The Environmental Protection Agency’s (EPA) plan to compel US power plants to capture or slash their fossil fuel emissions is a boon to the worst polluters and their shareholders, according to experts.
US power plants that run on coal and natural gas – two key fossil fuels worsening the climate crisis – will need to capture their carbon dioxide emissions or run on clean hydrogen, if the latest proposal from the Biden administration is successful.
The leaders in carbon dioxide capture, usage and storage (CCUS) are oil and gas giants, said Will Grainger (pictured), a Texas-based senior corporate research analyst at think tank, Carbon Tracker.
He explained, “CCUS helps with enhanced oil and gas recovery. As you inject CO2 into an injection well, you can theoretically produce more hydrocarbons. You can unlock more value out of an adjacent well by virtue of the injection well.
“[Oil and gas producers] are the ones who’ve been using this technology the longest so they’re going to ultimately be the ones to deploy this at a rapid pace. There will likely be some valuation uplift there.”
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Exploration and production companies (E&Ps) in the oil and gas industry could also benefit. The EPA proposes that the most polluting power plants with the longest shelf lives should capture their carbon emissions, which then need to be disposed of.
Grainger said: “You will need some form of storage, whether that be an old injection well or caverns. You will need to drill to do that and ultimately the drillers are the E&Ps. It could be a mining company as well.”
Elizabeth Levy, head of ESG strategy and portfolio manager at sustainable wealth manager Trillium, said: “Companies that provide capture components or systems will have incrementally more business under these proposed rules than they would have without them.”
The EPA’s CO2 capture targets are ambitious. Some 617 million metric tons of carbon pollution could be cut from current coal and new gas plants between 2028 and 2042, and a further 214 and 407 million metric tons of CO2 could be slashed from existing gas plants.
The agency and White House officials insist the proposals are needed to meet president Joe Biden’s goal of 100% clean electricity by 2035, and that the cost to the taxpayer is minimal.
Portfolio managers on the fence
However, until the rule is finalized and comes into effect, many investors may choose a ‘wait-and-see’ approach.
This isn’t the first time an administration has attempted to green up power plants; former president Obama tried and failed to execute his Clean Power Plan, and the EPA’s new proposal is already being criticized on various legal fronts.
Individual states are expected to push back. There is precedent for this too – 19 states, led by West Virginia, succeeded last year in legally challenging the EPA’s authority in regulating greenhouse gas emissions.
Experts anticipate similar litigation, especially considering the EPA is mandated to factor in cost when setting rules. The EPA is pinning its proposal on carbon capture and clean hydrogen technologies yet both are still relatively nascent, lacking economies of scale and widespread storage infrastructure.
Carbon capture technology operates at a very low scale, points out Christopher Knapp, managing director and principal at Texas-based wealth manager, Robertson Stephens. He said: “It is not a silver bullet for emissions reductions and is still far too expensive, even with the tax provisions in the Inflation Reduction Act.”
Nevertheless, the direction of travel is inevitable.
Coco Zhang, vice-president, ESG research at ING, said: “With or without the EPA rule, unabated coal-fired power plants will face stronger competition from renewables and natural gas in the next decade.
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“Gas-fired power plants, despite their significant contribution to the US power mix, will also feel higher pressure to decarbonize.
“The EPA rule, if finalized, will only make the process faster. Thus, investors in both fossil and clean power plants should factor that into their scenario analyses.”
