A controversial Illinois coal plant that has locked municipalities across the Midwest into financially crushing contracts could be forced to close within a decade under proposed state clean energy legislation.
The Clean Energy Jobs Act would require mandatory closure dates for all coal plants in the state, including the Prairie State Energy Campus, a 1,600-megawatt southern Illinois power station that is by far the state’s largest carbon emitter.
Shutting down the plant would be a major climate victory, but it wouldn’t necessarily provide financial relief for cities and ratepayers, which is why clean energy and consumer advocates are calling for elected officials to address the enormous debt associated with the troubled plant.
“Sadly a lot of the stuff we all feared would happen has come home to roost,” said Sandy Buchanan, executive director of the Institute for Energy Economics and Financial Analysis, which has published many reports on Prairie State. “The only reason Prairie State is operating at the level it is, is because it has these 50-year guaranteed contracts with cities essentially locked into buying the power. No one would buy the power if it was just a market choice.”
A new report by the Rocky Mountain Institute shows that Illinois customers paid near market rates for power from Prairie State since it was built in 2012, but the contracts have also saddled them with debt far beyond the norm. Other analyses, including by Buchanan’s organization, show customers have paid far more than market rates for power, in addition to debt payments.
Prairie State spokesperson Alyssa Harre said the Rocky Mountain Institute report is “flawed, relying on conjecture” involving overly optimistic projections for energy efficiency and renewable power available on the market.
“Relying on the market is a dangerous gamble,” Harre said. “This was proven yet again during the most recent winter weather events in Texas and the rolling blackouts and significant price spikes that followed.”
Under its complex web of contracts, Prairie State is essentially owned by nine public power agencies that serve almost 300 municipal utilities and electric cooperatives in Illinois, Indiana, Ohio, Kentucky, Michigan, Virginia, Missouri and West Virginia. The members are paying for $5 billion worth of bonds issued to build the plant.
“The contracts are difficult to break,” said J.C. Kibbey, Illinois clean energy advocate for the Natural Resources Defense Council, which commissioned the Rocky Mountain Institute report. “One recourse is to close the plant — but the ownership structure is so diffuse it’s difficult for any utility to do that on their own. It’s a wicked collective action problem. The good news is, there is a way out: The state has the authority to close the plant and help the utilities escape from these contracts, which the Clean Energy Jobs Act would do.”
Harre countered that legislation closing the plant would harm Illinois.
“Prairie State and its public power owners urge our legislators to develop and support policies that enable the long-term success of technologically advanced, baseload plants, like Prairie State,” she said. “Overly aggressive and unproven targets that call for the removal of fossil fuels prematurely or add unnecessary taxes will put customers at risk for increased energy costs and more frequent outages. Illinois is currently a net exporter of power. If legislation is passed in the General Assembly to prematurely shutter baseload plants like Prairie State, Illinois will need to import baseload power from states, likely from less efficient plants.”
Making the best of a bad situation
Under the proposed Clean Energy Jobs Act in Illinois, the state Environmental Protection Agency would set closure dates for all coal plants, prioritizing those with disproportionate environmental justice impacts and emissions. The Rocky Mountain Institute report examines a scenario where Prairie State would have to close by 2030.
Prairie State has widely been considered a debacle since its inception, with construction costs ballooning beyond predictions and generation delayed and stalled by technical problems — all at a cost to ratepayers and municipalities. Some small municipalities have faced bankruptcy because of their involvement, and pleaded and filed lawsuits to try to get out of the deal.
“It’s somewhere between disastrous and catastrophic,” said David Schlissel, director of resource planning analysis for the Institute for Energy Economics and Financial Analysis. “There’s a lot of money communities have spent and are spending for technology that is obsolete, out of date. I would hope communities that own pieces of Prairie State will study what it will cost when they have to transition away from the plant. Because that’s going to happen — I can’t tell you it will close tomorrow or in five years, but it’s going to happen.”
If Prairie State closes before the contracts are up, which many see as inevitable, ratepayers could face a similar situation to during past temporary plant shutdowns: paying for power elsewhere while still making promised payments for Prairie State.
“Closing the plant before the end of its useful life would essentially force communities to pay for two sources of power: the energy they have already bought through their partnerships with Prairie State, and replacement power to cover that loss,” Harre said. “That is an additional cost communities and taxpayers cannot afford, especially as communities across Illinois and the country struggle to make ends meet due to the negative economic impacts created by the pandemic.”
Experts say there is no good way out of the situation, but closing the plant sooner than later and looking for ways to reduce the debt would help.
“When this plant was built, plenty of folks were critiquing the climate risks of putting this thing up, including legislation like a carbon tax that would make it less economic,” said report co-author Kevin Brehm, co-op and municipal utility lead for the Shine Initiative at the Rocky Mountain Institute. “Now we’re seeing that happen. The coal supply chain is collapsing, and at the federal and state level there’s a chance of real action on carbon.”
In 2019 Prairie State was chosen as the site of a $15 million Department of Energy research site for carbon capture and storage; Prairie State Generating Company, which runs the plant, was slated to invest $3.75 million in the project. Researchers said that if carbon capture and storage was fully implemented at Prairie State, it could be the largest such retrofit in the world. And without carbon emissions, it might not need to close under an Illinois energy law.
Harre lauded the carbon capture and sequestration experiment, noting that the Department of Energy award had bipartisan support from U.S. Sens. Dick Durbin and Tammy Duckworth, both Democrats, and Republican Reps. Mike Bost and John Shimkus.
