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Cap-and-trade shuts down U.S. coal plants

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? Dynergy 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.

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