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Capital Conundrum

The Big Build will test the industry’s access to Wall Street.

Fortnightly Magazine - September 2008

residential customers, figures from the Lieberman-Warner Climate Change Bill estimate the cost of carbon could reach $54 to $64 per metric tonne in 2020, rising to $227 to $271 in 2030. This could dramatically drive up the cost of residential power: There is potential for political mayhem.

Standard & Poor’s (S&P) recently took the view 10 that the market could absorb the cost of carbon if it is done gradually, but that it would be disastrous for utilities if it is instigated aggressively and too quickly. We have to hope that this warning is heeded and that the approach taken by those responsible will be prudent, rather than zealous.

Clean Coal Lives

For two years, the proposed $1.8 billion FutureGen project, a single plant to test various coal types with gasification technology and permanent carbon capture and storage (CCS), was favored by the U.S. DOE. Recently, amid concerns over massively escalating costs, the DOE has reconfigured the project: The money now will be split into smaller packets to help utilities with the cost of CCS at plants still to be built. As this change of plan will delay commercialization of CCS technology by four years, investors might think this implies that the DOE’s belief in coal and CCS has waned. So is there a future for investing in clean coal? The answer is: probably. Private enterprises still are investing in carbon sequestration. 11 Without up-front government funding, clean coal could be further over the horizon, but there is no reason to believe the technology won’t happen.

In the meantime, some lawmakers in Congress are working on a bill that would ban construction of any coal plants unless carbon controls are in place. However, there is a major energy conundrum here. If you don’t want coal, you need nuclear to meet demand, and there is also considerable debate about the desirability of nuclear.

Market Forces

Looking at the market as a whole, it is clear that the wave of consolidations that some pundits predicted would occur over the past five years has not materialized. That is not wholly surprising, given that the regulators have shown a determined and aggressive tendency to refuse any transactions they felt didn’t provide sufficient benefits to customers.

However, just because this may have put merger plans on hold for some companies, it doesn’t mean consolidation won’t proceed in the future. And while this may affect certain companies’ freedom to invest, consolidation is only one avenue to raising cash. There still are many alternatives to explore: Aspiring investors also will be considering selling off non-core assets to raise cash; going to the debt markets; raising structured finance; or entering into joint ventures with alternative capital providers.

The United States urgently needs this growth in infrastructure to secure its energy future, and well-delineated projects with a clear business case should have access to adequate funding. However, there are challenges: A shortage of skilled people; uncertainty about environmental regulation; and of course, regulatory barriers to gaining a solid return on investment.

Investors will be wary of repeating past investment cycles, in