JPMorgan helps generate plan to reduce greenhouse gases

Principles create a consistent approach to climate change risks for U.S. electric power industry.

Having an ample supply of electric generating power underpins a growing economy.  At the same time, building more generating plants that consume fossil-fuels, notably coal, emits more greenhouse gases, and accelerates climate change.

If the U.S. is to reduce greenhouse gas production by 30% between the next 20 and 30 years, the nation needs to consume a lot less fossil fuel.

JPMorgan, seeking to balance the needs for economic growth, while promoting environmental efforts aimed at reducing greenhouse gases, has recently adopted a set of “Carbon Principles,” in concert with Citi and Morgan Stanley.

While not a mandate against any specific kind of electric generating facility, the Principles apply an enhanced due diligence process to the underwriting process for power plants that burn fossil fuels.  Today, coal, the greatest source of carbon emissions from electric production, represents half the fuel used in electric power plants.

“This is not intended to stop construction of coal power plants,” Eric Fornell, vice chairman of Natural Resources, explained. “What we’re doing is working together with environmental and utility groups to develop a process where we can fully vet from a risk and return perspective the merits of constructing a coal-fired power plant.”

Essentially, the principles forge a framework major lenders and advisors can use in evaluating climate change risks and opportunities and, ultimately, reduce the regulatory and financial risks involved in building power plants, especially since plant construction can take several years.

The combined effort is motivated by the rising concerns about greenhouse gases, their impact on climate change and the increasing likelihood that some form of emissions cap will be imposed within the next several years.

In several respects, Fornell explained, the questions the firms raise with utilities during the process mirror the kinds of issues that local utility regulators raise.  “They are asked to present data and analysis around demand projections, the sources of power supply and the justification for why the utility needs that specific plant, at that specific site and why that specific type of fuel will be the most economical and effective means to satisfy the needs of the community.”

Other fuel sources for power plants include oil, which is uneconomical at today’s prices per barrel; nuclear and natural gas.  Renewable sources, such as wind and solar, are also expanding, aided by government subsidies in the form of tax credits.

But it’s not all about building new power plants.  Refraining from generating power in the first place is an effective strategy, the Principles state, adding “the financial institutions will encourage clients to invest in cost-effective demand reduction, taking into consideration the value of avoided CO2 emissions.”

Fornell described the Principles as following three tracks:  Expanding energy efficiency, particularly in building construction; Adopting renewable and low carbon distributed energy technologies; and Relying on conventional and advanced generating technologies, while recognizing the financial and regulatory implications.

As the Principles state:  “It is the purpose of the enhanced due diligence process to assess and reflect these risks in the financing considerations for certain fossil fuel generation.  We will encourage regulatory and legislative changes that facilitate carbon capture and storage to further reduce CO2 emissions from the electric sector.”