{"id":6198,"date":"2019-03-08T19:32:47","date_gmt":"2019-03-08T23:32:47","guid":{"rendered":"http:\/\/ncjolt.org\/?p=6198"},"modified":"2020-06-04T20:52:26","modified_gmt":"2020-06-04T20:52:26","slug":"rethinking-debt-equity-ratios-and-securitized-bonds-could-help-finance-a-green-new-deal","status":"publish","type":"post","link":"https:\/\/journals.law.unc.edu\/ncjolt\/blogs\/rethinking-debt-equity-ratios-and-securitized-bonds-could-help-finance-a-green-new-deal\/","title":{"rendered":"Rethinking Debt-Equity Ratios and Securitized Bonds Could Help Finance a Green New Deal"},"content":{"rendered":"\n

Political firebrand and House\nRepresentative Alexandria Ocasio-Cortez and Senator Ed Markey released the Green\nNew Deal (\u201cGND\u201d)<\/a> in early February 2019. Spurred by recent findings from\nthe Intergovernmental Panel on Climate Change (IPCC) that suggest humans have\nless than a decade to reverse course on climate change before it will be too\nlate to prevent catastrophic events, the GND is somewhat of a roadmap of\npolicies intended to address climate change. In very broad terms, it describes\na series of investments into both renewable infrastructure and clean energy\njobs. Even from those that agree in principle with the overall themes of the\nGND, a reoccurring criticism is simply how these massive investments can be\nfunded. <\/p>\n\n\n

Though not a solution that could solely\nfund the GND, economists\nand regulators<\/a> have recently been examining how debt refinancing could better\nbe used to help transition aging fossil fuel generation to renewable\ngeneration. While closing down a dirty coal plant is a commendable goal of\nenvironmentalists, plant closure is quite an expensive prospect. When\nconsidering that energy infrastructure projects often run into the millions or\nbillions of dollars, the cost of these projects are amortized over a fixed and\nlengthy duration of usually no less than thirty years. If a coal plant is then\nforced to shut down before its thirty-year mark, it risks becoming a stranded\nasset<\/a>. <\/p>\n\n\n

Investors<\/a>\nare primarily the group most opposed to an asset being shut down before its\nend-of-life as it represents their unrecovered investment. These large capital\nprojects<\/a> are usually funded by a combination of equity where investors\npurchase shares of ownership, and debt where investors loan utilities money by\npurchasing bonds. In the event of bankruptcy, creditors are paid before\nshareholders which means equity investors usually have higher rates of return\nto compensate them for their additional risk. While the market determines a\nutility\u2019s stock price, financial institutions issue credit ratings that determine\nthe cost of debt financing, similarly to how Equifax or Experian issue credit\nscores for individuals to indicate their ability to repay a loan. <\/p>\n\n\n

Actualizing the GND would likely require an enormous federal initiative, but it would be foolhardy to disregard the potential financing tools already available at the local and state levels that could ameliorate some of the financial sting. Though a high debt to equity ratio is sometimes a sign of a utility that is at a high risk of bankruptcy, there is another key reason<\/a> why utility executives push for equity instead of debt investment\u2014regulators only allow profits on equity investments and not debt. So despite the very real risks that a higher debt to equity ratio might have for a utility, the potential impacts and industry best practices surrounding this ratio are obfuscated by a utility\u2019s blatant incentive to use equity instead of debt. Given its lower risk to investors\u2014debt is actually cheaper for utilities to obtain. <\/p>\n\n\n

Therefore, refinancing unrecovered equity investments in aging fossil fuel generation plants with debt or securitized utility bonds, could allow a quicker transition to renewable generation by lowering the cost burden on ratepayers and shareholders when closing down still useful assets. In addition to examining how this refinancing tool could apply to coal plants, other potential applications might include refinancing for nuclear plants that never were fully constructed like that in South Carolina<\/a> or refinancing in the wake of environmental accidents that require swift closure of the offending source. Achieving the GND will require creativity, dedication, and a willingness to forge ahead in a piecemeal approach with already available tools instead of waiting upon comprehensive legislation. Though not without risk, debt refinancing is one of these available tools. <\/p>\n\n\n

Abi Christoph, 25 February 2019<\/p>\n","protected":false},"excerpt":{"rendered":"

Political firebrand and House Representative Alexandria Ocasio-Cortez and Senator Ed Markey released the Green New Deal (\u201cGND\u201d) in early February 2019. Spurred by recent findings from the Intergovernmental Panel on Climate Change (IPCC) that suggest humans have less than a decade to reverse course on climate change before it will be too late to prevent …<\/a><\/p>\n","protected":false},"author":1,"featured_media":6199,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[51],"tags":[],"_links":{"self":[{"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/posts\/6198"}],"collection":[{"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/comments?post=6198"}],"version-history":[{"count":1,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/posts\/6198\/revisions"}],"predecessor-version":[{"id":6839,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/posts\/6198\/revisions\/6839"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/media\/6199"}],"wp:attachment":[{"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/media?parent=6198"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/categories?post=6198"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/journals.law.unc.edu\/ncjolt\/wp-json\/wp\/v2\/tags?post=6198"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}