“This could provide broad value for closing the gap between today’s technologies and long-term carbon reduction goals,” she said.
But Schlissel sees that road as leading to another possible boondoggle.
“Adding carbon capture is unproven and extremely expensive,” he said. “So these poor communities and their customers would get stuck with higher costs due to carbon capture which won’t work as well as proponents claim.”
Meanwhile, the Rocky Mountain Institute report notes that if customers of Prairie State aren’t able to move to replace that power relatively soon, they may miss out on the opportunity for low-cost solar and wind power purchase agreements.
A mine in the mix
Prairie State is supplied by a nearby coal mine, which would lose its sole major customer if the plant closes. Peabody Energy initially owned the mine and spearheaded the construction of the power plant, but it sold off most of its ownership shortly after the project launched and got rid of its entire stake in 2016.
“The Prairie State coal plant is like a Venus flytrap,” Kibbey said. “Peabody coal and their friends who developed the plant got all these utilities to sign on with the promise of a sweet deal. By the time the utilities figured out the plant was a disaster, it was too late — they were already trapped in these onerous contracts.”
Experts worry that under the contracts, ratepayers and municipalities could be on the hook for mine reclamation and coal ash cleanup as well as the plant debt.
“These communities through the vehicle of Prairie State don’t only own a plant,” Buchanan said, “they own a mine, and they own coal ash disposal — all of which can have a lot of environmental liabilities,”
Harre noted that the room-and-pillar method of mining used means less subsidence than the longwall method typically used in Illinois mines. She said the coal ash repository on-site has environmental controls, and the company sells coal combustion residuals for reuse — including as an alternative to Portland cement in concrete, “effectively offsetting thousands of tons of carbon dioxide while also providing economic benefit to its owners.”
In all the Prairie State energy complex employs more than 650 people, Harre said.
“I don’t know of any coal plant out there with as complex an ownership as this one, this is one of a kind,” said Brehm, noting the mine-mouth plant as part of the package. “It just means a whole lot of assets and jobs tied into it.”
The Clean Energy Jobs Act includes extensive provisions for a “just transition” away from the coal economy, including funds collected from fossil fuel industries used to retrain coal workers and support communities that lose tax revenue from closing plants and mines. Such programs would help ease the job losses and other impacts of the Prairie State plant and affiliated mine closing, Kibbey said.
Paying for coal plants that have closed because they were no longer economically viable is increasingly a problem for ratepayers nationwide. Refinancing the debt, often through a mechanism called securitization, is one option to relieve the burden. Securitization involves selling low-interest bonds to cover the debt, so that ratepayers are paying interest on those bonds rather than the higher-interest-rate initial debt.
Investor-owned utilities are generally guaranteed a rate of return — profit — on their investments that can be reduced or eliminated during refinancing, yielding more relief for ratepayers. At Prairie State, the stakeholders are mainly municipally-owned utilities and cooperatives that do not have that rate of return, so savings can’t necessarily be achieved on that front.
But Brehm said the Illinois Commerce Commission could help with refinancing by guaranteeing the bonds that would be sold to reduce the debt. “We want to think about creative solutions to deal with this debt burden, which could be debt subsidization from the state,” Brehm said.
The study, which focused primarily on Illinois, found that “refinancing the debt with a ratepayer-backed security could allow plant owners to reinvest in clean energy solutions while saving Illinois ratepayers more than $300 million.”
Harre said securitization would not be a good option, arguing: “Securitization is an elaborate long-term refinancing of debt that simply extends the remaining debt to a much longer time period. The idea would be to lower today’s costs by obligating future customers. Should Prairie State close as suggested by the RMI [Rocky Mountain Institute] plan, future customers would receive no benefit on a resource for which they are paying.”
Brehm said municipal utilities and co-ops may be afraid of closing down a plant with lots of debt outstanding, and they may think they need to recoup that debt quickly once the plant closes — which would mean spikes for ratepayers. But he said that position is a “fallacy.”
“We’ve heard the concern that if you’re holding all this debt but don’t have that big asset [the operating plant] to back it up, you could get yourself in trouble with the credit agency,” he said. But there are options for “taking debt off your balance sheet and putting it in a different bucket, that wouldn’t get you dinked” on credit scores.
Kibbey said the recent study underscores that point.
“There are voices out there that have been trying to scare us for years by saying how expensive it will be if Prairie State closes,” he said. “This is solid analysis showing the opposite. It’s true that even if the plant closes, utilities that bought into Prairie State will still hold the debt for what it cost to build the plant. But they don’t need to continue to buy overpriced power on top of that. There are financing options … that could help lessen the debt burden.”
Buchanan said that while securitization could be an option, municipalities should consider more drastic action to avoid the burden of a deal that was unfair and deceptive — as her organization sees it — from the beginning. Lawsuits have already been filed about the contracts, and Buchanan thinks the potential plant closure should spur elected officials to examine their options and work together.
She noted that the bonds sold to build the plant are held primarily by large financial institutions that can afford a loss, if municipalities are simply released from provisions of the contracts.
“Because Prairie State involves so many communities in so many states, in our view it would require some political will in a number of these communities to challenge the deal they were given and the bond issues,” Buchanan said. “Sometimes when you have a really bad deal, the bondholders have to take a haircut, people just can’t pay it back.”