So, all of that meant that even though there was such an attractive option, for the majority of coal plants in the country that were still operating, the trade didn't look attractive. Now, the Inflation Reduction Act actually meaningfully and materially addresses just about all these issues. So, I'm happy to talk about that, too, at some point.

[00:12:59] AR: Sure. Absolutely. Yeah, maybe before we get to that, just totally on this point of what it is that made these incentives the way they are, as they are. One piece of that that you've written about is the unusual financing structure for investor owned utilities, where investors receive a return on capital, that's different from the kind of return they receive on ordinary maintenance and things, expenses, and so on. So, how big of a piece do you think that is of what has caused this misalignment here?

[00:13:26] UV: So, the utility business model and the regulatory model for utilities certainly has a role to play and my transition was not as attractive as it might otherwise be. Essentially, be utilities made an investment, ratepayers are kind of on the hook to pay back that investment as if it was loaned to them. But unlike a mortgage, where you are just paying off an interest rate or a debt, you may be able to get mortgage. Before the last year or so, you were able to get a mortgage that was around 4% or 5%, and it was all debt. While regulated utility in your utility bills, you're paying off something that looks like a mortgage, for any investment that a utility is made at an interest rate that looks like it's effectively something between 8% and 10% right now. And that's because cost of service regulation allows the utility to get recovery of any investment that it's made, and an allowed rate of return on top of that.

Not allowed rate of return is usually a combination of debt and equity, and so that's a pretty high rate of return. It's a very attractive investment. The structure of cost of service regulation, incentivizes utilities to prioritize assets that are very capital intensive like that. Now, in principle, coal assets are reasonably capital intensive, but they actually don't make any money directly off of the fuel that they use or out of operating expenses. So, the way that rate of return regulation works, they only primarily make a return on the assets that they've invested in.

Generally, speaking, they're always incentivized to try to find a reason to ask their regulators to allow them to invest more and more capital, to increase what's called their rate base, which they earn that return on. And so, because of this, they are not incentivized to let go of any assets that they've made an investment in. And that includes old coal plants. And so, this is one of the things that makes them sort of load to get rid of their existing facilities. If they're still earning a rate of return on them, and they get to recover that in rates. Unlike other businesses, they don't really lose by keeping that asset on, regardless of economics for their customers. They win no matter what happens in that case, the customers are the ones paying. So, that's kind of the unique reason why utilities will want to keep an asset on even when it doesn't make economic sense necessarily for their customers.

[00:15:42] AR: So, you've described the negative effects of this traditional, unusual financial structure of an investor owned utility. Do you see that structure is something inherently flawed, that needs to be changed, or something that we need to continue to live with?

[00:15:55] UV: My colleagues have been thinking deeply about ways in which we can tweak that regulatory model in meaningful ways that can keep some of the benefits of the model. For instance, right now, the transition that we're talking about, would require that utilities deploy $3 trillion of capital over the next 12, 13 years across the country. For deploying such a huge amount of capital, a rate of return regulation isn't so bad. We actually need a hell of a lot of capital deployed.

So, in some sense, we don't want to throw the baby out with the bathwater, we don't want to actually, be in a situation where we're not utilizing the tried and true proven mechanism, regulatory mechanism that we know can historically has been able to raise the kind of capital that we need, and to do so quickly. But the flip side of this is, indeed, we need to be rethinking the way in which regulated utilities are incentivized. But that's not just about the way that they're regulated. It might also be about their corporate structure. We were talking a little bit about how investors are interested in ESG, and we've talked a little bit about how regulators want to see more and better from their utilities.

One of the things these regulated utilities do is technically speaking, they've got a charter from the government. And they've got investors who are desperate for them to do some things differently, and to not have these kinds of risks that PG&E has. And yet they operate as if with a purely a profit motive, and nothing else. Well, both the regulators and the customers and their owners are asking them to do something different. Their charter doesn't allow them to do that. Why the hell don't we change their charter? Why is it exactly that we have regulated utilities across the country that aren't B Corps. Something different, where actually the regulators interests and their shareholders’ interests are now written into their charter, and they're given the freedom to operate in ways that achieved more than just a single outcome that they're looking for?

