Innovative ideas can result in a 'carbon margin'
Tuesday, 25 March 2008
Sheila McNulty in Houston
WHEN Direct Energy, the power producer, realised it was only a matter of time before federal legislation was introduced penalising carbon emissions, it decided to set up a business that would help soften the blow.
The electric utility's new unit upgrades customers' insulation, air conditioners and furnaces, making them more energy efficient. Direct Energy says it has proved successful with customers wanting to reduce their energy bills. As well as providing a new income stream, the power producer is also cutting down on the amount of carbon emissions it will have to pay for in the future.
The company is one of a number of energy producers reducing their greenhouse gases ahead of future legislation.
While the White House has not set out climate change policies, most energy companies expect that the next US administration will introduce legislation penalising their emissions of greenhouse gases.
Larry Goldenhersh, chief executive of Enviance, which provides an internet-based compliance measuring and tracking system, says: "This issue has the potential to fundamentally alter the balance sheet of these companies. They could be forced under future federal legislation to pay $13 to $40 a ton for carbon dioxide equivalent emissions, which would easily add $100m of annual costs on some balance sheets."
Deryk King, Direct Energy chairman and chief executive, says: "This is a marathon we are engaged in. This is going to take a decade to play out and we have to start now. Not just for the environment, but also if the power sector wants to limit its exposure to federal legislation on climate change expected in 2009."
Standard & Poor's John Whitlock calls the discharge of carbon dioxide the "single biggest challenge" regulated electricity utilities will tackle this year. After all, the electricity utility industry produces a third of industry's greenhouse gas emissions.
Priscilla McLeroy, a director at Arthur D Little, the consultancy, says many companies, such as Direct Energy, are finding innovative ways to make profit margins from managing their carbon exposure. She calls it the "carbon margin". The margins are derived not just in savings through energy efficiencies and avoided environmental taxes but in following Direct Energy's lead and creating new revenue streams.
Some energy groups are investing in new technologies. AEP is partnering technology vendors to install carbon capture equipment at one of its plants, while NRG is among those testing a process being developed by GreenFuel Technologies to use algae to consume carbon before it is harvested to make biofuels.
Exelon, a leading US energy supplier, has been among the most aggressive in reducing its carbon footprint. It sold most of its coal-fired power plants seven years ago and is moving to build one of the nation's first nuclear plants in decades. It runs its transport fleet on predominately biofuel or hybrid vehicles, is developing efficiency products for its customers and recently renovated its headquarters with energy efficient lighting, air conditioning and appliances that cut its electricity consumption by almost 50 per cent.
John Rowe, Exelon chairman, president and chief executive, says: "Our goal is reduce, displace or offset the equivalent of our entire carbon footprint by 2020.''
Wood Mackenzie, the consultancy, notes that more than 50 per cent of coal plants announced since 2000 have been cancelled because of looming carbon legislation on top of escalating costs underpinned by the global demand for talent and supplies.
However, there is a downside to power producers' focus on upcoming carbon legislation. Many are limiting much-needed investment in baseload generation because of fears over the costs of carbon legislation.
Geir Vollsaeter, special adviser on climate change and carbon management for law firm Alston & Bird, says: "The US needs new generation urgently as the power demand/ supply gap is widening.''
He is concerned about potential blackouts in coming years: "The situation is pretty critical in a lot of states with getting new generation on line.''
FT Syndication Service
WHEN Direct Energy, the power producer, realised it was only a matter of time before federal legislation was introduced penalising carbon emissions, it decided to set up a business that would help soften the blow.
The electric utility's new unit upgrades customers' insulation, air conditioners and furnaces, making them more energy efficient. Direct Energy says it has proved successful with customers wanting to reduce their energy bills. As well as providing a new income stream, the power producer is also cutting down on the amount of carbon emissions it will have to pay for in the future.
The company is one of a number of energy producers reducing their greenhouse gases ahead of future legislation.
While the White House has not set out climate change policies, most energy companies expect that the next US administration will introduce legislation penalising their emissions of greenhouse gases.
Larry Goldenhersh, chief executive of Enviance, which provides an internet-based compliance measuring and tracking system, says: "This issue has the potential to fundamentally alter the balance sheet of these companies. They could be forced under future federal legislation to pay $13 to $40 a ton for carbon dioxide equivalent emissions, which would easily add $100m of annual costs on some balance sheets."
Deryk King, Direct Energy chairman and chief executive, says: "This is a marathon we are engaged in. This is going to take a decade to play out and we have to start now. Not just for the environment, but also if the power sector wants to limit its exposure to federal legislation on climate change expected in 2009."
Standard & Poor's John Whitlock calls the discharge of carbon dioxide the "single biggest challenge" regulated electricity utilities will tackle this year. After all, the electricity utility industry produces a third of industry's greenhouse gas emissions.
Priscilla McLeroy, a director at Arthur D Little, the consultancy, says many companies, such as Direct Energy, are finding innovative ways to make profit margins from managing their carbon exposure. She calls it the "carbon margin". The margins are derived not just in savings through energy efficiencies and avoided environmental taxes but in following Direct Energy's lead and creating new revenue streams.
Some energy groups are investing in new technologies. AEP is partnering technology vendors to install carbon capture equipment at one of its plants, while NRG is among those testing a process being developed by GreenFuel Technologies to use algae to consume carbon before it is harvested to make biofuels.
Exelon, a leading US energy supplier, has been among the most aggressive in reducing its carbon footprint. It sold most of its coal-fired power plants seven years ago and is moving to build one of the nation's first nuclear plants in decades. It runs its transport fleet on predominately biofuel or hybrid vehicles, is developing efficiency products for its customers and recently renovated its headquarters with energy efficient lighting, air conditioning and appliances that cut its electricity consumption by almost 50 per cent.
John Rowe, Exelon chairman, president and chief executive, says: "Our goal is reduce, displace or offset the equivalent of our entire carbon footprint by 2020.''
Wood Mackenzie, the consultancy, notes that more than 50 per cent of coal plants announced since 2000 have been cancelled because of looming carbon legislation on top of escalating costs underpinned by the global demand for talent and supplies.
However, there is a downside to power producers' focus on upcoming carbon legislation. Many are limiting much-needed investment in baseload generation because of fears over the costs of carbon legislation.
Geir Vollsaeter, special adviser on climate change and carbon management for law firm Alston & Bird, says: "The US needs new generation urgently as the power demand/ supply gap is widening.''
He is concerned about potential blackouts in coming years: "The situation is pretty critical in a lot of states with getting new generation on line.''
FT Syndication Service