Green Bonds or green washing?

Green Bonds or Green washing?

The latest rage in environmental finance is the green bond.   Christiana Figueres the Executive Secretary of the UN Framework Convention on Climate Change even declared optimistically and perhaps hopefully at the 2014 Investor Summit on Climate Risk in January that 2014 would be the year of the GreenBond (http://www.ceres.org/investor-network/investor-summit ). Based on the issuances and financing of green bonds in 2014 and 2014, most people would agree that Green bonds have taken off and this is the first year where green bond financing has increased significantly from almost nothing to a small player in the finance sector.

The question remains, what makes a bond green?  The definition of a green bond is evolving but one recognized definition is encoded in the green bond principles.  A subset of green bonds are what are called Climate Bonds.  These are primarily promoted by the Climate Bonds Initiative.  Now a number of organizations are starting to define what is a and is not a green bond upfront.  Examples of green bonds that are generally accepted are bonds where the financing is going to renewable energy projects, energy efficiency, waste to energy, mass transit including subways or light rail transit as well as others.  Here is a list of potential projects that have started to be defined by as acceptable for financing by green bonds (link to green bond or climate bond definition).

However, since this is early days of the green bond market, it is still a little like the wild west out there. What does that mean? It means that there are no rules as of yet and some organizations and people are taking the opportunity to define on their own what a green bond is or is not.  For example if an oil refinery is looking for financing could you consider this a green bond?  What about a waste water treatment project?  what about if the funding is used for general “green” projects which are yet to be defined?

Bonds are of course one method for getting financing for your project.  What this means is that most of the organizations and people involved in bond financing are only interested in the interest rate, the yield, the tenor and the risks associated with the underlying investment and how well it matches with the rate being charged and how well it fits the needs or gaps of the buyers portfolio.  In addition, they are also interested in the liquidity of the investment, is there another market ( a secondary market) where once the bond has been issued by the sponsoring financial organization the bond can be sold to another buyer.  The questions is is how many of these green bond financiers both from the buy side and the sell side are interested in the green – supposed – benefits of the projects being funded by the green bond.

The question is what is a green bond and what makes it green?  Is a green bond which is used to pay for a new subway a green bond?  No-one would argue that a subway will move people from cars meaning less fuel burned and less greenhouse gas emissions particularly if the electricity powering the subway is clean (and does not include any coal).  That is the situation in Ontario where the the Ontario government issued a green bond to pay for the construction of a subway line in Toronto. Do they need a green  bond for this?  They government would have probably financed this with a bond regardless.  Does this mean that the subway will be “greener” than otherwise because it is now financed with a green bond? What are the differences between a normal bond and green bond?  Is there a lower interest rate for the borrower  or any sort of preferred terms?  I suspect not and if not then the financing is the same and what is the label “green” for. In this case, the answer could be marketing and branding?

If we look at green bonds through the lens of greenwashing…what do we find?  Sustainable brands has a good set of guidelines for if your ecofriendly products are green washing.  As sustainable brands says at least 95% of products are guilty of breaking at least one of the sins of greenwashing.  Let’s see look at green bonds …

First the sevens sins as shown below are taken straight from here.

1. Hidden Trade-Off: Labeling a product as environmentally friendly based on a small set of attributes (e.g., made of recycled content) when other attributes not addressed (e.g., energy use of manufacturing, gas emissions, etc.) might make a bigger impact on the eco-friendliness of a product as a whole.

Green bonds – I would argue that some green bonds are being labelled based on one or a small set of attributes as opposed to looking at the entire product or the entire project that is being funded.  However, at the same time there are some projects funded by green bonds which are looking at many attributes.

VERDICT – Partially guilty

Stay tuned next week for the other sins of greenwashing and how green bonds rate!

Geothermal power – What is not to like?

So what is not to like about geothermal power and where are all of the geothermal facilities in Canada? Why is it not contributing more to energy generation in this country?

What is it and what are the benefits?

First of all, it is clean, no emissions. Geothermal involves drilling into the ground and circulating water through the pipes that are in the ground. The water then captures the heat from the ground and the heat is used to spin turbines which generate electricity. In addition, any other the excess heat maybe captured and harvested in other ways. Geothermal does not generate any greenhouse gas emissions and no air quality emissions that affect people’s health.

