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Wall Street Greens Up TXU

In a first of its kind deal, a consortium led by Kohlberg, Kravis & Roberts (KKR) and Texas Pacific Group (TPG) have announced an agreement to acquire TXU Corporation, a major Texas power utility.

The transaction is valued at a record $45 billion, which by itself makes it significant. But what's really interesting about the TXU/KKR deal is its implications for global warming policy in the U.S. and what it says about the influence that capital markets now have on environmental decision making. The deal has been called a leveraged environmental buyout.

TXU had been moving ahead with plans to build 11 new coal plants in Texas, which would have resulted in an additional 78 million tons of CO2 emissions (MtCO2) per year. To put that in perspective, Texas' utility sector currently emits 223 MtCO2, more than any other state. The new TXU plants would have raised those emissions by 35%.

<p>Source: Climate Analysis Indicators Tool, World Resources Institute.</p>

Source: Climate Analysis Indicators Tool, World Resources Institute.

If approved by its shareholders, the KKR deal would take TXU in an entirely new direction:

  • TXU would abandon 8 of the 11 planned coal plants, preventing 56 MtCO2 of new emissions. TXU would also drop its plans for new plants based on old pulverized coal technology, increase efficiency at its existing plants by 2%, and invest in new technologies like IGCC and carbon capture.
  • TXU would signal intent to join the US Climate Action Partnership (USCAP) and support a mandatory cap and trade system.
  • TXU would invest $400 million in energy efficiency and conservation.
  • TXU would double its wind power purchases to 1,500 megawatts (MW) and increase its promotion of solar power. Texas currently has 3,000 MW of wind capacity, more than any other state, and 24% of total U.S. wind capacity.

Capital Markets Are Greening Companies

The TXU story illustrates how quickly things are changing in U.S. global warming policy. Two weeks ago, environmental groups were actively opposing TXU. But today many are endorsing the TXU buyout.

But the investment community also had a huge role in the TXU deal. Goldman Sachs, Lehman Brothers, Morgan Stanley, and Citigroup are likely equity partners in the deal (Lehman Brothers is also a USCAP member).

It's no revelation that capital markets play a major role in modern economies, and that capital investments influence and reflect the business models that will be successful. And financial markets are now factoring the impacts of climate change into their investment portfolios. The effect is that companies are experiencing powerful incentives to improve their environmental performance, account for climate change in their business plans, and reduce risks from climate change for investors and stockholders. Ultimately, this new paradigm facilitates capital allocation towards companies with sound climate strategies.

As the TXU deal shows, capital markets now assume a "carbon constrained economy" in the not too distant future, and are factoring climate change into investment decisions. And the TXU buyout demonstrates that climate change is not only an environmental issue; it affects the bottom line.

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