French energy firm EDF will extend the life of four of its eight nuclear power plants in the UK.

The move will safeguard 2,000 jobs and help with tight energy supplies.
Heysham 1 and Hartlepool will have their life extended by five years until 2024, while Heysham 2 and Torness will see their closure dates pushed back by seven years to 2030.

Meanwhile, EDF said its 2015 profits fell 68% to €1.18bn mainly due to writedowns on coal-fired plants.

The results were below analysts’ expectations.

The value of plants in the UK, Italy, Poland and Belgium fell, and the company also took charges on its Edison oil and gas exploration business.

EDF will cut its dividend by 15 cents to €1.10 a share with an option for payment in new shares rather than cash.

Its shares have fallen almost 25% since the start of the year.

EDF said its decision to extend the life of its plants followed “extensive technical and safety reviews”.

Chief executive Vincent de Rivaz said: “Our continuing investment, our expertise and the professional relationship we have with the safety regulator means we can safely prolong the operating life of our nuclear power stations. 

“Their excellent output shows that reliability is improving whilst their safety and environmental performance is higher than ever.”

The four nuclear plants employ about 2,000 permanent staff and 1,000 contractors.

They provide electricity to about a quarter of the UK’s homes.

The announcement comes amid concern about the amount of energy available to keep the lights on, due to the closure of many of Britain’s ageing power plants.

………. [further narrative on the Hinckley C project in Somerset].

Source BBC website 16/02/16

Emissions Bring Bumpy Ride for Carmakers

German carmaker Volkswagen said this week it was increasing provisions to cover the cost of the diesel emissions scandal.
It has nearly tripled the amount, from €6.7bn to €16.2bn (£12.6bn).

The German government has also asked the country’s manufacturers to recall 630,000 vehicles to modify emissions control software.

Shares in Daimler, the owner of Mercedes-Benz, fell almost 5% on Friday over emissions questions.

It said it was investigating possible irregularities in emissions testing in the United States following a request from the US Department of Justice.

There were also raids by fraud investigators at PSA, the parent company of Peugeot and Citroen, in connection with an emissions enquiry.

The diesel emissions scandal has meant a bumpy ride this week for European car makers.

Volkswagen itself reached a provisional deal with regulators and private lawyers over how to compensate US buyers whose cars were fitted with defeat devices. As part of the settlement, the company will offer to buy back nearly half a million vehicles.

The level of compensation is much higher than what has been offered to consumers elsewhere in the world. This is understood to be partly because US emissions standards are stricter, which makes it harder to repair the affected vehicles in a cost-effective way that does not harm performance.

The deal should go some way to reducing the uncertainty surrounding the company, although it is still facing the prospect of heavy fines for breaking environmental laws, as well as civil legal action.

So it was no surprise that when VW published its much-delayed results for 2015 on Friday, it dramatically increased the money being set aside to cover costs linked to the scandal.

Meanwhile, Volkswagen’s German rival Daimler has also been under scrutiny. It said it had been approached by the US Department of Justice over “possible indications of irregularities” in the way it tests emissions on its cars sold in America.

The company has begun an internal investigation and said it will take “all necessary actions” to resolve any issues.

Since the VW scandal first erupted, Daimler has insisted that its cars do not use defeat devices.

It reiterated the point earlier this month when a group of Mercedes owners sued the company. However, it has refused to say what the US authorities’ concerns relate to.

Daimler’s problems are not as severe as those of Mitsubishi. The Japanese manufacturer’s management apologised profusely on Tuesday after the company admitted manipulating fuel consumption tests to make its vehicles appear more frugal than they really were.

About 600,000 “kei cars”- small vehicles with tiny engines, which are popular in Japan but rarely sold elsewhere – were affected.

And also this week, the UK and the German governments published the results of extensive investigations into vehicle emissions. Their technical teams collaborated, and unsurprisingly, they came up with similar results.

There was no evidence, they said, that manufacturers outside the VW group were deliberately using defeat devices to pass emissions tests. But invariably emissions measured on the road or at a test track were much higher than those detected under laboratory conditions.

They also found that at times emissions controls were effectively being turned off, especially in cold weather. The manufacturers argue that this is necessary to prevent the systems themselves or the engines from being damaged.

This is allowed under EU law, but German officials are not convinced that it is being done only when absolutely necessary.

In other words, it is a loophole that an unscrupulous manufacturer could use to boost performance at the expense of increased pollution.

For that reason, German carmakers have been asked to recall 630,000 cars in Europe. It is understood they will be given a software fix that will ensure emissions controls can only be manipulated under specific circumstances.

