The banking industry is taking an increasing interest in green energy and carbon emissions, in lieu of the Federal government not taking any action. Because of this failing, the Bank of America has decided to start assessing the cost of carbon in their risk and underwriting processes for loans to power companies, currently estimating the cost of carbon will fall between $20-$40 per ton of carbon dioxide, anticipating that either a carbon tax will be assessed in the future or that CCS will be required at some point. This follows the establishment of the Carbon Principles, which established guidelines for banks to use in considering the risk factors in making loans to power companies, as announced by a consortium of banks on Feb. 4.
This action effectively acts as a carbon tax and will raise the cost of electricity from power plants emitting carbon to a cost that will give renewable energy a fairer playing field. This action could increase the spread between the cost of electricity made from nuclear power and coal power, considering that nuclear does not produce any carbon due to the operation of their plants. While I support Gen III+ nuclear (the next generation of nuclear plants), I also believe that the direct and indirect subsidies that the government gives nuclear plants should be eliminated (not much chance of this happening though), which would probably bring coal plants with CCS back into more favorable economics as compared to nuclear.
This action should help clear up the logjam that has been developing regarding construction of new coal fired plants. Because the procedures for approval of Gen III+ plants have not been ironed out, it will still take an extended period to get the first few of these on line. Also the nuclear industry has said that it will not build additional plants until the first 6-8 of these plants are in operation. Thus coal plants will probably start being built again in the not to distant future. Wind power is near the point where their manufacturing capacity is significant and this should keep their growth rate growing strong. Solar has many years (5-7) before their capacity could reasonably be expected to be significant and their costs reduced, so the immediate impact on them is nil -- still waiting for more silicon capacity and thin-film technologies to be more developed. However these factors have not kept solar from growing at a high pace.
In a speech at the Feb. 12 North Carolina Issues Forum Ken Lewis, Chairman and Chief Executive Officer, Bank of America made the following statements outlining his banks position on this subject:
One of the biggest gaps we are working to fill has to do with fundamental changes that the green economy is bringing to the traditional, carbon-based utility sector. The fact is that coal provides half of all electric power in the U.S…. and with energy demand rising by as much as 50% over the next 25 years, coal is projected to increase its share of the market… even accounting for the rapid growth of renewables.
So the coal industry will be with us for a long time… but the competitive and regulatory environments for coal in particular… and energy in general… are changing. And so will the risk formulas banks use to finance the industry.
Consider the following facts:
• the utility sector is one of the largest contributors to greenhouse gas emissions…
• the carbon impacts of new plant construction will be with us for many years…
• regulation of greenhouse gas emissions is coming, but until it does we need to make assumptions about what the cost of carbon will be…
• there is a growing volume of research showing the needed actions and associated costs to slow, stop and reverse the growth of greenhouse gas emissions.
With these facts in mind, we have decided, as have other banks, to start assessing the cost of carbon in our risk and underwriting processes as we evaluate the business models of utility sector companies. In the absence of Federal legislation, we estimate the cost will fall between $20-$40 per ton of carbon dioxide (based on recent analyses by McKinsey and other leading experts).
These projected costs for carbon emissions will also mean that the financial services industry must work with traditional utility clients to finance the development of cleaner technologies. It will take time to make this shift happen. In the meantime, I’d like to keep the lights on.
Thanks to NEI Nuclear Notes for the tip.