That can be one way to start to shift the incentive of management. If they actually know the shareholders have their back, and they have similar goals to the regulators, maybe it would make this a little bit more of an efficient process and less adversarial. So, that's one way in which we can change the utility, start thinking about why it is that investor owned utilities that are regulated utilities, that should be owned by ESG firms in a perfect world, to a good degree, ESG investors that are regulated by entities that have certain specific requirements that are about the public good. Why the hell don't we actually have that written in to the charter of the utility itself?

Secondly, there are good reasons to think about modifications to rate of return or regulation. TOTEX accounting is a really interesting idea that would put CAPEX and OPEX on a similar footing.

[00:18:43] AR: So, we're talking about capital being, you'd invest in a long-lived physical plant or piece of equipment, like a power plant, versus operating expenses would be an ongoing repeated expense. For example, the salaries of the employees running a power plant, or the cost of whatever fuel that power plant is running on.

[00:19:01] UV: That's absolutely right. So, the question is, why do utilities only earn a return on the capital expenses? And is there some way that we can actually equalize the operating expenses and the capital expenses so that they've got an incentive to invest? Put the money where it needs to be to focus on reliability, rather than worry about whether that's technically speaking a capital investment or an operating expense, and get compensated based more on the services that they provide on how good of a job they do, in providing those services in a reliable way, in a way that meets environmental goals that addresses equity and other justice challenges that we face, the things that might matter for achieving a low energy burden.

So, the idea of TOTEX and performance-based regulation which are generally performance-based regulation of which to tax accounting is one way of addressing some of these accounting issues that would make capital and operating expenses appear to be different from the perspective of an inventor in a utility to using some of these performance-based approaches might help mitigate some of these weird incentives that utilities have. And moving forward, I think this is one of the opportunities that we have to rethink the way that we regulate utilities, in ways that we have only 10 years, we don't have very much time to completely rebuild the utility landscape, it might be very difficult to get the consensus we need across the 50 states in the country, to move to a deregulated market to completely shift.

But we can potentially start making these tweaks to the way that regulation is done, to better align the interests of utilities, with the regulators, and to do so in ways that might be scalable quickly, and maybe more quickly. These are smaller tweaks that we're talking about. They keep a lot of the same structures in place, and don't necessarily require that every state do the same thing. Or that every state have to cooperate with every other state to make it happen in the United States, which I think can make it a lot easier for us to imagine that this could happen more quickly.

[00:21:03] AR: We talked a bit about the unusual financial structure of utilities, which incentivizes the utilities to keep operating them. You said, the Inflation Reduction Act helps to address this problem. How does it do that?

[00:21:15] UV: Yeah, so we talked a little bit about how regulated utilities across the country. We're in a situation where coal used to be 50-ish percent of US generation, we're down to something closer to 22%, 23%. The amount invested by regulated utilities in their existing coal plants has actually gone up by nearly doubled, more than doubled. And so, this is now $100 billion burden on American ratepayers. And every year, ratepayers are paying on the order of 12 to $15 billion a year in rates on these coal plants, these old coal plants just on these capital costs, mostly on pollution control. This is a huge overhang. If you try to replace those dirty resources with clean energy, even if it is cheap, even it’s in the Inflation Reduction Act has created some incentives that make that look really attractive.

But one of the really interesting things that the Inflation Reduction Act actually also does is it also provides the ability to kind of deal with this overhang of $100 billion. You've got these 100 billion dollars, and you're paying really high capital costs for it. If I look at the numbers, for what I just told you, it's as if you've got a mortgage, where you're paying something like an 8% to 10% mortgage rate on these old coal plant investments, and you're doing so over about 20-year period.