Source: Theo Leggett, Business correspondent, BBC News 22/04/16

Drax says may mothball coal plant amid weak energy markets

British power producer Drax may decide to mothball its coal-fired power generation units, the company said, as part of a strategy review triggered by competition from cheap gas and renewables.  
A surge in intermittent renewable energy production and cheap gas prices have effectively priced coal-fired plants out of the market in Britain, whose government has anyway said it plans to shut all coal-fired stations by 2025 in a bid to lower carbon emissions.
Source Money Market No. 129 March 2016

http://www.money-marketuk.com

Is there a scientific consensus on climate change in the US?

The major scientific agencies of the United States — including the National Aeronautics and Space Administration (NASA) and the National Oceanic and Atmospheric Administration (NOAA) — agree that climate change is occurring and that humans are contributing to it. In 2010, the National Research Council concluded that “Climate change is occurring, is very likely caused by human activities, and poses significant risks for a broad range of human and natural systems”. Many independent scientific organizations have released similar statements, both in the United States and abroad. This doesn’t necessarily mean that every scientist sees eye to eye on each component of the climate change problem, but broad agreement exists that climate change is happening and is primarily caused by excess greenhouse gases from human activities.
Scientists are still researching a number of important questions, including exactly how much Earth will warm, how quickly it will warm, and what the consequences of the warming will be in specific regions of the world. Scientists continue to research these questions so society can be better informed about how to plan for a changing climate. However, enough certainty exists about basic causes and effects of climate change to justify taking actions that reduce future risks.

Source EPA website

http://www3.epa.gov/climatechange/basics/facts.html

Renewable energy among global megatrends

Technology and cost are set to take over from government mandating as the principal drivers of renewable energy investment and capacity expansion, according to two global energy marke experts.

Gerard Reid, founding partner of London-based Alexa Capital, and Jochen Kreusel, head of engineering and technology giant ABB’s Smart Grids Industry Sector Initiative, say while government mandating of higher renewable energy input into national power grids (particularly in Europe) has underpinned the roll-out of renewables worldwide, increasing cost competitiveness and “strategic advances in technology” will play major roles going forward.

Technologies, but more importantly the business models around them, are now developing at greater speed. This is something the new breed of ‘smart miner’ must stay abreast of, both from an operating and market opportunity standpoint. The speed of change is altering competitive playing fields in all types of industries, leaving some – even big corporates – behind.

“We’ve seen very rapid reductions in [variable] costs, especially in solar but also in wind,” Reid said.

“Renewables are rapidly becoming too cheap to ignore.

“In terms of [capital or fixed costs], people might say the costs of solar are US$1 million/megawatt and say the figure for gas is about the same, and so assume they are at parity. But that’s not true because what you really have to look at is the capex per MWh. If a gas generator is going to run 60% of the time and a solar park is going to run 15% of the time, the capex cost per unit generated is going to be four times higher for the solar park.

“If we want to get renewables onto the system, we have to get the cost of capital down. Capital costs are going to be determinant in getting renewables onto the grid. This can have different implications across regions. For example, the cost of capital in India is almost twice as high as in Germany. However, as India has nearly twice as much sun, the cost of electricity production is more or less the same in both countries.

“We’ve never had this scenario with conventional generation because we recovered capex through the power price, and the power price was determined by the marginal cost. So if fuel costs went up, they went up for everybody, and so the power price went up. With renewables, we don’t live in that world anymore. Based on the low marginal costs of renewables, a utility or power producer can offer consumers a power purchase agreement with a set price for the next 20 years. No utility would do this with gas or coal.

“However, with competition in the market, a consumer can switch suppliers quickly, and thus sign only short-term contracts. This does not align to renewables as investors need the security of power prices to recover the capital costs. This requires a fundamental change in the way we look at power markets.”

Reid said Europe’s massive build-out of renewables needed green-movement pressure to change laws around emissions and pollution, and the new regulatory environment was still important because “the power markets as we know them are broken – no generation of any type can be built without some form of very clear regulation in place”.

“In Europe you are not going to get your capital expenditure back, except maybe in the United Kingdom. Without that return, there is going to be no investment in power generation. This is why renewables – and energy in general – will need a support or market mechanism,” he said.

Kreusel said technology, and the cost of the technology, was “where industry is flexing its muscles”.

“After what these companies [Apple and Google] have done to the telecoms space, they are now looking at the automobile and electricity space and seeing it’s also all about data”

“Electricity demand is growing rapidly and CO2 emissions have to be reduced. These two countertrends can really only be addressed by technology – front-end renewable technology per se and the associated technology that supports it. Indepth knowledge of renewable power generation technologies and experience installing these around the world are required to serve the renewable energy industry. This comprehensive approach will become ever more significant as the renewable business continues its rapid evolution.