Second, no fuel. Operating costs are low and not based on any fuel based commodity so the costs have less volatility than fossil fuel based power plants.  You could argue that the hot water from the crust is the fuel source.  Of course the heat that is harvested from the earth would need to be consistent in order to deliver consistent energy and heat load.

Thirdly, it is generally based on relatively well established technology.  Whether it be a combined heat and power plant or a turbine and heat recovery, these technologies are well established.  Certainly the big companies are continuing to innovate and refine them, but the risk of non-performance of the heat and energy recovery would be expected to be low.  Possibly the piping to move the energy and the hot water could be more susceptible to non performance, since there could be corrosion issues.

Fourthly, geothermal can contribute to base load generation: Unlike wind and solar, geothermal is not intermittent It is constant and can be managed in that way.  This is a major advantage over most other renewable sources of energy except for hydro.  This means that geothermal can displace nuclear and base load coal.  Replacing coal fired generation as base load generation will be a challenges in places where coal is one of the primary fuel sources (Alberta, Saskatchewan, Nova Scotia and the U.S.) . Geothermal could be a key energy source in transitioning away from coal and towards cleaner fuels.  The newly announced Clean Power Plan , if it gets passed and through all of the court hurdles could incent this in the U.S.

What are the potential constraints and barriers?

Location, location, location:  Geothermal is very regional based so far. It is built around sites where there is active venting at the surface and there are not a lot of spots in the country that meet this condition.

Competing interests:  This overlaps a bit with the location one, since wherever there are hot springs, humans have built generally built a tourism sector and hot springs are attractive. There are concerns that geothermal will harvest all of the heat and water and the local hot springs will no longer be as good as they once were.  Not an unrealistic thought.  This also speaks to the social licence for geothermal.

One of the only ways to counter this is to have more projects that show that the geothermal plants can operate without impacting the quality of the hot springs. However few communities want to let projects get built unless they can see from previous projects that there is no impact (classic chicken and egg).

Understanding: Another possibility could be that with the growth of other new energy sources like wind and renewable, people including investors could be wondering “why do we even need this geothermal, let’s grow solar and wind and we can think about geothermal and the role it will play later when we need it.”  This thought is not entirely logical since investment is going into research into tidal energy or offshore wind which have larger technical barriers than geothermal. This though process also means that financing may not be as easily available.

Lack of knowledge of the potential opportunity:  Geothermal resource mapping is expensive and not as easy to do as for other energy sources.  Clearly places where there is heat venting and hot springs are prime candidates to start.  To understand the true potential of geothermal in any area a significant amount of drilling needs to take place to determine temperature profiles and others aspects. In the past the sector has piggybacked or attempted to piggyback off of oil and gas drilling and this continues.  It strikes me that a secondary business for the oil service sector could be to provide drilling services to the geothermal sector and to provide information and data from drilling to the sector to use in their mapping.

Confusion with fracking sector: I think with all of the drilling involved in mapping the resource and some of the impacts from fracking, maybe there is some confusion of geothermal with oil fracking.  With geothermal, there is no “fracking” where the rocks are fractured with high pressure to release oil or gas.  The drilling for geothermal is very similar to the drilling for oil and gas exploration.

Higher capital costs:  One aspect of geothermal plants is that they have higher capital costs than some other forms of generation.  They need to install the power generation plant as well as the all of the piping to transfer the heat from the ground to the water in the pipes.  However, as already mentioned operating costs will be lower and prices for power can be locked in with power purchase agreements, so you would think that should be enough to offset the risks of higher capital costs.  Carbon pricing can also only help the economics of geothermal.

I still think that geothermal has a bright future and requires some vision, a government to set some policies right, hard work.  The best locations would be locations with a good heat source close to the surface, with some experience with oil and gas drilling, an electricity source that is reliant on coal, some form of carbon pricing and experience with large capital projects.  Alberta and Saskatchewan seem like prime location, maybe BC as well.

For more information:

Borealis geopower mentions many of these as well in the following presentation on slide 22

The Canadian geothermal association has these points and more at their website.

CBC has a recent article on their website and another one here.