I’ve previously espoused the belief that banks need to be given time to formulate a response to the current climate crisis. After COP26 in Glasgow, it is clear that the costs of wind and solar are falling and production advances in both are happening so quickly, I no longer believe that banks need to be extended the benefit of an extended period to outline their climate practices.

But, this opens up a new reality. A quick transition to an electric economy dependent primarily on wind and solar may result in the rapid abandonment of oil, gas and coal-based generation. We may quickly reach a point where environmental events become so extreme that abandonment of these assets could be required by local or federal authorities. Even without government action, these assets might well be rendered obsolete due to costs of operation, and closed due to adverse public relations of continued operations.

I have many friends in credit departments of the major banks on Wall Street who privately confide that their banks have not performed any sort of sensitivity analysis to reflect the possible implications of default of their fossil fuel creditors or projects. Some of these banks have such extensive loan networks that they cannot even begin to analyze which creditors are fossil fuel creditors and which projects could be jeopardized by the climate crisis or when.

I had believed that while the Federal Reserve has lagged in requiring US banks to analyze this information, we should be able to get some insight and direction from Europe where the European Central Bank (ECB) is several years ahead of the US in analyzing and adjusting to climate exposure. Unfortunately, the news from Europe is not good. The ECB reported this week that of 112 European banks analyzed, not one is fully prepared for the possibility of stranded or abandoned assets. Even today, according to the report, only 28% of the banks surveyed are fully modeling environmental or climate change risks when evaluating a debtor’s credit profile.

At the same time, an article that I found on the ECB report suggests that banks’ credit is much more exposed to a fully functioning ecosystem and cites a French study showing that 42% of security in the French banking system is exposed to the ecosystem.

I think we can boil this down to some very unsettling facts regarding the banking system. First, we are going to get very little information from banks on their exposure to fossil fuels companies; it may take years for the largest banks to begin to quantify their risk internally. Second, the climate crisis poses a systemic risk to the banking system. It is very clear that the entire banking system – and not just the largest banks -- is extremely exposed to the fossil fuels industry and corollary industries (as well as to the nuclear industry), all of which may be forced into obsolescence prior to maturity or even significant loan amortization. Third, banks are equally exposed to disruption and dysfunction in the environment, and they cannot drag their feet in the funding of new solar and wind projects. They should be leading the way on this transition as a failure of the ecosystem would be even more costly for them (and the Earth writ large) than writing off their fossil assets.

I follow developments in renewable energy and work in the space. 2021 has been a remarkable year for the decline in the cost of offshore wind. We are seeing something similar in the solar/PV space. It is ending with Vestas's surprise unveiling of an onshore wind turbine that can generate 7.2 MW, dramatically more output than anything we have seen to date. It is almost reminiscent of Moore's law.

We do not need any more advancements in wind and solar for them to be dramatically less expensive than any new facilities based on generation of electricity from fossil fuels. The US Department of Energy under Trump had indicated in 2020 that the lowest cost of energy by the middle of the decade would be from offshore wind, solar/PV and then onshore wind. It is now already here. New energy projects should only be wind of some sort or solar. (MIT is making advances in fusion, but they have also said that their next tests will be in 2025. Any full scale production remains several decades away; we cannot wait).

Against this backdrop, Twitter is now full of bots and maybe people on the payroll of the nuclear lobby who are advancing nuclear. They reason that nuclear is more durable than wind and solar, both of which are intermittent. They also say that nuclear is safe enough to prevent another Fukushima, Chernobyl or Three Mile Island now that it is dependent on small modular nuclear reactors (SMNR).

Unfortunately, after the entire situation where Emmanuel Macron got upset about the US and UK edging France out of an Australian nuclear submarine deal, we’ve started seeing US government officials try to appease France by bringing nuclear back into the mix in the US and other places where it has no business being. Biden's DOE officials who have spent their entire life researching wind and solar are releasing ridiculous videos on LinkedIn and Anthony Blinken got Romania to agreement to a nuclear deal that, if it were ever built, will make Romania the pariah of Europe for the next 5 centuries. To boot, people who should know better, including Obama's Secretary of Energy, are now advocating extending the life of existing nuclear facilities.