“ABB sees a large part of the renewable cost equation and the power markets issue being addressed by products that make the integration of large amounts of renewable power into the grid cost-effective and straightforward. I’m thinking here about automation and control systems for flexible power generation, HVDC, FACTS and a whole host of other enabling technologies on one side, and a market design giving flexibility and dispatchability at an adequate price on the other.”

The discussion between Reid and Kruesel, presented in the latest ABB Review journal, offers some fascinating insights into a rapidly transforming global power generation market, and the implications for traditional energy suppliers, and the convergence of power, manufacturing, communications and information technology industry megatrends.

Reid said while wind, wave, biomass and geothermal power were evolutionary renewable technologies, “solar is a revolution”, with the global market growing from 1 gigawatt to 50GW in the past decade.

“You can put it in your calculator, you can put it on your roof, you can build a big plant, and it’s quick to install. We’ve never had a technology like solar where you can do something so locally, cheaply, quickly and effectively,” he said.

“Looking at the cost roadmaps of companies in the future, I see cost reductions of another 40% [for solar] over the next five years. Meanwhile, for wind I only see a cost reduction potential of maybe 5% a year, but not 10%.”

Asked where investment for new renewables capacity was going to come from – and specifically, would traditional incumbents defend their market dominance and take the lead, or would new investors move in and gradually take over the market – Reid and Kreusel said it was useful to look at change in the telecommunications industry.

“We actually still have all the old incumbents … [but] the problem [they] have is that after 100 years of doing the same thing, they may face a challenge in adapting to the sudden revolution,” Reid said.

Kreusel added: “The old [telecoms] are still there, but much of the money in value-added telecommunication-based services is being made by new players. The incumbents are still providers of the commoditised infrastructure, but the money is being made by the users of that infrastructure, or in one prominent case, by a device manufacturer.”

Reid said another analogy he saw was the automobile industry, which was going through big changes as it “electrifies and is thus bringing itself closer to the utilities”.

“One of the main reasons for this is that costs of batteries are going down. Looking at automobile manufacturers, I ask myself, what they will be in 10 years’ time. I think some of them will be service companies. Some might use the automobile as a platform, but will be providing energy services and a whole range of other services into them.

“This is why I think that the players they should be watching out for are the likes of Apple and Google. After what these companies have done to the telecoms space, they are now looking at the automobile and electricity space and seeing it’s also all about data. They can say, ‘we are already in the data space and we are already in the home. Let’s go and run the electric vehicle, install the solar panel and connect them all together’.

“So in the future it’s not just going to be about the power market but the power market will be interconnected with these other spaces in a convergence of two if not three industries.”

Emerging leaders in ‘new industries’ did not just bring disruptive technologies, but “disruptive technologies and business models”, Reid said.

“If we look at the so-called disruptive businesses that are out there, what they really are is a mixture of technology and business model. If your customers have a battery in their car, you can aggregate those batteries and use them to trade in the power market. The idea might sound crazy, but it makes sense from the battery manufacturer’s or automobile maker’s point of view. He wants to make sure that the charging of that battery is controlled. He wants to control the charging by giving you a service package. So he could say, ‘here is a flat rate for your battery, you can plug it in wherever you want and it will cost you, say, $35 per month’. He has all the data about you. He knows where you are. He realises you’re in the airport and are going to be in France for two days. So he takes that battery, aggregates it across a country, and participates in the power market. That is a revolution.

“And manufacturers and consumers will sign up to this agreement because it is in their interest. You are thus going to get customers signing up for long-term purchase agreements. Many of us do not want to go out and buy a $500 smartphone but accept those costs when they are hidden in our mobile phone bills.”

Kreusel said the e-mobility renewable energy chain was an area drawing in more and more new players. Increased flexibility in product offerings would be a major trend.

Reid said: “My view is that everything is going to go electric and everything is going to go digital. The consumers are also beginning to change their behaviour. Young consumers don’t need to own the latest top-of-the-range car. They are quite happy to actually just rent a car. And this means they can rent the best car for the job rather than having a one-size-fits-all car. I’ve heard that some car manufacturers make twice as much money on a car that they put out to car sharing. That’s impressive in terms of margins – but of course it doesn’t help them in terms of volumes as they’re going to make fewer cars overall.

“But it’s very clear that they’re moving from thinking in terms of ownership models to service models. This is a very courageous strategy, but in a revolution you need to be brave. You cannot predict the future but you can try to shape it.”

