Carbon Emissions Cap
By S.R. Nunnally
Carbon Emissions Cap: TXU Buyer Wants More Green Power
In this article
TXU Corp. accepts buyout terms for $45 billion deal.
This is the first buyout deal to ever include environmental concessions.
California legislation now requires a 25% reduction in carbon dioxide emissions by 2020.
Not very many people were happy with TXU Corp.'s (TXU:NYSE) 11 proposed coal-fired power plants. In fact, the company incurred the wrath of normally business-friendly groups like Environmental Defense and the Natural Resource Defense Council.
“This is an $11 billion step in the wrong direction. And when you're marching backward with $11 billion, you can do a lot of damage,” said David Hawkins, a climate-change expert from NRDC, to Fortune magazine.
TXU was planning on spending $1 billion per plant, for a total of $11 billion, by 2010, but none of those plants would be equipped to capture carbon or greenhouse gases.
Now, analysts have said that the company could have made money with these 11 coal-fired plants, but now, the whole game has changed.
In a move that would result in the largest private-equity buyout in history, Kohlberg Kravis Roberts (KKR), Texas Pacific Group, and Goldman Sachs have put together a $45 billion deal to buyout TXU.
TXU has accepted, and has until April 16 to fully agree to the deal.
Carbon Emissions Cap: First Ever Concessions to Environmental Groups
This isn't just a straight-up cash deal. This buyout deal calls for TXU to withdraw applications for eight of the 11 proposed power plants. It's the first buyout deal to ever include environmental concessions.
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Hawkins told MarketWatch.com, “The decision by the buyers to reach out to our organization reflects a conclusion by the business community that they can't simply ignore global warming and come up with sound business strategies. It's an earthquake that happened in Texas but the shock waves will be felt in Wall Street and Washington.”
I say it's about time…
Here are some other concessions and commitments TXU will make (via Platts):
- Reduce its total sulfur dioxide, nitrogen oxide and mercury emissions by 20% from 2005 levels...
- Reduce its CO2 emissions by increasing efficiency of its generating facilities up to 2%...
- Join the United States Climate Action Partnership and support the mandatory cap-and-trade program to regulate carbon emissions...
- Reduce by 10% the rate of residential customers who rolled off the old “price to beat” or default rate program into its successor program now pay...
- Cap the new lower rate through September 2008 to provide “price protection.”
With a number of states banging the carbon cap drum, this is a proactive step in the power industry. It's a signal that other companies will follow. The folks on and off Wall Street believe that carbon caps are coming -- in some form or another. So just how are businesses to behave when they don't know what legislation will pass?
Carbon Emissions Cap: Setting the Standards
A look to state legislation is a good start. California legislation now requires a 25% reduction in carbon dioxide emissions by 2020. That will bring CO2 levels down to where they were in 1990.
Interestingly, the Kyoto Project is asking for similar cuts, but the United States hasn't signed it.
California is also setting up a market for carbon credits that allows for environmentally sound companies to acquire credits for beating emissions standards, and allows those companies to sell those credits to other businesses that fail to meet emissions standards.
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At least eight other states are pushing though carbon emission legislation:
Alaska
Connecticut
Maine
North Carolina
Wisconsin
Minnesota
New Jersey
Washington
My suggestion? Look at each state's proposed standards… and beat them. You know it's coming. Get ahead of the game. I can guarantee that most carbon emission caps will come with a way to trade credits. If you're beating the proposed standards, then you'll be getting more credits to trade for profit.
Carbon Emissions Cap: Demand for Carbon Technology
Admittedly, “beating the standards” will be costly at first. But the more businesses are buying carbon sequestering or filtering technologies, the cheaper it gets.
It's the same tune for every technology from laptops and cell phones to hybrid cars and nuclear reactors.
Heck, it's the same concept as your local warehouse store: buying in bulk is cheaper.
TXU's buyers certainly have the cash to make these changes, and they're not the only ones.
Many utilities have the means to introduce clean technology: FPL Group (FPL:NYSE) has a significant amount of energy coming from wind power and Exelon Corp. (EXC:NYSE) extracts methane from landfills.
Now is the time for businesses to move forward, before state or federal legislation forces them to.
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Related Resources
Texas's big global warming battle: Environmentalist groups take on TXU for its proposed coal-burning plants. - Fortune (via CNNMoney)
TXU's emissions U-turn: TXU Corp.'s decision to whittle down plans to build 11 carbon-spewing, coal-fired power plants signals that utilities can no longer afford to ignore climate change. - MarketWatch.com
TXU Agrees to Go Private: Private-equity giants to buy TXU in $45 billion deal. - Platts