New Report from Ceres Warns of Investor Risks from TXU Coal Strategy

BOSTON--(BUSINESS WIRE)--Amid recent reports that TXU Corp. will be acquired by a private equity firm and will scale back its plan to build 11 new coal-fired power plants in Texas, the Ceres investor coalition today issued a new report about wide-ranging financial risks that TXU investors face from the company’s original proposal.

The report concludes that TXU’s investors – whether as public shareholders or private investors – will face a multitude of financial risks if the company moves forward with its plans to build 9,000 megawatts of pulverized coal-fired capacity. The report cites construction cost over-runs, burdensome regulatory costs as climate regulations take hold and a slowing of power demand in Texas as state legislators aggressively push energy efficiency and other energy-saving programs.

“We are encouraged by recent news that TXU’s potential buyers are focused on mitigating these financial risks and scaling the project back,” said Mindy S. Lubber, president of Ceres and director of the $3.7 trillion Investor Network on Climate Risk. “It doesn’t matter who owns TXU, the 11-plant proposal, if it proceeded, would undermine revenues, profits and long-term share value.”

“If private equity investors buy TXU, it opens a new era in which private equity firms must evaluate climate risk just as public investors have been,” said David Gardiner, whose firm, David Gardiner & Associates, authored the report. “Our report suggests those risks are substantially greater than TXU and other analysts have previously suggested.”

The 11 coal plants that TXU proposed to build are among more than 150 coal-fired power plants currently proposed across the United States. As with TXU, most of these generating facilities would be built with no technologies or controls for capturing carbon dioxide, a primary contributor to global warming.

The report, TXU’s Expansion Proposal: A Risk for Investors, says all coal-fired power plants present wide-ranging financial risks for investors, including to shareholders of power companies as well as to banks financing the projects. But the TXU proposal, which planned to add more coal-fired electricity capacity than has been built in the entire U.S. in the past 10 years, is considered especially risky for investors due to the project’s sheer magnitude and because TXU operates in a deregulated market, where risks are borne primarily by shareholders and other investors instead of ratepayers.

The report highlights various financial risks that the TXU proposal has not accounted for, including:

Unrealistic Cost Assumptions: TXU’s estimated $10 billion price tag is unrealistically low. Recent construction cost figures from NRG Energy, which has more experience in building coal-fired power plants than TXU and which is proposing a similar but smaller expansion in Texas, indicate that the total cost of TXU’s project could rise by more than 35 percent to $13.6 billion. Similarly, Duke Energy recently announced that building a new coal-fired power plant in North Carolina will be 50 percent more expensive than planned because of rising materials and labor costs. The same economic forces will affect TXU’s project, possibly pushing overall project costs to increase to as much as $15 billion.

Underestimated Regulatory Costs: National climate regulations are inevitable and high carbon emitters like TXU will be at a disadvantage when they must pay for their carbon emissions. Although TXU promises to make its new facilities “carbon capture ready,” it has not provided any clear timeline or costs for those technologies. Therefore, TXU will need to purchase CO2 credits until such technologies are commercially available and cost competitive. It is likely that the baseline for GHG reductions established in the national regulations will be set prior to construction of these plants (i.e., they will not be ‘grandfathered’), which means TXU will have to pay its emissions. Assuming TXU has to pay for 100 percent of its emissions from the expansion and 25 percent of its existing emissions under national regulations, the company’s costs will likely range from $917 million to nearly $2.3 billion annually, or 9 to 23 percent of its estimated cost for the entire project. These additional costs will reduce the company’s profits and erode shareholder returns.

Impact of Energy Efficiency Measures: Electricity demand growth in Texas may be lower than TXU’s aggressive projections. This means TXU may experience lower revenues due to unused capacity. Numerous legislative proposals are currently under consideration in the Texas legislature to dramatically boost energy efficiency. A recent analysis, done by Optimal Energy, found that aggressive investments in efficiency and other energy-saving programs would have a $38 billion net economic benefit for Texas while reducing peak electric demand by 4,000 megawatts by 2011 and 18,500 megawatts by 2021.

Competition from Renewable Energy: Electric power from renewable sources is becoming increasingly cost-competitive with power generated from fossil fuels. Texas is already the nation’s largest producer of wind power and the state has mandated that wind generation nearly double by 2015 and nearly double again by 2025. With mandates like that and costs that are competitive – $23 to $59/MWh for wind vs. $56 to $83/MWh for coal (including potential costs for controlling CO2) – wind power is a growth area that could cut into demand for some of TXU’s power. While wind resources are intermittent and therefore not a baseload generation source, wind’s cost competitiveness enables it to compete with coal, especially during off-peak hours.

Reputation Harm & Litigation Risk: Two-thirds of Texans oppose new coal-fired power plants in the state and three of four would rather rely first on energy efficiency and conservation. Several lawsuits have already been filed against TXU regarding the project’s environmental impacts and the Texas legislature is considering several proposals that could adversely impact the project. All of these trends will increase the project’s costs and potentially undermine customer attraction and retention in Texas’s deregulated electric power market.

Ceres is a leading coalition of investors, environmental groups and other public interest organizations working with companies to address sustainability challenges such as global climate change. Ceres also directs the Investor Network on Climate Risk, a network of more than 50 institutional investors with assets totaling $3.7 trillion. For more information, visit www.ceres.org.

David Gardiner & Associates provides innovative environmental and sustainability services to clients in the private and public sectors, helping organizational leaders make critical decisions by providing thorough research, clear analysis, and astute implementation guidance. The firm has core expertise in climate change, clean energy, corporate responsibility, investor services, business and non-profit management, and sustainable development. For more information, visit www.dgardiner.com.