Kreusel said system-integration technological advances that enabled further deployment of renewables could see a bigger role for battery storage. But extending the telecoms analogy to the power sector – with storage emerging as an alternative to transmission via grid infrastructure in need of new investment – came with limitations.

“I think there is an important difference, namely that the mobile networks have in part replaced the functionality of fixed lines in a one-on-one manner. In the power grid, there is the challenge of providing electricity in regions with strong seasonal variations,” he said.

“For example, winter in the northern hemisphere. Batteries can shift the load within the day, but you cannot shift loads over months in an economical manner using batteries.

“I see only two ways to deal with that. One is to not go beyond, say, 50% renewables. The other is to connect regions with transmission. Areas with the best wind and solar resources are often situated in remote locations. Tapping into these resources will require efficient ways to transport a large amount of power to the consumption centres.

“Power transmission interconnections need to be enhanced to facilitate optimum utilisation of renewables and balancing of loads.”

Source Mining Journal 03/03/16

http://www.mining-journal.com/technology/general-technology/renewable-energy-among-global-megatrends/

Investors Turn up the Heat in the Battle to Limit Global Warming

According to one fund management group, the investment community does not expect this week’s Paris Climate Change Conference to achieve much.  But its views are in stark contrast with what would appear to be the majority of asset managers — those responsible for trillions of dollars of funds under management.
These managers have taken a series of initiatives in recent months designed to hold the politicians’ feet to the fire to maximise the chances of a meaningful result.
The likes of Colin Melvin, head of Hermes Equity Ownership Services, have spent much of the past 12 months impressing on their counterparts worldwide that this is a debate in which they have to get involved. 
One result was a letter delivered to the heads of the G7 leading industrial nations who met in Turkey last month, signed by the chief executives of investment groups representing $12 trillion of assets — at least five times the value of all the UK pension funds.  It urged them to ensure the Paris conference would aim to set meaningful goals for the long-term reduction of emissions.  This was agreed and, for good measure, the G7 also resolved to phase out the use of fossil fuels by the end of this century. 

Such things can be dismissed as empty gestures or as signs of a gathering momentum behind the climate change challenge. This initiative comes on top of other actions by shareholder groups, one of which successfully lobbied the government of Alberta — which lies at the heart of the Canadian oil shale and tar sands industry — to set a carbon-price floor of $30 a tonne from 2018.  Another is seeking a pledge from companies that they will work to reach any goals set by Paris and not leave it as the responsibility of governments.

Individual fund management groups have also taken a stand.  Axa, one of the Europe’s largest, and huge French groups CDC and CNP said last week that they are to scale back or cease investing in any businesses based on the extraction of thermal coal.  They and other investment groups are clearly alive to the issue of stranded assets — how 60% to 80% of the known reserves of coal, oil and gas will have to stay in the ground if the world is to meet its target of holding global warming to 2°C.  It is widely forecast there will be a 40% drop in the use of coal over the next 20 years. 
As well as their concern for the future of the planet and the lifestyle of their beneficiaries who will have to live in it, fund managers are concerned about the risks to businesses in which they invest. They want to make sure that company boards are taking the issue of climate-change risk seriously and reporting fully on its potential impact.

A surprising number still seem to be asleep or in denial.  Although the oil majors are beginning to engage with the issue and look for technologies that will allow the continued use of fossil fuels without harmful effects, many other global companies still seem to have a tin ear or assume it is not a major concern for them.  

Influencemap, a London-based organisation that monitors corporate statements on climate change, recently pointed out how little, if anything, major US companies such as Procter & Gamble, GE and Boeing disclosed on their climate change policies even in Securities & Exchange Commission filings, which are supposed to document the most significant risks facing the business. 
Carbon Tracker, a think-tank based in London whose mission is to align capital markets with climate-change reality, said in a report last month that fossil-fuel companies risk wasting up to $2.2 trillion (£1.5 trillion) in the next decade by pursuing projects which could turn out to be uneconomic.  It said specifically that no new coal mines will be needed, oil demand will peak in about 2020 and the growth in gas will disappoint industry expectations.
Others may dismiss this as special pleading but, even if one argues about how fast these changes will come, there should be no mistaking the trend.  The fact that so many investors are now engaged with the issue will also increasingly force energy producers and users to recognise they are going to have to change and to embrace new technologies to lower the carbon intensity of their products. 
The role of the investors highlights one further point. They are frequently taken to task for not engaging with the companies with which they invest, or being lax in holding underperforming managements to account. But any shortcomings in this area are more than offset by the quite remarkable mobilisation of the investment world around climate change.
Typical of this is a just-published paper from BlackRock, called The Price of Climate Change: Global Warming’s Impact on Portfolios. In its introduction, Ewen Cameron Watt, the firm’s chief investment strategist, writes that even those sceptical about the science should not ignore the significant regulatory, economic and technological developments around global warming that make it a significant investment issue. Investors, companies and governments are focusing on the risks and the threats that may emerge. 
“These profound changes have the potential to affect asset prices in all areas for a long time to come,” Cameron Watt concludes.
Source Anthony Hilton The Evening Standard 01/12/15