The pronuclear stuff is bought and paid for by an industry that has a lot to lose. There are certainly also banks that have extended credit to the nuclear industry that have a hand in this. But, the realities are clear. Not only is nuclear 4x the cost of wind or solar, but SMNR requires about 7x the lead time. Wind and solar have the durability of nuclear when paired with a long term storage solution and there are many that are now being brought to market that have a levelized cost of storage around 5 cents per kilowatt hour (those interested can check out Gridscale, Azelio's TES.POD, ESS Tech or multiple lithium-based solutions). Nuclear, including SMNR, simply should not be part of any discussions about new energy generation sources.

As far as extending the life of nuclear and Diablo Canyon in particular, the plant now requires a $4.50 billion upgrade to be cooled more efficiently and to be less environmentally taxing (but, even after this upgrade it will still require an extraordinary amount of the area's fresh water supply to be properly cooled and it will still be environmentally taxing). And dangerous (I have been in both Japan and the Ukraine and I do not think California wants the risk of becoming either one). Andrew Cuomo finally closed Indian Point that is only 35 miles from Times Square in New York earlier this year before he had to resign. Even so, it is estimated to take another 60 years before it is fully decommissioned and safe. With wind and solar being 100% safe and dramatically more cost-effective, we should continue along the course of removing all risks of a global catastrophe in our energy production system, not just those that release carbon into the atmosphere.

We can solve the climate crisis with wind and solar and without putting (prolonging) the ridiculous burden of nuclear onto future generations.

At COP26 in Glasgow, unlike before, the financial world showed up and a group of 450 financial institutions pledged to invest $130 trillion in the transition to a low carbon world.

But, there is so much to be done and it is now incumbent upon banks of all sizes in the US – and around the world – to become engaged in the necessary climate transition that must occur to ensure the world remains within what the Paris Agreement deemed acceptable climate change parameters.

The question is how. There is so much to be done. And, while banks come under heavy criticism for their lending to the fossil fuel and coal industry and commitments must be made now to reduce this funding over the next few years, banks must also need to figure out how to more actively engage in a transition.

At the consumer level, it seems obvious that banks can assist any federal and state incentives and require heat pumps and energy efficiencies in any mortgages and home equity loans they extend. Auto loans can be predicated on shorter payback periods with favorable terms extended if the car is removed from service in favor of a fully electric car.

Loans to industry can require immediately methane remediation and sourcing of materials from green carbon-neutral sources. Green steel, for example, could be immediately required, even if that now requires sourcing all steel from Scandinavia where Hybrit and Vow Green Metals are way ahead at this game.

Loans to agriculture can also demand methane procedures around livestock, but also better water and fertilizer practices.

But, the biggest challenge facing banks is that many technologies that have the potential to reduce carbon are still in their infancy and may in fact never materialize – such as the use of hydrogen as a fuel and carbon capture. And, banks and large financial institutions, which are inherently risk averse, will not be able to get comfortable with the risks of these projects.

One area where banks can easily become comfortable and where tremendous progress can be made very quickly is through investing in onshore and offshore wind projects. Wind projects are essential to the new energy infrastructure, offering not only the lowest levelized cost of energy for the next decade, according to the Department of Energy, but also a proven technology that banks across northern Europe have now been actively funding for the last 10 years. Other areas that banks can invest in today without technology risks are solar, energy storage and the laying of cables to expand the electrification of transportation networks.

These types of projects, particularly offshore wind projects, can require complex lending structures to protect the lending banks. The good news is that the repayment periods for the cost of funding are much shorter and collateral can be better securitized than was ever possible for oil and gas project finance structures that major banks were always so eager to fund worldwide. Banks of all sizes in the US can extend capital to these projects at the most senior or secure tranches where the cost of capital is the lowest. Other funding and guarantees can come in at less secure levels in the capital structure by long-term power purchase agreement (PPA) counterparties (utilities or direct partners) or by local and federal agencies. As a result of Build Back Better, there will be a healthy amount of capital available that will be released through these agencies in early 2022.

The highest level of risk in the project (and much higher returns) is then taken by sponsors, by OEMs, by developers or by a group of venture capitalists. Sponsors like NextEra, Brookfield, Orsted and Avangrid will have basically unlimited capacity for these projects in the US.

It is time for banks to begin to act.

Contact me through BestCashCow if you need further direction, advice or introductions.