Thursday, February 14, 2008

Climate risks start to bite Eskom's planned coal fired power stations

Pricing carbon is not a new idea. Emissions Trading Schemes and carbon taxes have been discussed and implemented throughout the world.

This time there is something new. The Bank of America has decided to start factoring a cost of carbon-dioxide emissions into decisions whether to underwrite debt for new coal-fired plants, according to an article on WSJ Environmental Capital. The shadow price is set at between $20 - $40 per ton of CO2.

Eskom currently emits around 210Mt of CO2 per annum at a rate of around 0.9 kg of CO2/Kwh sent out.

It is not a distant American or European challenge only. Financing Eskom's planned expansion is already under pressure, and one of the reasons is the climate risk (see Business Report):

Steve Lennon, Eskom's resources and strategy managing director, says both the Medupi and Bravo stations will use state-of-the-art climate change technology for higher efficiencies. Both plants will be built to ensure they are ready for carbon capture and storage technologies that may be established in time, he says.

However, South Africa may not have the appropriate geological formations for carbon storage. It is this kind of uncertainty that may influence the rate at which Eskom can borrow.

The utility is already feeling the pinch of funding constraints.

Its credit quality is being questioned. Standard & Poor's says the utility's credit rating may be downgraded in the next three months because of the absence of a funding plan for the R300 billion Eskom plans to spend building generating capacity over the next five years. In addition, global markets are increasingly averse to risky economies, as liquidity is being distributed far more circumspectly.

Coal fired power stations are planned to contribute around 28500 MW of capacity by 2025 (75% of the planned expansion to 80000MW from the current 42000 Mw).

Clean coal technology research suffered a major blow when the US Dept of Energy pulled the plug on FutureGen (see articles in Reuters and here).

At an average emission rate of close to 0.9kg CO2/Kwh and a price for carbon between $20 and $40 per tCO2 start penciling in an additional cost of between 14-28 cents per Kwh ($1 = R7.5). To place this in perspective Business Day reports: Eskom is understood to have guaranteed the Coega project electricity at 14c/kWh.

Who pays the rest?

It may not happen tomorrow, but it seems as if the accumulation of these potential liabilities is a bit too much for some to stomach.

No comments: