News July-August 2005

The following are summaries of news stories from the July-August 2005 print edition of Environmental Finance magazine

Airtricity plans $1.5 billion US expansion…

Wind energy developer Airtricity has unveiled an ambitious $1.5 billion expansion into the US market, with plans to construct more than 1,500MW of capacity by 2010. The Dublin-based company is to raise 50% of the money involved via project finance and 30% from passive tax investors, with the remainder coming from its own equity.

Speaking at the Renewable Energy Finance Forum in New York in late June, Airtricity CEO Eddie O’Connor said the plan would make the company “the largest private renewable energy developer in the country”.

An initial $270 million investment will see “in excess of 200MW” of capacity installed in 2006, including a 125MW farm in Texas, near Abilene. The company has options on other sites, including in Idaho and New York state, US general manager Martin McAdam told Environmental Finance.

… but US wind market ‘overheated’

The US wind energy market is “overheated”, according to Michael Eckhart, president of the American Council on Renewable Energy. Developers are rushing to get projects online before the end of this year when the Production Tax Credit – a major driver of renewables projects in the US – is due to expire, he explained.

As a result, “more than 1,500MW of wind energy, and possibly as much as 2,500MW”, could be installed his year, he told delegates at the Renewable Energy Finance Forum in New York in late June. This compares with just 389MW installed in 2004.

There is now “way too much money chasing wind deals”, said Keith Martin, a partner with law firm Chadbourne & Park. Returns have fallen to below 8%, he added. A few years ago, they were twice as high, other speakers said.

Swiss Re to trade emissions

Reinsurance giant Swiss Re is to throw its weight behind the global greenhouse gas and US emissions markets, with plans to begin trading carbon credits, and sulphur dioxide and nitrogen oxide allowances. Its weather and energy products group received “corporate level authorisation” at the end of April to start trading the new products, Environmental Finance has learnt.

The firm is to establish a new desk in New York to trade the products, in cooperation with the existing greenhouse gas group, run by Chris Walker. However, since the plans became public, the head of the weather and energy products group has left the company, with two colleagues.

A spokesman says that Mark Tawney, and his colleagues, Bill Windle and Bill MacLauchlan, left “for personal reasons”, and that the weather risk management and energy business would continue as usual.

Essent plans weather desk

Dutch utility Essent plans to set up a weather derivatives desk later this year, says Ruben Benders, the company’s emissions portfolio manager.

Essent is the largest energy company in the Netherlands and a leading participant in the EU Emissions Trading Scheme (ETS). Weather is one of the major influences on the price of carbon dioxide emission allowances in this market, Benders told delegates at the Environmental Finance conference on the EU ETS, in Brussels on 12 July.

Carbon capture and storage gaining momentum

The prospect of carbon dioxide being routinely captured and stored underground has moved closer to reality over recent weeks with plans announced for two ‘carbon-free’ power stations in Europe and the UK government offering financial support for the technology. Environmentalists are also beginning to warm to the idea, with leading NGOs offering qualified support.

Speaking at the launch of the UK’s Carbon Abatement Technology Strategy in June, the UK Minister for Energy Malcolm Wicks said that carbon capture and storage (CCS) could be up and running in the country within 10 years. The new strategy includes the provision of £25 million ($44 million) for carbon abatement demonstration projects, including CCS.

Meanwhile, Swedish power company Vattenfall announced in May that it is planning the “world’s first pilot plant for a carbon dioxide-free coal-fired power station”. The 30MW plant, which will rely on CCS, will be located in Germany and should be ready for operation in 2008, says Vattenfall.

Six weeks later, oil giant BP announced that it, too, is planning to build a power plant centred around CCS.

Climate Change Capital closes $100 million-plus carbon fund

Climate Change Capital has raised “significantly more” than $100 million into a carbon fund, and simultaneously completed a £6 million ($10.6 million) fundraising into the boutique London-based merchant bank.

The Climate Change Capital Carbon Fund “will be principally focused on the purchase of emissions rights from projects and companies,” says Gareth Hughes, co-founder and executive director. “These will be repackaged into fungible instruments, including structured products, to be distributed to both voluntary and compliance carbon markets.”

Senate devotes energy to climate and renewables

The US Senate passed its version of energy legislation on 28 June, stressing efficiency and renewables in the face of a bill from the US House of Representatives more favourable to traditional energy sources. The two competing versions are now to be reconciled in a conference committee made up of leaders from both bodies.