UNFCCC Host Country Profile: France

Source: UNFCCC Host Country Profile: France

Iceland’s volcanoes could become a new power source for the UK

Iceland’s volcanoes could become a new power source for the UK, under new plans expected to be announced by David Cameron on Thursday (29 October). The plan would see the construction of an electricity underwater pipeline between the UK and Iceland within the next 10 years.
The prime minister is due to make the announcement as he attends the Northern Future Forum in Reykjavik, which brings together prime ministers of the Nordic and Baltic countries, as well as the UK. Cameron is also believed to have held meetings with Iceland’s prime minister Sigmundur David Gunnlaugsson earlier this week as the first British prime minister to visit Reykjavik since Winston Churchill in 1941.

The plans to harness Iceland’s renewable geothermal energy is expected to take between seven to 10 years to build and would allow Britain to begin following Iceland’s example, where they currently get 95% of their electricity from renewable hydro and geothermal sources.

A special UK-Iceland Energy Task Force has been set up to examine the feasibility of the project and will be expected to report back with an update within six months. The underwater pipeline [cable] is expected to run for 750 miles (1,200km) and the entire project could come at a multi-billion pound cost but would ensure greater energy security for Britain.

The announcement for the new geothermal plans comes as UK homeowners have been warned that they could face higher energy bills because of power stations closing. Britain also currently has the highest electricity prices in Europe, while Iceland has the cheapest prices on the continent.

Iceland is one of the most tectonically active places on earth, which means they are home to a large number of volcanoes. There are more than 200 volcanoes in their active volcano zone that stretches across the country from southwest to northeast and more than 600 hot springs have been found.

Source Priyanka Mogul International Business Times 29/10/15

The Economist and VW: A Mucky Business

Systematic fraud by the world’s biggest carmaker threatens to engulf the entire industry and possibly reshape it.

HERBIE, a Volkswagen Beetle with a mind of its own in a series of Disney films launched in the 1960s, had its share of misadventures. But things had a way of ending up happily for both the car and its passengers. The German carmaker’s more recent attempts to give its cars the gift of thought have things headed in an altogether grimmer direction. Its use of hidden software to deceive American regulators measuring emissions from diesel-engined cars has plunged VW into crisis. And as the scandal provokes further investigations it seems likely to throw into question a wider range of claims about emissions and fuel efficiency. It could thus be a blow to much of the industry—one that might be large enough to reshape it.
The damage to VW, the world’s biggest carmaker, is cataclysmic. The company’s shares have collapsed by a third since its chicanery surfaced. It faces billions of dollars in fines and other financial penalties. Lawsuits will be flying their way to its headquarters in Wolfsburg. Its strategy for the crucial American market is ruined; its reputation is in tatters. Its boss, Martin Winterkorn—who in 2009, when the misleading “defeat” software made its first appearance, was also directly responsible for the company’s R&D—resigned on September 23rd.
The company’s home country is in shock. Germany’s environment minister, Barbara Hendricks, spoke for many when she declared herself “more than astonished”—though the Greens, an opposition party, say that in its response to a parliamentary question earlier this year the government admitted that it knew manipulating emissions data was technically possible. Mixed in with this is some embarrassment that, as with the scandals over FIFA and the World Cup, it is falling to America to enforce rules that Europeans have been breaking.
There is also a certain apprehension. Sigmar Gabriel, the vice-chancellor and economics minister, said on September 21st that he hoped the export brand of Germany as a whole would not be tarnished. Germany’s economic strength rests in large part on the idea that anything stamped “Made in Germany” will offer a high level of reliability, trustworthiness and engineering prowess. Much of that reputation rests on the broad shoulders and sturdy tyres of the car industry, which directly or indirectly employs one in seven of the country’s workers; and with a stable of marques that includes Porsche and Audi, VW is that industry’s leader. Industrialists fret that consumers worldwide could exact reputational Sippenhaft—collective punishment, but literally “kin liability”—on all German engineering.

