Coal Plants: The Next Round of Subprime Loans?

This post is co-written by Mark Kresowik, Corporate Accountability Representative for the Sierra Club’s National Coal Campaign.

Shortly after the credit markets crumbled this fall, Executive Secretary of the United Nations Framework Convention on Climate Change, Yvo De Boer, suggested that it was a good time for banks to review the financial risks of global warming: “We’re in this pickle in the first place because these banks made unwise loans.  Giving a loan that doesn’t take climate change into account also is an unwise loan.”

As UN Climate Change Conference talks in Poznan, Poland wind down, the incoming U.S. administration is gearing up plans to restore the flow of credit and stimulate the economy, led by creating millions of new green jobs through energy efficiency and clean energy.

This is great news for our economy and the environment. But it also means banks and credit rating agencies rushing to green light as many as 100 massive coal-fired power plants. Banks like Citigroup, JPMorgan Chase, Goldman Sachs, Moody’s, Standard and Poor’s, and Fitch Ratings are betting against the next President of the United States and making a new round of subprime loans.

Coal plants cost billions of dollars to build, and this requires bank loans. In turn, those banks are expecting us to buy power from the utilities for decades, at a high enough price to cover operating costs and pay back the loans.  

Coal plants are also very dirty, spewing millions of tons of global warming pollution and toxic particles into the air. So far we have given companies a free pass, letting them emit as much carbon dioxide as they want.  But with President-Elect Obama and Congress committed to strong action on global warming, the free pollution days are over.

So if companies build new coal plants - 100 plants currently proposed at a cost of more than $250 billion - we will be paying higher electricity prices for more pollution.  

As energy prices soared earlier this year, families and businesses across the country have said “No More!”  Electricity demand has been dropping as people reduce waste and install energy sipping appliances and light bulbs. The incoming administration is planning to help save even more energy. 

In short, we aren’t going to need the power from new coal plants.  Just like we didn’t want gas-guzzling cars, we don’t want pollution-spewing coal plants.

Americans want energy-efficient technology. So when banks and utilities are suddenly without customers willing to buy coal power, expect banks and utilities to be next in line for bailouts.

As energy demand drops further, companies that build risky new coal plants will only have two options - default on loans or raise energy prices even higher.  Defaults on loans hurt the banking system and local communities. Higher prices hurt residential consumers and chase businesses away. We've seen this cycle before.

“In the 1970s and 1980s, (the federal government) provided financing for several (utilities) that had invested in the construction of large nuclear and coal-fired generating power plants. Several of these plants were completed late and over budget.  In addition, an expected increase in demand for electric power did not materialize, and as a result, several of these (cooperatives) became financially troubled and could not meet their debt-servicing requirements. In turn, the federal government incurred several billion dollars in loan losses.”

We can’t afford to repeat the same mistakes, but the credit rating agencies and investment banks have put their heads in the sand when they really need to see the efficient, clean energy future ahead.   We hope Congress will urge the same, as we taxpayers are tiring of the bailouts.

Comments

[Ryan]

Good Post!, puts a whole new spin on the state of the financial sector.

It would have seemed implausible to people just a few years or months ago that these bad loan practices are taking place deep down in the markets, especially to such an extent.

But, are you suggesting that the credit markets crumbled in part because banks were making loans that didn't take global warming into account? Are loans that ignore long-term climate risks also risky in the shorter-term; have they tussled with investor sentiment to the extent of having contributed to this crumble?

Keep up the good work!

[Dr. James Singmaster]

Here's a suggestion. Sierra Club ought to call for
5-10% "sin" tax on coal sales to pay for recovery of areas in the environment "sinned" upon by coal mining over the past century. This would become a fund to pay for work to recover the despoiled lands. Coal workers displaced as we get rid of coal as a fuel would be paid for working to get trees and other plants growing to help trap carbon dioxide a bit. Certainly such work will be cleaner, healthier and safer than coal mining.
Also I point out that the Natl. Intell. Council in its just released report"Global Trends, 2025" has section on energy totally sold out on "CLEAN COAL" and Synfuels as the only way to go. It sounds like it was written up by the coal industry, and the Club ought to come out denouncing it.
Dr. J. Singmaster

[David]

Commercial banking is a part of the financial industry that bears little resemblance to personal finance. While one relies on the capability of the business owner to pay through evaluating past credit and job, commercial banking is based on the industry and business cash flows. Some banks will not lend to a business, even if there is strong management or business cash flows.

David from http:/jumplanet.com the Get a Business Loan site

[Easy Grow Greenhouses]

Great post and blog! I really enjoyed this post, thanks for that. I look forward to reading your upcoming posts, thanks!

[Grant]

Excellent post! I sometimes find it hard to believe that our country has gotten itself into this mess with the corruption and bad loan practices.

[Mini Greenhouse Kits]

Great post! It was very well researched and I enjoyed it very much. I bookmarked your site and will be back very soon, I look forward to reading some interesting posts! Thanks, Whitney

[Aerogarden Grower]

Great post! It was very well researched and I enjoyed it very much.

[Pasadena Real Estate]

Interesting post. It's shocking to realize where our country is right now after the subprime catastrophe....what a mess!