Among other things, the 1,200-page Senate bill mandates increased funding for hydrogen research and a federal renewable portfolio standard (RPS). The RPS would require electricity providers to source 10% of their supplies from wind, solar, geothermal, biomass or wave power by 2020 – the first time a nationwide RPS has been included in such legislation. It also provides tax incentives for the production of renewable energy.

The Senate also passed two climate change measures for the first time: a non-binding “Sense of the Senate” stating that Congress should create a national, market-based, mandatory programme to deal with the emission of greenhouse gases (GHGs); and a voluntary programme using tax credits to encourage GHG reductions and technology partnerships with developing countries.

WRI and Merrill Lynch pick clean car winners

Merrill Lynch and the US-based World Resources Institute have chosen seven potential winners from the nascent ‘clean car revolution’, in the first such collaboration on climate research between a US investment bank and an NGO.

Potential winners – companies which the report’s authors think are “positioned to capitalise on the revolution” – include three vehicle manufacturers: Japan’s Toyota, the global leader in hybrid technology; Korea’s Hyundai Motors, which has been focusing R&D efforts on cleaner technologies; and Denway Motors, a Hong Kong investment holding company with a 50% stake in China’s Guangzhou Honda, which is likely to benefit from new fuel efficiency standards in the country.

New source for New Source Review cases

Despite setbacks in two federal cases concerning the New Source Review (NSR) provision of the Clean Air Act, individual US states have taken up the challenge of prosecuting older power plants that may have undertaken upgrades without installing modern pollution controls.

On 28 June, Pennsylvania filed suit against Allegheny Energy for alleged NSR violations at three coal-fired power plants in the western portion of the state. The move follows a series of decisions in federal courts in June overturning efforts to bring NSR to bear on coal-fired power plants owned by Duke Energy and Alabama Power. In both cases, federal judges found that NSR was not violated as long as hourly emissions did not increase – even if annual emissions did.

Insurers raise temperature on climate risks

German finance giant Allianz has called for a systematic approach to climate change risks within the financial sector, backed by a clearer long-term policy framework. The call comes as the Association of British Insurers (ABI) predicts a two-thirds rise in insured losses from storm damage – to an average of $27 billion/year in 2080 compared to $15 billion today – if greenhouse gas (GHG) emissions are not curbed.

The Allianz Group – which includes Dresdner Bank – is to begin addressing climate risks at board level, “putting climate change on a par with other business risks,” Allianz Global Investors CEO Joachim Faber told a press conference in late June. He was launching a report – Climate Change and the Financial Sector: An Agenda for Action – produced with conservation group WWF.

The Allianz/WWF announcement came hot on the heels of a report by the ABI, Financial Risks of Climate Change, which claims to be the first attempt to put figures on the possible impacts of climate change on the costs of windstorms.

Aside from increased average losses, climate change could – for example – see intense US hurricane seasons costing insurers $100 billion–150 billion – up 75% on current levels – or the equivalent of three times the cost of 1992’s Hurricane Andrew, the most expensive storm to hit the US.

Row looms over RECs definition

A heated debate is brewing in the US on the nature of a possible national market for renewable energy certificates (RECs). At the heart of the dispute is the definition of such certificates.

In the present fragmented US RECs market, some states issue the certificates simply to denote that 1MWh of power has been generated from an approved renewable source of supply. In other states, however, each certificate is deemed to carry other environmental attributes of clean energy, such as the savings in greenhouse gas emissions.

The issue has split the environmental community, with two leading NGOs on opposite sides of the debate.

New forestry company eyes environmental markets

US-based forestry investment manager Hancock Timber Resources Group has spun off its New Forests programme, in a management buy-out that has created a new company “specialising in sustainable forestry management and emerging environmental markets”.

New Forests, an Australia-based company led by the programme’s former head, David Brand, will offer forestry and timberland asset management, and consulting services to business, government and investors.

It will aim to “create value for our clients by extending forest management beyond timber production and into carbon trading, water rights, and even biodiversity conservation as a way of increasing returns,” according to the company.

WRI sees loophole in development bank policies

The World Resources Institute has called on the International Finance Corporation (IFC) and other multilateral development banks to close a loophole which it says allows loans to be made to projects or businesses that do not meet the banks’ publicised environmental and social standards.

There is a growing trend for multilateral banks to make loans to financial intermediaries in developing countries, which then invest the money locally, explains a report* released in June by the Washington-based think-tank. However, these loans are often based only on a limited assessment of the potential environmental and social impacts of sub-projects, it says.

According to an IFC spokeswoman, the report “is premised on a different understanding of the purpose of lending to financial intermediaries”.

* Multilateral development bank lending through financial intermediaries, WRI

go to Features July-August 2005