As well as being a threat to Germany’s export earnings, the scandal also menaces the brainchild of one of its most eminent engineers, Rudolf Diesel—at least as far as its future in cars is concerned. Diesel engines use fuel more efficiently than engines with spark plugs, and better efficiency reduces both drivers’ expenses and carbon-dioxide emissions. Those advantages have endeared diesel engines to thrifty Europeans with green governments; none too popular elsewhere in the world, they power half of Europe’s cars.
Unfortunately, the benefits come with costs. Diesel cars’ efficiency comes from burning their fuel at a higher temperature, and that means they turn more of the nitrogen in the air they use for burning into various oxides of nitrogen, collectively known as NOx. This does not have global climate effects on the same scale as those of carbon dioxide, which is the most important long-lived greenhouse gas. But it has far worse local effects, generating smogs and damaging plants and lungs. To make matters worse, the catalytic technologies used to deal with the NOx emitted by petrol engines are not well suited for use with diesels, requiring engine makers to deploy more complex and expensive alternatives. That is not a big problem for large engines like those of trucks and ships. But it is for small engines like those of cars.  

In America NOx standards are more demanding than they are in Europe. Mazda and Honda, both accomplished producers of diesel engines, have had trouble complying with them. It now appears that VW, which has put a lot of effort into persuading Americans that diesels can be clean and green, would also have failed to comply if it had not cheated. The campaign to convince Americans of the merits of diesel may thus well be at an end. And if it turns out that under real-life conditions many diesels also break Europe’s less stringent NOx standards then the future of diesel cars worldwide will be bleak.

Nothing seems right

The scandal broke on September 18th, when America’s Environmental Protection Agency (EPA) revealed that several diesel-engined VWs and Audis had software which switched NOx-controlling technology on only when faced with the highly predictable sort of demands seen under test conditions. The NOx-emission limit for a fleet of cars is 0.07 grams per mile (0.04g/km); under normal conditions the cars were 40 times over the limit. The EPA ordered VW to recall around half a million cars in America to fix the software. On September 22nd the company admitted that in 11m vehicles worldwide there was a “noticeable deviation” between the NOx emissions seen in official testing and those found in real-world use.
On the basis of 482,000 cars sold and a maximum fine of $37,500 per vehicle under the Clean Air Act, the Department of Justice could in theory fine VW $18 billion. In practice the punishment may be a lot less severe. General Motors, which for years ignored problems with ignition switches that directly claimed 124 lives, was fined just $900m earlier in September. In 2014 Toyota paid $1.2 billion when it settled a criminal investigation into its handling of unintended acceleration problems that led to 8.1m recalls.
But fines are not the only losses involved. Class-action lawsuits from aggrieved motorists will arrive at the speed of a turbocharged Porsche. On September 22nd VW announced a €6.5 billion ($7.3 billion) provision to cover the costs of the scandal but that is likely to prove too little. By that stage the company’s value had fallen €26 billion.

The financial damage could go further. Hidden within the German firm is a big finance operation that makes loans to car buyers and dealers and also takes deposits, acting as a bank. Its assets have more than doubled in the past decade and make up 44% of the firm’s total. And it may be vulnerable to a run. In previous crises “captive-finance” arms of industrial firms have proven fragile. After the Deepwater Horizon disaster BP’s oil-derivative trading arm was cut off from long-term contracts by some counterparties. General Motors’ former finance arm, GMAC, had to be bailed out in 2009.
With €164 billion of assets in June, VW’s finance operation is as big as GMAC was six years ago, and it appears to be more dependent on short-term debts and deposits to fund itself. Together, VW’s car and finance businesses had €67 billion of bonds, deposits and debt classified as “current” in June. This means—roughly speaking—that lenders can demand repayment of that sum over the next 12 months. The group also has a big book of derivatives which it uses to hedge currency and interest-rate risk and which represented over €200 billion of notional exposure at the end of 2014. It is impossible to know if these derivatives pose a further risk, but if counterparties begin to think VW could be done for they might try to wind down their exposure to the car firm or demand higher margin payments from it.

