May 19, 2024

Reuters Breakingviews: An Opportunity for Green Energy

In April 2010, an explosion in one of Massey Energy’s coal mines killed 29 workers. Just weeks later, BP’s Macondo well started gushing millions of barrels of oil into the gulf. And more than a month after Japan’s large earthquake, the Fukushima nuclear plant is still leaking radiation.

This week’s blowout and spill in Bradford County, Pa., puts the latest technique to extract natural gas under scrutiny, too. With thousands of wells now being drilled in the United States and big plans unfolding around the world, this is unlikely to be the last time frackers stumble.

And it gives proponents of greener energy a public relations opening. Natural gas has become an unexpected nemesis of wind and solar energy in recent years. Low gas prices have made renewable projects look even more expensive than they seemed before.

In addition to the image-enhancement opportunity, renewable energy firms can also finally showcase projects with enough scale to rival fossil fuel burners and nuclear reactors. The Shepherds Flat wind project under construction in Oregon will create 850 megawatts of capacity, close to the output of a typical atomic reactor. First Solar, a $12 billion energy company, is building a 550-megawatt plant in California.

Renewable energy still has a mountain to climb. In America, for instance, wind and solar power still provide just 1.4 percent of the nation’s total energy diet. And although alternative sources are becoming cheaper, in many cases they still need subsidies. With belt-tightening happening in governments everywhere, that kind of help is under threat. But with the full range of traditional energy sources now on the defensive, wind and solar power producers have a chance to seize an opportunity.

Narrower Margin

Chalk one up for Morgan Stanley’s chief executive, James P. Gorman. Persuading Mitsubishi UFJ to convert $7.8 billion of preferred stock into common shares early will save his bank almost $800 million a year in dividend payments and lift its common equity. It’s a smart and opportunistic move to offload the expensive capital that saved the Wall Street firm during in the 2008 crisis.

Of course, Morgan Stanley’s deal with its Japanese partner isn’t all good. Increasing the capital base makes it harder to reach a mid-teens return on equity, the bank’s target, especially after managing only about a 6 percent return in the first quarter. Not having to pay Mitsubishi dividends will make up only about half the extra earnings needed to post a 16.5 percent return with the extra capital — and to sustain it across the cycle.

That’s a distant prospect either way, even if Morgan Stanley is making progress. Its advisory and underwriting units are performing well and its trading operation posted its best quarter since the crisis. But there’s a long way to go. The pretax margin in wealth management, 10 percent, is slightly better than what it was for all of 2010, but it’s still half of Mr. Gorman’s target.

Even the beleaguered fixed-income trading unit looks better. Revenue more than doubled from the fourth quarter, after stripping out the effect of accounting rules on its own liabilities. But there’s still no tangible evidence that Morgan Stanley is making enough headway to improve its market share from 6.5 percent among the top nine players to the 8 percent the management wants to achieve within a year.

Mr. Gorman, who will be under growing pressure to improve the bank’s performance in his second year on the job, could decide to put some of the additional equity into trading in hopes of increasing returns. Or he could lobby the Federal Reserve to allow his firm to buy back some of the extra capital. Neither step is a sure thing. For now, the Mitsubishi deal leaves the chief executive’s recovery plan with less margin for error.


For more independent financial commentary and analysis, visit

Article source:

Speak Your Mind