It's not a very great mortgage, it's a very expensive mortgage. And what the government is offering that's passed through the Inflation Reduction Act, is if a utility is willing to make an investment in the clean energy, the government will help reduce the cost of that clean energy, part of that clean energy investment, and help you refinance this old debt associated, this old effective mortgage, which is really kind of utility equity and debt. To take that $100 billion, let you instead of paying a mortgage, that's a 20-year mortgage with an 8% to 10% interest rate, replace that with a 30-year effective mortgage at closer to 4%. That can be a huge savings in cost going from paying $100 billion. Again, if you replace it with a 30-year mortgage, that ends up being something takes a cost that was about 12 to $15 billion a year, and brings it down to someplace closer to seven.

[00:23:31] AR: So, the customer of the utility doesn't see a line item as a mortgage, they see the line item is just that's your power bill. It's a higher power bill that they're paying in order to cover the cost that the utility has incurred.

[00:23:43] UV: That's absolutely right. So, if the government steps in and says, “Hey, you know what, you're shutting down these plants, and your customers are paying for an equity at a debt rate of return, when they're not really getting service from this. That's kind of crazy.” Because the government can say, “Okay, well, these plants are being shut down early”, in part because we have a public good that we're trying to go after and this clean energy can reduce health care costs, it can reduce – mitigate climate change, there's a good reason for us to come in and say, “Okay, we'll use the power of fine you know, government financing, we can go get borrow from the capital markets, a treasury interest rates. We’ll provide you a loan, a treasury plus a small spread, that will allow you to replace that 8% to 10% interest rate that your customers are paying in rates with something that looks like a 30-year mortgage, instead of 20-year mortgage, and with an interest rate of somewhere around 4%, rather than 8% to 10%.” That can be a huge savings.

[00:24:38] AR: Okay. So, another thing I wanted to mention that all this that has been in the news a lot and I'm sure you've addressed a lot is power from these coal plants is reliably there all the time. Whereas renewables obviously come on when they come on in terms of when the sun shines or when the wind blows. And so, there's been obviously an increase in concerns around grid reliability for probably a bunch of reasons, but a lot of publicized incidents of grids being less reliable than they may have been in the past.

So, I'm interested to hear your thoughts on how you see the issue of grid reliability addressed in the context of taking away or hopefully taking away, this still pretty significant amount of coal power, and then replacing that with renewables, at least some of which might be intermittent.

[00:25:26] UV: Yeah, I think it's important to note that there are costs and benefits and a shift in risk as we shift to clean energy. Some of this is indeed tied to renewables. Indeed, renewables are variable. Indeed, as we're seeing a shift, climate change itself driving that shift to see more extreme weather events. We do anticipate that we need to be particularly careful about establishing resilient grids. But achieving a more resilient grid is likely going to benefit tremendously from some of the technologies that are envisioned to be deployed to achieve high levels of renewable penetration, particularly the battery storage, responsive demand. And particularly, as we start thinking about long term, clean and firm resources, whether they are, in particular, a point to the potential of green hydrogen in turbans as another firming resource, but the long-term benefit that is also low carbon.

I think there are going to be higher, they would be unsubsidized hardcore cost resources at the end of the day. But what we've seen in the Inflation Reduction Act is significant incentives to start bringing those clean, firm resources down the cost curve, to the point where by the end of the decade, the hope is that the transition that we're talking about, is going to lead to the deployment of resources, battery storage, long-term storage through hydrogen electrolyzers, and hydrogen turbines are fuel cells.

In fact, ultimately, with hydrogen derived ideally, from clean energy resources to the greatest degree possible, these resources have the potential in principle to create actually a more resilient grid over time, but this transition is going to be challenging, and making our way of figuring out how to shift the grid, build out the resources, build out the grid infrastructure that's needed and manage the grid differently, is going to be potentially a rocky time. And it's something that we have to move very carefully about.

One way that you can do that, I will mention, is that you don't need to shut down the coal plants completely to get most of the benefits by using mechanisms like the loan program that I'm talking about that can refinance.

[00:27:30] AR: This is through the Department of Energy, US Department of Energy loan program.