If depositors, lenders and counterparties were to refuse to roll over funds to VW, the company could hang on for a bit. It has €33 billion of cash and marketable securities on hand, as well as unused bank lines and the cashflow from the car business. The German government would lean on German banks to prop up their tarnished national champion, 20% of which is owned by the state of Lower Saxony. So far the cost of insuring VW’s debt has risen, but not to distressed levels. Still, unless the company convinces the world that it can contain the cost of its dishonesty, it could yet face a debt and liquidity crisis.
Doubts about NOx emissions from VW’s four-cylinder TDI series of diesels (which can also be found in Seats and Skodas) first surfaced after testing by the International Council on Clean Transportation, a small NGO, two years ago. The tests—intended, ironically, to demonstrate the engines’ cleanliness—revealed that the cars’ emissions far exceeded what the company had previously stated. The ICCT brought the results to the attention of the California Air Resources Board (CARB), which badgered VW into a voluntary recall to fix what the company insisted were “technical issues”. When the recall failed to resolve things VW offered excuse after excuse before eventually confessing—it was still dithering when the EPA, with which CARB had shared its results, finally acted.

The image breaks down

Why did VW take the risk of cheating, given the devastation that has followed? There seem to be three parts to the explanation. The first is an overwhelming desire for size. The company has been obsessed with surpassing Toyota and becoming the world’s biggest car company, despite making little money from its most high-volume products (cars carrying the VW badge make up 60% of sales but the profit margin on them is just 2%). This required that the company increase its small share of the American market—the largest after China. Making more of the SUVs that Americans covet was one obvious strategy. Getting them keen on the fuel-efficient diesel engines that VW sells elsewhere was another. In a modest way it was succeeding; though diesels account for only 1% of the American market for cars, last year VW had half of that slim slice.
Though these cars were substandard when it came to NOx, they didn’t have to be. According to a British professor who specialises in the subject, “you can solve any emissions problem if you throw enough engineering and money at it”. As VW spends more on R&D than any other company on the planet—€13.1 billion in 2014—it is very well positioned for such throwing. But here the second part of the explanation comes into play: fixes to the NOx problem come with trade-offs. Exhaust-gas recirculation, one of the technologies VW uses, reduces both fuel efficiency and power, which drivers tend not to like. 
Reports indicate that this recirculation was something the software turned off when regulators were not looking. Selective catalytic reduction, used in some newer cars, reacts NOx with ammonia, reducing the eventual level of pollution by a great deal. But designing, installing and operating these systems all add to a car’s cost. Easier not to fix the problem, if you think you can get away with it.
Apparently some people at VW thought they could get away with it. And this leads to the third bit of the explanation: a large part of their reason for believing this would have been that carmakers, particularly European ones, are used to getting away with a great deal in such matters.Their trickery is an open secret within the industry; new scrutiny in the aftermath of the NOx revelations seems likely to make it an open scandal to the world at large. This may be why VW’s competitors, too, are seeing their share prices fall. Its crimes may be particular, but it is far from the only carmaker producing vehicles that fall far below the performance that regulators require of them.
The European Union (EU) is not as demanding in the matter of NOx as the Americans are. It concentrates more on fuel efficiency and carbon-dioxide emissions, where its standards are the highest in the world. The problem is that these tough limits bear little resemblance to what cars emit when on the road. According to Transport & Environment (T&E), a green pressure group, the gulf between stated fuel-economy figures (and by extension carbon-dioxide emissions) and those achieved by an average driver has grown to 40% in recent years.
It is possible that some companies are using software trickery to cheat on Europe’s tests on fuel efficiency. But as Nick Molden of Emission Analytics, a consulting firm in Britain, argues, the European testing regime is so out of date and open to abuse that carmakers do not have to bother with such subtlety. The companies test their own vehicles under the auspices of independent testing organisations certified by national governments. But these organisations are commercial enterprises that compete for business. Although obliged to put the vehicles through standard activity cycles both in a laboratory and on a test track—neither of which is remotely realistic—they are aware that their ability to “optimise” the test procedures is a way to win clients. In practice this means doing everything possible to make the test cars perform far better than the versions punters drive off the forecourt.
The cars that are tested have generally been modified to be as frugal as possible. Things that add weight, such as sound systems, are left out. Drag is reduced by removing wing mirrors and taping up cracks between panels. Special lubricants make the engines run more smoothly. Low-resistance tyres are overinflated with special mixtures of gas. Alternators are disconnected, which gives more power to the wheels but guarantees a flat battery in the end. The cars may be run in too high a gear, and conducting tests at the highest allowed ambient temperature—another efficiency booster—is commonplace

