Bank of America to Assess Cost of Carbon on Loans to Utility Companies

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.

Comments

[poetryman69]

Energy Independence Now!

No more Oil Wars!

Stop funding the terrorists!

Drill in Anwar.

Build more nuclear power plants

Use More coal.

Use more natural gas

Turn trash into energy

Double the efficiency of windmills and solar cells.

If France can do nuclear power so can we.

If Brazil can do biomass/ethanol power so can we.

If Australia can do LNG power so can we.

Domestically produced energy will end recession and spur the economy.

[Luttkus]

Your editorial is typical in that "efficiency technology" is overlooked. With the current limited electricity output from wind and solar, the near term constraints of peak oil and greenhouse gasses, and my personal reluctance to drill in ANWAR or revisit nuclear, I personally perceive the necessity for reducing our energy demand. More than just LED lighting, better insulation and combined cycle industrial implementations, I perceive proven concepts such as residential solar panels, electric cars, net-metering, urban living and mass transit to be essential.

Efficiency technology is here today. However, I understand human habit is the hardest thing to change.

[Charles Barton]

Luttkus Since the 18th century Numerous technological breakthrews have greately increased the energy efficiency of your society. When the economist W.S. Jevon's looked at increases of energy efficiency on energy use, he discovered that increased energy always lead to greater energy demand. This discovery is called Jevon's paradox, and it has been observed over and ocer since 1865 when Jevon's furst published it. For over thirty years Amory Lovins has been preaching that energy efficiency will solve our energy problems. Since Lovins started his energy efficiency advocacy, quite litterly thousand of breakthroughs in energy efficiency have been made. If Jevon's was wrong and Lovins was right energy use should have dropped. Guess what happened? Jevon's not Lovins was proven right!

[technofossil]

What's interesting to me is that the investors and industry see that bringing CO2 emissions into the economic system will happen. It seems only politicians can't see it, and choke at even thinking of that t-- word that Jim mentions above.

What the industry and economy needs is a cost for CO2, one that reflects the actual cost of avoidance, and one that is predictable.

The cap-and-trade system, though good in attempting to bring emission into the economic system, is neither predictable, nor reflects actual costs other than by luck-- the price is mostly a matter of cap settings and short term issues.

The prior post "The Case for Investing in Energy Productivity" was on the topic of conservation and efficiency. In the report cited, they measure Rate-of-Return/year at 17-30% up to 500% for lighting.

In the case of Google's solar panels, the costs are very predictable (other than future energy price), so they get payback in 7 years, so it makes sense, independent of anything else. I wonder what the gain would be, replacing all the desktops with energy efficient laptops?

I saw a report on the most energy efficient supercomputer (best performance/kW)-- a simple one was made using laptop motherboards. It reminded me of the home brew computing cluster Google made with bulk motherboards, etc. kludged together without cases inside a rack.

[bigTom]

Charles:
So far Jevon's has been proven right. I suspect that in a time of high and increasing energy costs the result might change. But that needs to be demonstrated. To get back to the main topic, BA seems to be making prudent risk analysis. One doesn't need to be green -or advocate a carbon tax in order to factor it into financial risk analysis. This of course does not make carbon more expensive -at least not by $20-$40/ton -but it does make financing for high carbon projects a bit harder to obtain. And it probably raises the issue for the project designers as well.

[Charles Barton]

bigTom, High energy cost mean that the financing of nuks will be easier. Nuks with their low fuel cycle costs will eventually drive the cost of electricity down. Lower electrical costs will stimulate demand, even with very high efficiencies.

In addition, it is likely that future surface transportation will be powered by electricity. Industrial processes that currently rely on fossil fuels will probably also use electricity. In the future upwards of 80% of energy will be transmitted via electricity. We will then join Walt Whitman in singing the body electric.

[David B. Benson]

I contradict myself? I contain multitudes.

--- Walt Whitman

[Peter Spinney]

I can't imagine anything better to blog on. My own personal bank is going to apply a $20-$40 risk premium to financing it does for coal-fired assets, based on CO2 liability. A couple of years ago that would have been equivalent to the cost of coal itself. But that was before the cost of coal skyrocketed, reaching record levels today of $101/ton.

So just a couple of years ago, NeuCo, Inc. was saving customers on average about $1.50 for each mmBtu avoided through efficiency enhancements for coal-fired plants (ignoring NOx and SOx which both are about to increase precipitously and are now factored into bid/dispatch decisions in all organized markets). Now that same avoided mmBtu just a couple years later is worth anywhere between $4-$8.

One would think that the value of our efficiency improvements going up by 3-5x and the value of our NOx reduction increasing by 4-12x over the last two years would actually have some effects on the market demand for our optimizers. Of course this assumes some modicum of economic rationality on the part of our market. I'm not sure there is any. But it will be interesting to see.

[Noclegi Ustka]

Use more natural gas
Turn trash into energy
Double the efficiency of windmills and solar cells.
That is solution of problem

[shiny]

Bank of America has taken a nice step in showing interest on Green energy and carbon emissions.Coal industry will be with us for a long time,coal is mainly used for electricity.
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shiny

auto auctions

[Charge controller]

The solution as we all know is renewable energy. We have come a long way, but have we really? I grew up with wind mills pumping water on farms. Why did that go away? Was it too "old" technology to use the wind? Now we find we can do so much more with wind and solar. We are on the right track for sure. We will win this battle.

[Charge controller]

The biggest problem for the average American is the cost of going solar or wind power is the cost. When the average job for solar is in the $20, 30 or $40,000.00 range, most people cannot afford it, or won't pay for it. When the cost becomes more reasonable then great strides will be taken. In San Francisco, I have been told that all new constuction must have solar power. That will make a big difference whar there is no choice and will be financed in the mortgage.

[windmill power]

@poetry man, strong words.

@charge controller,I think the costs involved in going solar and wind powered is now becoming more accessible to the average consumer.

The main point is if you can afford to completely go green, then do what you can afford rather than say its too much or its not worth it and sweep it under the carpet.

Ben from the windmill power at home hub.

[viv energy drink]

In this case, I see utilities such as AEP and Southern Company rigging the game. A preemptive strike if you will. They obviously see a carbon tax or cap and trade system coming down the pipeline and they obviously see the threat that solar and wind poses to their veritable mints (coal fired plants).