UTILITIES AND CARBON CAPS

Emissions constraints are coming to the U.S.

Hugh Wynne, senior analyst, Sanford C. Bernstein & Co: “I think the time when you can keep your head in the ground is just over…”

Congress will put forward legislation (ex: Lieberman-Warner Climate Security Act) this spring and is expected to get serious on a cap-and-trade program after the November election. Regional pacts putting a price on emissions via a cap-and-trade system are now ready to go.

The first and most obvious impact of the constraints will be on utilities, especially utilities dependent on coal burning plants. The question: Will constraints drive up consumer electric bills?

Utilities will try to pass added costs to ratepayers but state public utility commissions may very well refuse them permission. The retail price of electricity has already gone up 30% over the last five years.

Will the result be power outages? The cost of new emissions control systems led to several power authorities halting plans for coal-fired power plants in the last year. If building traditional nuclear- and coal-fired power plants is too expensive, where will the energy to meet rising demand come from?

There are alternatives. With emissions costs, wind energy installations and solar power plants will only look better in comparison to fossil fuels like coal and natural gas.

The recent crises in Texas and Florida (see TEXAS: LIGHTS ALMOST WENT OUT; FLORIDA: LIGHTS WENT OUT underscored for many analysts the high value of wind energy. Texas' ability to readily cope with wind's fluctuations shows it to be a better short and long term investment than nuclear. Florida's blackout demonstrates how problematic nuclear can be.

Rising emissions costs also up the value of what energy guru Amory Lovins calls negawatts, the megawatts not used as a result of efficiency improvements.

Innovest rates utilities as investment values. It is no accident that the utilities with the best efficiency programs and the biggest commitment to wind and other New Energies are Innovest's highest rated.

Among its lowest rated companies are those relying heavily on coal, an energy investment Al Gore calls “subprime.”

Innovest drew on data from the Carbon Disclosure Project in evaluating utilities as investments. (click to enlarge)

Sizing Up the Utilities, if Carbon Caps Take Hold
Abby Schultz, April 13, 2008 (NY Times)

WHO
Ceres; Innovest; Innovest Best: FPL Group, PG&E, Consolidated Edison. Innovest Worst: Allegheny Energy, the Southern Company, the Ameren Corporation, the Scana Corporation

Innovest could also draw on Carbon Disclosure Project data for evaluating future value. (click to enlarge)

WHAT
Federal regulations over the next few years could limit the carbon emissions of these companies, and Wall Street analysts have begun compiling lists of potential winners and losers. Winners will likely be operators of nuclear power plants (which don’t emit carbon) and losers will likely be power companies that mainly burn coal. Emissions caps and constraints will surely impact the companies’ stock prices.

WHEN
Details of the competing cap-and-trade policies are far from settled. A national policy will most likely not be decided until after the November election. It might be premature to pick winners and losers.

At the CARMA website, power suppliers' emissions are quantified. (click to enlarge

WHERE
- Federal rules might be similar to regional efforts in the Northeast and California.
- The Northeast Regional caps will be on CO2 while the California/Western region is expected to cap all GhGs.
- EU ETS market-traded credits have averaged $25 a metric tonne of CO2 equivalent since January 2005

WHY
- The 3 remaining major presidential candidates all support cap-and-trade legislation.
- Natural gas creates 1/3 or fewer GhGs than coal so the utilities already more heavily invested there may be better off – but natural gas supplies may peak before the middle of the century and costs are already rising.
- However the process plays out, utilities are expected to try to pass costs on to ratepayers and regulators are expected to try to prevent that. Utility shareholders may be the ones to suffer the burden.

The big U.S. emissions spewers. (click to enlarge)

QUOTES
- Brian Chin, an equity analyst at Citi Investment Research: “Carbon has been an ongoing issue for the investment community for the last three or four years…”
- Brian Chin, equity analyst, Citi Investment Research, on the impact of proposed legislation on utilities: “They all potentially get a very large benefit from higher power prices being pushed up by carbon…”
- Eric Kane, senior analyst, Innovest Strategic Value Advisors: “It’s unlikely these companies will be able to pass all the costs down to consumers…”
- Dan Bakal, director of electric power programs, Ceres: “[Emissions reduction is] more and more material for investors [as national regulations] are getting closer and closer to reality.”