Olde King Coal

New coal plants just became a lot more expensive. Is this the beginning of the end for coal?

Three major banks, Citigroup, JP Morgan Chase, and Morgan Stanley have concluded that the US will eventually cap carbon emissions. As a result, the prospective borrowers of funds to build coal plants will be required to “prove” that the coal plant will be economically viable, even with stringent caps on CO2 emissions.

I can’t see how you could possibly “prove” that your plant would be economically viable. We don’t know what the caps on emissions will be, nor what the cost of emission permits will be. Furthermore, with the ever increasing knowledge we have about climate change, it is extremely likely that caps will be tightened in the future. In other words, a certain regulatory environment will not exist. So proof of economic viability will not be possible.

The one exception would be if the plant was selling into a market that had an unlimited ability to absorb price increases. This could occur if regulators based the allowable price of power for the plant on the plant’s cost of operating, including purchase of pollution permits. Although with cost uncertainty, why would regulators allow the plant to be built in the first place?

Electricity plants are built with debt and equity. Debt usually costs 5-7% annually, and be used to supply 60-80% of the capital required to build a plant. Equity investors require a higher return, of perhaps 10-12%. If the banks pull out, or reduce the amount they will lend, then the cost of financing a coal plant increases dramatically, and this of course raises their cost of energy. And along the way, makes other cleaner sources more competitive.
Citigroup, JP Morgan Chase, and Morgan Stanley are wise indeed to take a very hard look at lending money to build plants that may be no longer viable in a future regulatory environment. And their wisdom in lending will do more to help the environment than the current inactions by government.

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