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October 23, 2012
As You Sow Updates Investment Risks Associated with Coal
    by Robert Kropp

Investors are warned that as the use of coal as a source of power output in the US declines and construction costs increase, the financial risks of investing in coal-dependent electric utilities are significant.

In a white paper published last year, As You Sow detailed many of the growing risks associated with continued reliance on coal, from increased regulation to declining prices and rising construction costs. "The utility markets which include investor-owned utilities, public power authorities, rural electric cooperatives, and municipal electric systems have canceled or postponed 153 new coal plant proposals," amounting to $243 billion in investments reversed, As You Sow reported.

In an
update to the white paper issued this week, the advocacy organization observes that the risks of investing in coal have only intensified during the past year. When the first report was published, the use of coal to generate power had already dropped considerably, from 52% in 2000 to 42% in 2011; in the same time period, the use of natural gas, which has benefited from such controversial new extraction technologies such as hydraulic fracturing, increased from 16% to 25% of the nation's power output.

During the year since As You Sow published the first white paper, the decline of coal has continued, and it now contributes just 39% as a source of power output, while natural gas increased to 34%.

Of course, natural gas presents its own environmental and social risks, especially when extraction relies on such technologies as fracking; the
Investor Environmental Health Network (IEHN) and other investor organizations have produced several reports to help investors and companies mitigate such risks.

Fortunately, As You Sow's new white paper also confirms that wind energy is establishing itself as a renewable energy technology capable of competing with coal and natural gas, provided the playing field remains leveled through legislative action such as renewing the Production Tax Credit (PTC). By 2011, "31% more wind power was installed in the U.S. than in 2010 and wind power accounted for 32% of U.S. generating capacity additions; and the U.S. installed 1,855 megawatts (MW) of photovoltaic solar systems, a growth of 109% over 2010."

And as prices for coal and even natural gas are on the increase, "the cost and price of both wind and solar are falling dramatically," As You Sow found.

The regulatory risks of investing in coal are considerable. Analysts estimate that by 2030, 75 GW of coal-fired capacity may be retired as a result of environmental controls. Furthermore, "stringent regulation under existing environmental laws requires investor owned utilities to either make large capital investments in aging coal plants or retire them."

Commodity risks include competition from natural gas, price volatility, and the increase of exports to foreign markets. And there is no guarantee that the cost of constructing new coal-fired power plants would ever be recovered; the cost of constructing a 600 MW plant more than doubled between 2002 and 2009, and construction costs continue to increase exponentially, the white paper states.

Yet many banks headquartered in the US persist in financing the construction of new coal-fired power plants. A
2011 BankTrack report revealed that since 2005, financing of the construction of coal-fired power plants by JPMorgan Chase has exceeded $22 million. Following closely behind JPMorgan Chase are Citigroup ($18.6 million), Bank of America ($17 million), and Morgan Stanley ($16.4 million). Of the four banks, all but Morgan Stanley are signatories to the Equator Principles, whose signatories commit to managing environmental and social risks in their project finance transactions.

"Business and residential consumers will continue to reduce their energy consumption through efficiency and demand management, and will move increasingly to distributed, rather than centralized, generation as the price of solar technology declines," As You Sow concludes. "All of which indicate troubled times ahead for coal-dependent utilities."


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