The Transformer – June 11, 2008

Vol. 5, No. 3

When big money talks, it pays to listen:

Financiers cast critical eye on coal plant proposals


This February, a press release from four of the country’s largest financial institutions caught utilities’ attention. Citigroup, Morgan Stanley, Chase and Bank of America announced they had endorsed a set of carbon principles to be followed when evaluating loan applications to build or renovate coal-fired power plants.

According to the release, the “Carbon Principles represent the first time that financial institutions, advised by their clients and environmental advocacy groups, have jointly committed to advance a consistent approach to the issue of climate change in the US electric power industry.” Full Release (29 kB PDF)

The banks hailed what they presented as a groundbreaking commitment. But will they actually use these principles to make funding decisions? And, if so, does that mean coal plants will be impossible to finance?

This issue of The Transformer briefly considers what the Carbon Principles will and won’t do.

What the banks will do…

To implement the Carbon Principles, the four banks commit to performing
what they call “Enhanced Due Diligence” [Full text (50.5 kB PDF)] on any proposal to finance construction or major renovation of a coal plant larger than 200 megawatts. This due diligence requires an analysis of the applicant’s plans for dealing with the risks related to the plant’s carbon dioxide emissions. Essentially, applicants must go through the kind of integrated resource planning process that most of the region’s investor-owned utilities go through to get regulatory commissions’ approval of their projects. This process includes evaluating lower-carbon alternatives such as energy efficiency and renewables in the context of possible future state and national carbon-emissions regulations.

The banks also will ask developers, including those whose projects are not regulated (known as independent power producers, or IPPs) to analyze the market potential of their carbon-intense electricity in a carbon-regulated environment. For example, will carbon regulation force their customers to invest in efficiency and renewables rather than their product? And even if they can sell it, will carbon regulation render their electricity more expensive and thus less profitable?

Adopters of these principles commit to encouraging their clients to pursue efficiency, renewable resource development and other low-carbon alternatives to conventional generation. The adopters also are taking an educational and advocacy stance in support of regulatory and legislative policies consistent with the principles … an unusual perspective from financial institutions.

…And won’t do

While the banks are telling developers that carbon is serious business, they’re definitely not refusing to finance coal projects. Essentially the banks are incorporating into their risk assessments the very real likelihood that CO2 will soon be regulated and that the future for carbon-spewing coal plants may be bleak (or to be technical, “won’t result in big bonuses”).

The bottom line

The banks’ adoption of the Carbon Principles might signal a new-found commitment to environmental leadership. But it’s really a sign of bankers being bankers. Before lending hundreds of millions of dollars, the banks want to know they’ll be repaid.

In signing the principles, these conservative institutions admit that the world has changed and that business as usual is no longer possible when carbon emissions are involved. The principles reflect clean-energy advocates’ success in raising the financial risks of coal so high that Wall Street must deal with it. The principles proclaim an important early victory in the war against global warming.