[00:27:33] UV: That's right. The US Department of Energy has the authority to provide $250 billion in loans to basically focused on energy infrastructure reinvestment. Basically, take existing infrastructure and reinvest in it. And this is exactly what you can do with some of the passive assets. You don't have to – it isn't necessarily about shutting them down. It's potentially about transitioning the assets. It's investing in clean energy to reduce the utilization of those assets. So, you can use these loans to basically reduce the cost of this giant mortgage that was out there, make it cheaper to keep them around, and keep them around for a bit while you integrate the clean energy over the next decade. Use the less and less, but keep them around when they're needed. So, that you've got them, when you've got that random event that requires you turn on a gas plant, you've still got it on ground. Or you turn out a coal plant in the winter when you need it for those couple of weeks.

[00:28:24] AR: Gotcha. And that helps to address that resilience problem with the grid that we're talking about reliability.

[00:28:28] UV: Over time, what it does is allows you to sort of while we're making the transition and until we can get the clean firm resources into replacement, you can keep using some of the dirty resources, but use them a lot less. But the overall emissions are still coming way down. Use a clean energy most of the time when you've got it with the batteries, and then use this when you have to as backup. And we've already built all the backup generation in the country, we just need to make sure we're paying for it more cost effectively. And it's not as expensive to make a move away from them and to transition them. And that's exactly what this financing program in the Department of Energy is intended to do, to make it easier to make that transition, particularly for all of the utilities in red states across the country that have invested in coal and fossil assets. This is a way for them to get to the point where they can reduce their dependence on fossil fuels that often have volatile prices, which have absolutely spiked in the last couple of years. So, you're going to have more certain prices that are lower, but at the same time not given up on the reliability benefits of those assets, particularly as we're making that transition to more reliable and firm clean resources.

[00:29:30] AR: There are also some other important provisions of the inflation Reduction Act that incentivize the development of clean energy resources. Can you tell us a bit about those?

[00:29:40] UV: The biggest thing that the Inflation Reduction Act did is to make the tax incentives that we've provided historically, to make them attractive for the 80% of utilities that previously weren't able to use them. And there's a couple of provisions called direct pay and transferability that essentially make those tax credits useful again, another issue called tax normalization.

[00:30:04] AR: So, in other words, whereas previously doing something good for renewable energy might get you a reduction in your tax bill, if you're the kind of utility that had no tax bill, like publicly owned, or nonprofit or whatever it may be, then that wasn't any good for you. But this changes that to allow you to somehow access those dollars anyway, even without a tax bill, is that right?

[00:30:26] UV: That's absolutely right. Very well put. That's exactly what this bill does. Moreover, it also addresses disincentives that regulated utilities had to build clean energy. All of these utilities that couldn't use these tax incentives didn't really see clean energy is something particularly better than the dirty energy resources. And so, they never really made the move. They resisted solar.

My belief is that with the Inflation Reduction Act, with this change in the tax incentives, you're going to see that script flip. And you'll see a lot of utilities that have really resisted putting on solar and storage in particular, change their mind, same with wind, to the extent to which they can, to the extent to which they can build these. This is going to be attractive for their business model, and be attractive in ways that allow them to reduce cost to them for their customers, while growing their businesses.

The shift will take a little time. We have supply chain constraints. Not everybody can build all this clean stuff all at once right now, because we don't have enough supply of wind turbines and solar panels and batteries to make this happen immediately. But over the next decade, you're going to see that shift happen increasingly rapidly. I would guess it'll start really in earnest, probably closer to 2024, 2025, before this gets going.

[00:31:37] AR: You've touched a bit on the ways the energy transition can be damaging to some communities. For example, a coal mine, or a power plant can be a really important regional employer. The Inflation Reduction Act has some provisions that try to help. Can you talk a bit about how it would do that?

