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Facing the Climate Challenge

Climate risks are entering the calculus for utility investment strategies.

Fortnightly Magazine - August 2006

Beneath the crystal-blue waters of the Caribbean Sea, coral reefs once vibrant with color are turning white and dying. Their demise, evident for more than a decade, is disquieting not only because it shows the disruption of a fragile ecosystem and the decline of some truly splendid snorkeling destinations, but for its potential effect on U.S. environmental policy.

What’s killing the corals is not entirely understood, but researchers have identified temperature changes as a culprit. Temperatures are rising globally, in the oceans as well as the atmosphere. But more troublesome for the corals, climate changes are disrupting ocean currents that keep Caribbean water temperatures relatively stable and cool—and incidentally, keep Northern Europe warm, according to a data from various research groups, including NASA.

In May 2006, the U.S. National Marine Fisheries Service added two types of Caribbean coral (elkhorn and staghorn) to the list of threatened species protected under the Endangered Species Act (ESA). Except for Puerto Rico and a few other islands, most of the Caribbean Sea lies outside U.S. jurisdiction. But the corals’ plight could affect many U.S. companies nonetheless.

The ESA requires federal agencies to ensure their actions do not jeopardize any listed species, or adversely affect their critical habitat. This directive could translate into changes in environmental and investment policies, depending on how the law is enforced. In the short term, it adds legal ammunition for plaintiffs in climate-change lawsuits, and represents another signal that greenhouse-gas regulation is coming to America (see sidebar “Legal Heatwave: Courts & Climate Change”).

These trends pose a dilemma for U.S. power companies and regulators. To meet rising electricity demands over the next decade, the American market needs more than $100 billion worth of new generating capacity, and billions more in upgraded emissions controls and life-extensions at existing plants. But utilities and their underwriters are beginning to think seriously about how future GHG restrictions will affect strategic plans.

“Carbon risk has to be factored into any decision going forward,” says Dennis Murphy, vice president and COO, PPL Generation in Allentown, Pa. “We expect to be participating in the discussion of what the regulations and controls might be, and we are assessing carbon constraints at a corporate level.”

PPL considered such factors, for example, when deciding to spend $1.5 billion between now and 2009 to install scrubbers at its two coal-fired 1,500-MW plants at Montour and Brunner Island in Central Pennsylvania. And in June 2006, it joined the FutureGen Alliance that is seeking to develop a near-zero emissions power plant.

At the same time, though, PPL and other power companies in many U.S. states are pursuing an investment strategy that relies significantly on new coal capacity, particularly in market regions dominated by higher-cost gas-fired power (see sidebar “TXU’s Coal Bet”) . Confidence in pulverized coal is wavering, but whether it might fade like the color of Caribbean corals remains to be seen.

Diversity First

Regulatory risk has been an important

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