Energy Biz - July/August 2008 - (Page 90) » legal eagle Embracing Carbon Principles guiding Power investments By gary KreLLenstein ConCerns over Climate Change are driving policy makers to impose new regulations on the energy industry. Although uncertainties remain regarding the causes, impact and magnitude of climate change, it is highly likely that regulations related to greenhouse gas emissions will be imposed on the electric utility industry in the relatively near future. Greenhouse gas emissions from coal-fired electricity generation are 27 percent of emissions from the United States — the largest historical emitter. Yet, demand for electricity in the United States is projected to increase by approximately 25 percent by 2030 and coal remains the most affordable and domestically plentiful fuel source available. In fact, coal-fired generation accounts for just over 50 percent of U.S. electricity production. These are the basic facts that led us to formulate and adopt the Carbon Principles. The need for these principles is driven by the additional financial risks faced by investors, lenders and utilities in dealing with the regulatory uncertainties associated with likely implementation of a national climate change policy. And that policy is very likely coming. Both presidential candidates support putting a price on greenhouse gas emissions, aka carbon. Democratic leadership in both the Senate and the House is committed to regulating greenhouse gas emissions whether through a cap-and-trade system or some other approach. And there is increasing public pressure from the scientific community and the public to NewsFlash take action. IraNIaN As this reality became Nuclear spIes more apparent over the An Iranian engineer past year, JPMorgan and has been convicted of our partner banks — Bank using training software obtained at an Arizona of America, Citigroup, and nuclear power plant, Morgan Stanley — realized the Associated Press reported. the necessity of better He had worked understanding the risks of at Palo Verde for 17 years. He returned to assets that emit substantial Iran with a computer amounts of greenhouse containing the software and designs of the plant. gases. In light of their Palo Verde officials said large share of emissions, there was no security extremely long useful life, threat. July/August 2008 (Guest opinion) and the fact that there were then about 150 new coalfired power plants on the drawing board, we realized that coal-fired electricity generation was particularly exposed to the risks of future carbon regulation. We further recognized that any meaningful change to the way coal-fired generation is financed would require the active consultation of the power companies and the environmental community. Our effort is the first time a group of banks has come together and consulted with power companies and environmental groups The Carbon Principles: http://carbonprinciples.org. to develop a process for understanding carbon risk around power sector investments needed to meet future economic growth and the needs of consumers for reliable and affordable energy. The consortium has developed an Enhanced Diligence framework to help lenders better understand and evaluate the potential carbon risks associated with coal plant investments. The principles recognize the benefits of a portfolio approach to meeting the power needs of consumers, without prescribing how power companies should act to meet these needs. However, if high-carbondioxide-emitting technologies are selected by power companies, the adopting banks have agreed to follow the enhanced diligence process and factor these risks and potential mitigants into the final financing decision. The Carbon Principles’ portfolio approach focuses on three areas: energy efficiency, renewable and low carbon technologies, and conventional and advanced power generation. The best way to reduce carbon emissions and manage their risk is not to produce them. Hence, the principles inquire whether and how a borrower is seeking to maximize energy efficiency and reduce or eliminate the need to build new capacity. The next focus, renewable and low-carbon technologies, seeks to understand the extent to which a borrower is maximizing its use of renewable energy sources. Again, renewable energy production may reduce the need to build new conventional power capacity and better manage the financial risk of carbon regulation. Finally, the principles seek to understand the fundamentals driving the decision to build new capacity and whether the borrower is positioning the asset to manage carbon risk through steps like offset purchases or preparation for carbon capture and sequestration installation. The Carbon Principles have not been without controversy. Some say they mean that we will not finance coal-fired power plants. Others have criticized them for ignoring the threat of climate change and coal-fired electricity’s role in it. And still others have said they go too far and jeopardize the ability to build needed new generating capacity. Like Goldilocks, we feel they’re just right. 90 E n E rgyB i z http://carbonprinciples.org http://www.energycentral.com
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