Linking New financing to carbon reductions

Linking New Financing to Carbon Reduction

Three of the world’s leading financial institutions have come up new climate change guidelines for advisors and lenders to power companies in the United States.

The principles were developed in partnership by Citi, JPMorgan Chase and Morgan Stanley, and in consultation with leading power companies American Electric Power, CMS Energy, DTE Energy, NRG Energy, PSEG, Sempra and Southern Co. Environmental Defense and the Natural Resources Defense Council, environmental non-governmental organizations, also advised on the creation of the principles.

This effort is the first time a group of banks has come together and consulted with power companies and environmental groups 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 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 carbon dioxide-emitting technologies are selected by power companies, the signatory banks have agreed to follow an enhanced diligence process and factor these risks and potential mitigants into the final financing decision.

“There was full and frank dialogue around the table,” said Matt Arnold, director of Sustainable Finance, which helped coordinate the development of the principles and enhanced diligence process. “There was a remarkable amount of debate and exchange of information and views among the banks, power companies and environmental organizations. The dialogue resulted in a rigorous analysis of the carbon risks in power investments, and sets the stage for further discussion.”

Called, The Carbon Principles, they are the result of a nine-month intensive effort to create an approach to evaluating and addressing carbon risks in the financing of electric power projects.

The effort creates a consistent approach among major lenders and advisors in evaluating climate change risks and opportunities in the US electric power industry. The principles and associated enhanced diligence represent a first step in a process aimed at providing banks and their power industry clients with a consistent roadmap for reducing the regulatory and financial risks associated with greenhouse gas emissions.

The need for these principles is driven by the risks faced by the power industry as utilities, independent producers, regulators, lenders and investors deal with the uncertainties around regional and national climate change policy.

The consortium has developed an enhanced diligence framework to help lenders better understand and evaluate the potential carbon risks associated with coal plant investments.

Citi, JPMorgan Chase and Morgan Stanley have pledged their commitment to the principles to use as a framework when talking about these issues with clients.

“To move the needle on global warming, clean energy technologies need to be developed, demonstrated and deployed as quickly as possible,” said David Crane, president and CEO of NRG Energy Inc. “Given the capital intensive nature of this challenge, we welcome these carbon principles as a sign that America’s leading financial institutions are ready to support a massive increase of investment in clean energy solutions. With the support of both Wall Street and public policymakers in Washington, the American power industry can lead the way in achieving the dramatic GHG reductions that are critical to the health of both our economy and our planet.”

The principles are as follows.

— An effective way to limit CO2 emissions is to not produce them. The signatory financial institutions will encourage clients to invest in cost-effective demand reduction, taking into consideration the value of avoided CO2 emissions. The group will also encourage regulatory and legislative changes that increase efficiency in electricity consumption including the removal of barriers to investment in cost-effective demand reduction. The institutions will consider demand reduction caused by increased energy efficiency (or other means) as part of the enhanced diligence Process and assess its impact on proposed financings of certain new fossil fuel generation.

— Renewable energy and low carbon distributed energy technologies hold considerable promise for meeting the electricity needs of the U.S. while also leveraging American technology and creating jobs. The group will encourage clients to invest in cost-effective renewables and distributed technologies, taking into consideration the value of avoided CO2 emissions. The group will also encourage legislative and regulatory changes that remove barriers to, and promote such investments (including related investments in infrastructure and equipment needed to support the connection of renewable sources to the system). The group will consider production increases from renewable and low carbon generation as part of the enhanced diligence process and assess their impact on proposed financings of certain new fossil fuel generation.

— In addition to cost effective energy efficiency, renewables and low carbon distributed generation, investments in conventional or advanced generating facilities will be needed to supply reliable electric power to the US market. This may include power from natural gas, coal and nuclear technologies. Due to evolving climate policy, investing in CO2-emitting fossil fuel generation entails uncertain financial, regulatory and certain environmental liability risks. It is the purpose of the enhanced diligence process to assess and reflect these risks in the financing considerations for certain fossil fuel generation. The group will encourage regulatory and legislative changes that facilitate carbon capture and storage (CCS) to further reduce CO2 emissions from the electric sector.

Tags:

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: