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Cap-and-Trade Shuts Down U.S. Coal Plants
Adam Stein, 5 Jan 09

Jubilant environmentalists trade high fives, carbon permits

We tend to see a lot of handwringing over the fact that Europe has a carbon cap in place, yet they’re still adding coal to the mix. But stories like this never seem to get reported the other way. Did you hear the good news? Dynegy scuttled six coal plants because of the U.S. carbon cap:

“The development landscape has changed significantly since we agreed to enter into the development joint venture with LS Power in the fall of 2006,” said Bruce A. Williamson, Chairman, President and Chief Executive Officer of Dynegy Inc. “Today, the development of new generation is increasingly marked by barriers to entry including external credit and regulatory factors that make development much more uncertain. In light of these market circumstances, Dynegy has elected to focus development activities and investments around our own portfolio where we control the option to develop and can manage the costs being incurred more closely.”

“Regulatory factors” refer to a host of potential legal obstacles, but the chief among them is the anticipated passage of a federal cap-and-trade bill sometime in the next several years. Unlike some market observers, energy developers aren’t watching for the price of carbon to pass the magical point at which clean coal or solar or whatever becomes cost-competitive. Rather, they’re looking ahead many years, performing scenario analysis, comparing cash flows, and making investments accordingly.

“External credit factors” refer, in part, to the ongoing financial crisis. But the credit squeeze affects other forms of energy development much as it does coal-fired plants, so Dynergy may also be referring to the fact that banks were tightening lending for projects with massive carbon exposure long before the crisis hit. And again, this tightened credit is a direct result of (as-yet-unwritten) federal cap-and-trade legislation.

Needless to say, many factors may have played into the decision to shut down those coal plants: grassroots pressure, lawsuits (real or threatened), disastrous publicity from the sludge spill, the imminent changing of the guard at the EPA, state-level permitting difficulties, etc. But as long as we’re handing out credit, let’s not forget the most obvious and compelling factor. In a carbon-constrained economy, no one wants to double down on coal.

Adam Stein is a co-founder of TerraPass. He writes on issues related to carbon, climate change, policy, and conservation.

Image by Flickr user DanieVDM.

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Thanks for the story Adam, and your great work at TerraPass.

My understanding is a bit different, and maybe you can help sort this out for me.

First, while Dynegy's joint venture will be dissolved, the rights to build those plants will vest with its partner, LS energy--at least as I understand it. Do you know if LS plans to proceed with construction?

Second, the six plants in question were being planned or in construction, not operating facilities--again, as I read the press coverage. No facilties were shut down, and no actual emissions are reduced because of this action, right?

Third, Dynegy's reason for dissolving the venture is that it has better uses for its capital (generally meaning higher returns) on existing facilities. Do you know if these are cleaner or dirtier than the planned facilities? has anyone run the numbers to see what the carbon adjusted rates of return are likely to be for each use of capital? (That is, are their higher rates of return associated with more emissions per dollar or less than they would have been with the new plants?)

Any help that you (or anyone else) can be in sorting this out would be most appreciated.

Posted by: j david on 6 Jan 09

David, these are all good questions, and unfortunately I don't have good answers for you.

Regarding your first question: I'm not familiar with the details of the unwinding, which I'm sure are complex -- these things always are. Perhaps another entity will go ahead with the plants, although I think the point of the post would still stand: the specter of carbon regulation is driving private investors away from new coal plants.

Regarding question 2: right. It's hard to shut down a coal plant once built, because most of the cost is sunk. This is a problem, and possibly one that carbon pricing is not well-suited to address.

Question 3: again, not sure, although I do know that U.S. plant operators have been squeezing more performance out of existing coal plants for over a decade now. This strategy is obviously self-limiting, and it seems to now be hitting it's natural limit. Which is good news -- at some point, those redeployed resources are going to have to go into other forms of generation.

Posted by: Adam Stein on 6 Jan 09

Hey there,
Good snippet, just wanted to say that the company's name is DYNEGY, not Dynergy.

Posted by: Dennis Robert on 6 Jan 09

adam, this is not right.

you have no evidence whatsoever that people are more afraid of cap-and-trade than other carbon pricing mechanisms.

you also have no evidence that people are more afraid of carbon pricing vaporware than they are of david bookbinder and public interest lawsuits that have landed real, hard blows to the body on new coal plants and carbon regulation.

it's not right. give back the credit, it's not yours.

Posted by: hapa on 6 Jan 09

Er...I never said that people are "more afraid of cap-and-trade than other carbon pricing mechanisms." Rather, cap-and-trade is what we're going to get in the U.S., so that's where the credit goes.

Cap-and-trade has always been overwhelmingly likely to be the form of carbon pricing passed in the U.S., and it's only become more so as time has passed. The West coast will soon be operating under cap-and-trade, the Northeast states already are, as is all of Europe. Our incoming president has stated his preference for cap-and-trade, and all of the major greenhouse gas legislation being considered by Congress is cap and trade. I'm simply acknowledging that reality.

As for lawsuits, I explicitly mention them as a factor contributing to difficulties coal plants are facing, so I'm not sure where the disagreement lies. It does seem pretty clear that the threat of massive, ongoing fines on your primary business activity presents a powerful incentive, so I'm going to continue to credit cap-and-trade with the assist.

Posted by: Adam Stein on 6 Jan 09

well ok. as long as you don't personally gain from any particular carbon pricing mechanism, i'll take your word that you're pushing cap-and-trade as the hero because it's state-of-the-art in popular-because-insufficient regulation.

Posted by: hapa on 6 Jan 09

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