[00:31:53] UV: One of the really important things that the Inflation Reduction Act does is it provides an extra incentive for assets that are deployed in energy communities, in communities that have hosted fossil assets, and in distressed communities and disadvantaged communities. And especially in the combination of both. Those are all stackable incentives that make it very, very attractive for utilities and other entities to cite these assets in ways that benefit some of the communities that might have otherwise been knocked out.

In addition, they require – there pretty stringent labor requirements and they have significant domestic content requirements. I should say, in addition to the disadvantaged community’s benefit, the biggest [inaudible 00:32:31] is actually a domestic content requirement. And they're also simultaneously significant incentives in the IRA, for a lot of the clean energy supply chain to be built in the United States. That means that it's going to look more and more attractive for all of these utilities to buy solar panels and batteries and wind turbines, that to a significant degree, have had more and more of their manufacturing in the United States. Where the critical minerals that are used to, are mined in the United States, whether the factories that produce them are in the United States.

Not only that, again, for those incentives, it's going to be attractive for folks who are trying to figure out where to build those factories, to build those factories in the same communities. And because we're talking about manufacturing, this isn't stuff that's just going to be there for a couple of years, and in construction jobs and go away. This is something that can be a long-term driver for continued economic prosperity, or revitalizing a lot of American towns and cities.

[00:33:32] AR: The energy transition is somewhat new. But the problem of communities that suffer from a change in economics or public policy is not so new. We've seen it before when mines or factories close or with logging in the northwest and other areas. And there have been programs in the past that have provided job retraining and things like that. But they haven't always been effective, especially for people who are well into middle age and have been doing a certain type of work all their lives, it can be difficult to move into a very different line of work. So, in what ways do current policies reflect lessons from past efforts?

[00:34:06] UV: Yeah, that's a really good point. Those issues have been pretty important in shaping the nature of these provisions to address community transition. In particular, there's been a long observation that when for instance, with a transition at hand right now, while it is likely true, that clean energy in aggregate creates greater employment that might have been replaced in the dirty energy it's replacing. That employment is much more widespread, is likely to have a very, very different set of skills and profile than the employment it replaces.

For that middle-aged coworker, it's going to be 100% irrelevant, most of the clean energy economy. So, one of the important features of not just the Inflation Reduction Act but the Bipartisan Infrastructure Build Chips Act is that they create a suite of incentives that provide a much broader set of options for the type of economic activity and the type of compensation for workers and communities that is made available.

So, the $250 billion loan program, that the Department of Energy hose is flexible. Exactly how that financing is used in a minor plant that's been retired doesn't have to be for clean energy. Doesn't have to be for anything energy related. In fact, anything repurposing can do it. It includes financing that can be provided through the rate making process that is just about paying coworkers their retirement, or providing for an early retirement package that all of that can be included in some of the compensation packages, or it can allow for utility to make, again, make it more attractive for utility to repurpose some of those workers, move them somewhere else.

Secondly, the program allows broad latitude for communities to think about other types of industries that may have a better match for their communities. If they want manufacturing, they can get manufacturing. If they want a different type of mining, and it works for them, they can get financing for that. And finally, I'd say that one of the biggest pieces for a lot of these older, especially for coal communities, is a significant amount of funding for remediation, and for accelerated remediation that was in the Bipartisan Infrastructure Bill. And this additional piece is particularly attractive because especially for mining jobs, the remediation workers often are reasonably well matched in terms of the list skills of labor that are required with the skills of existing coal miners.

So, there are multiple opportunities and options that communities can work with utilities and themselves can access, that can create a better fit for the specific needs of their communities, their workers, their essential services, et cetera. And it gives them the opportunity to do something. I think this is – at least, that's how we've sort of taken some lessons from what has and hasn’t worked and incorporated it into the mechanisms that are in place today.

[00:37:04] AR: I really appreciate your optimism, and also your willingness to roll up your sleeves and keep plugging away to make progress on this critically important work. Uday Varadarajan, thank you so much for talking with us.

[00:37:15] UV: Thanks so much for the invite. It was a really interesting conversation. Those are great questions. Appreciate the chance to talk about it. 

[END OF INTERVIEW]

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