Stable for days

Worst of all, though, is that once this charade has produced a claim as to the car’s efficiency, no one checks whether it is true or not. In America, too, carmakers are responsible for their own tests. But there the EPA goes on to acquire vehicles at random for testing at a later date, to see if the cars on sale to the public live up to the claims. If the numbers do not match up substantial fines can follow. In 2014 Hyundai-Kia was fined $300m for misstating fuel-economy figures. Europe has no such system for punishing those who transgress. As a result more than half Europe’s claimed gains in efficiency since 2008 have been “purely theoretical”, says T&E. And the industry as a whole has developed a gaming attitude to tests and regulations that it should take seriously. As Drew Kodjak of the ICCT observes, VW’s activities in America are part of a pattern of behaviour that the “European system created”.
A new level of scrutiny will change things. It may turn out that other manufacturers are using similar software to cheat on either NOx or carbon-dioxide tests. The NOx emissions from new diesel cars in Europe are on average five times higher on the road than in tests; some cars run at ten times the limit, according to T&E. But even if they are not, a wider understanding of the bogus way in which the system runs seems sure to provoke action, and weaken the power of the industry to keep the system lax. Carmakers have been lobbying against the EU’s plans to introduce more realistic cycles into their tests by 2017, saying it can’t be done until 2020. 
Their pleading is unlikely now to help; the changes may not just arrive in 2017 but also be more exacting than previously planned.

This all takes place against a background of increasingly strict controls on carbon emissions. Europe’s carbon-dioxide goal of an average of 95g/km across all a carmaker’s models by 2021 is already demanding. It will be even harder to achieve if it has to be reached honestly. The same goes for more stringent fuel-economy standards that are coming soon in other markets such as China, America and Japan.
The industry had built a continuing shift to diesel into its assumptions about how it would meet these requirements. But if diesels cannot deliver low NOx emissions while maintaining high fuel efficiency and staying affordable, that assumption will have to be jettisoned—quite possibly taking with it the whole idea of diesel engines for mass-market cars. They are difficult and expensive to develop, and there is already a backlash against them in Europe, where they are blamed for high particulates as well as NOx; both Paris and London have talked of banning them.
If diesels cannot deliver then carmakers will need to turn heavily towards hybrids and very efficient small petrol engines. All this at a time when, according to Mary Barra, boss of GM, carmaking already faces more change in five to ten years than in the previous half-century. On top of meeting environmental targets and pioneering new hybrid and all-electric drivetrains carmakers need to spend a lot on using the internet to make their machines smarter and preparing them for the advent of autonomous driving. The investment required will be monumental, and some will surely be unable to bear it.
Meanwhile cut-throat competitiveness is only going to get more intense as non-carmakers with deep pockets, such as Google and Apple (see article), eye up the industry. One answer is consolidation to tackle overcapacity. 
Big mergers have generally proved disastrous in the industry—but then so have attempts to become number one by other means. It was a devotion to size above all things that led to Toyota’s devastating outbreak of quality defects in the late 2000s, and the same ambition has played its role in the downfall of VW. If the gathering emissions scandal has any virtue it may lie in forcing a reshaping that the industry badly needs.

Source The Economist 26/09/15

http://www.economist.com/news/briefing/2166791-systematic

Highlights of Obama’s Plan to Cut Carbon

Obama’s plan to cut carbon emissions is sumarised in the Washington Post (04/08/15) as follows:

Curbing carbon pollution:
• Directs the EPA to establish carbon pollution standards for both new and existing power plants.

• Promises $8 billion in loan guarantees for fossil fuel projects.

• Directs the Interior Department to permit 10 gigawatts of wind and solar projects on public lands by 2020.

• Expands the president’s Better Building Challenge, helping buildings cut waste to become at least 20 percent more energy efficient by 2020.

• Sets a goal to reduce carbon pollution by at least 3 billion metric tons cumulatively by 2030 through efficiency standards set for appliances and federal buildings.

• Commits to developing fuel economy standards for heavy-duty vehicles.

• Aims to reduce hydrofluorocarbons, highly potent greenhouse gases.

• Directs agencies to develop a comprehensive methane strategy.

• Commits to forests and other landscape protection.

Preparing for climate change:

• Directs agencies to support local investment to help vulnerable communities become more resilient to the effects of global warming.

• Establishment of flood-risk reduction standards in the Hurricane Sandy-affected region.

• Will work with the health-care industry to create sustainable, resilient hospitals.

• Distribution of science-based information for farmers, ranchers and landowners.

• Establishment of the National Drought Resilience Partnership to make rangelands less vulnerable to catastrophic fires.

• Climate Data Initiative will provide information for state, local and private-sector leaders.

Leading global efforts to address climate change:

• Commits to expanding new and existing initiatives, including those with China, India and other major emitting countries.

• Calls for the end of U.S. government support for public financing of new coal-fired power plants overseas.*

• Expands government capacity for planning and response.

*Except for efficient coal plants in the poorest countries, or for plants using carbon capture.