Cdp utilities report

Carbon Disclosure
Project Report
Global Electric Utilities
Building business resilience
to inevitable climate change

The Adaptation Challenge

Report prepared by: Report sponsored by:

Acclimatise reference CDP001/02

This document should be referenced as:
Acclimatise (2009). ‘Building Business Resilience to Inevitable Climate Change’.
Carbon Disclosure Project Report. Global Electric Utilities. Oxford

Project Manager
Jean-Christophe Amado

Approved by
John Firth, CEO and co-founder

Acclimatise
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Acknowledgements

The authors would like to thank the following organisations and individuals
for their guidance, advice and support in the preparation and publication
of this report:

Daniel Turner Carbon Disclosure Project
Joanna Lee Carbon Disclosure Project
Matt King Acclimatise
Clephane Compton Acclimatise
David Beer Acclimatise
Jon Bentley IBM
Cathy Pickering IBM
Graham Butler IBM
Gavin Jones IBM
John Juliano IBM
Peter Richardson IBM

The IBM Viewpoint was written by Graham Butler, Executive Partner,
Utilities Sector, Global Business Services, IBM UK & Ireland

IBM Viewpoint

IBM believes the electricity industry is Energy Agency1. This is due not only So, the industry is both a major
central to addressing world concerns to population growth, urbanisation greenhouse gas emitter and one of
about both energy and climate. and improvement in living standards, the solutions to reducing emissions.
Reducing greenhouse gas emissions, but also to new requirements such as For example, electric vehicles are
adapting to the climate change already electric vehicles and the substitution promoted by many as the best
underway and planning for a secure of electricity for hydrocarbon-based option to reduce vehicle emissions,
energy future must be addressed in fuels as an ‘energy carrier’. We can but there is little point in doing this
concert. And action is required now. expect further growth in energy if the generation, transmission and
demands as individuals, communities distribution of electricity is no ‘cleaner’
and organisations strive to adapt to than it is today.
History shows the need to invest
changing climatic conditions.
for the future
Climate change will exacerbate
Throughout history major problems The industry faces major challenges some existing industry challenges
have been the catalyst for major in meeting this growing demand, not and give rise to new ones.
change. The growing demands and least because of inhibitors such as:
constraints on the electricity industry regulation and legislation; inadequate
suggest we are rapidly approaching Climate change problems and
investment returns and out-dated
such a critical moment. So, a look solutions are intertwined
economic incentives that are now
back to the lessons from previous unhelpful; and the supply of natural The two core focus areas in addressing
large scale infrastructural changes resources. Climate change concerns climate change come together for the
might be timely. both constrain and direct the way electricity industry more acutely than
in which these challenges can in many areas of society:
The problems of overcrowding be overcome.
and unhygienic living conditions in
• Mitigation: reducing greenhouse
Victorian London endangered not only Taking just one example, electricity gas emissions to limit the impact
people’s health but also the political companies face major financing of climate change in coming
and commercial well-being of the city. challenges. With an urgent demand decades will require changes in
The result was major expenditure on for more capacity, the industry must consumption behaviour and new
a new infrastructure, the sewerage raise capital for these projects. This supply side technologies
system. The difficulty in transporting is particularly difficult because of
people and goods over large distances the size of the investment (in the UK, • Adaptation: addressing the risks
in 19th century USA, was a major the industry requires an estimated and opportunities resulting from the
inhibitor to growth removed by £233.5 bn investment2 over the inevitable climate change – occurring
massive investment in the rail network. next 15 years which equates to a now due to previous emissions
cost of approximately £9000.00 per of greenhouse gases – which are
Key to both examples is that a household), the desire from investors changing demand patterns and
completely fresh approach was for a short return on investment and placing operational and resource
taken and the investment made the general lack of funding available constraints on supply.
for the future rather than repairing due to the current global financial
existing infrastructure. situation. The situation is made more Mitigation has been the main focus
complex by the relative immaturity of the industry so far. There are
and lack of commercial scale of some many good examples of the work
A crisis of energy demand
of the technologies central to these underway here, with investment
and supply
projects. to reduce emissions from existing
We now face a series of major infrastructure, the development of
problems relating to the generation, Any growth in energy supply must new technologies such as wind and
transmission and consumption of be achieved in a low carbon way. solar, and the deployment of smart
energy, all of which are essential to Power generation creates 25% of the grids and smart meters. But there is
the commercial world, the way we world’s CO2 emissions, the largest much still to do and it is vital that
live and the development aspirations man-made source, according to The these efforts intensify without delay.
of the majority of humankind. Climate Group and McKinsey & Co3.
Sadly, too much of the generated Adaptation, according to the analysis
The world is demanding more and energy is currently wasted. According in this report, has not had the same
more energy. The projected growth of to a recent Ontario Smart Price Pilot focus and we ignore this at our peril.
worldwide energy demand by 2030 is report4, 170 billion kilowatt-hours of We need to understand the effects
36.8% according to the International electricity are wasted each year by that inevitable climate change will have
consumers due to insufficient power on the electricity industry over the
1
International Energy Outlook 2008. usage information. next few years – and what steps the
2
3
Times article, quoting Ernst & Young Study, 25 May 2009.
The Climate Group and McKinsey & Co.,“Smart 2020 Report”.
industry should be taking.
4
Ontario Smart Price Pilot report: http://www.oeb.gov.on.ca/OEB/Industry+Relations/OEB+Key+Initiatives/
Regulated+Price+Plan/Regulated+Price+Plan+-+Ontario+Smart+Price+Pilot ii

IBM Viewpoint

Scientists inform us that climate systems means more dynamic control To achieve this, we need the
change is underway and the of the flows of power, information and consumer to become part of the
direct effects of increasing global money; new sources of ‘supply’ and electricity management and efficiency
temperatures, changes in precipitation ‘demand’; and changed relationships story. Examples of this type of
and rising sea levels are becoming between the two. engagement include:
more evident. The indirect impacts
on social, environmental and economic
Many opportunities exist to optimise • Encouraging people to use less
systems are also beginning to come
and grow existing capabilities and energy, differently. This can help
into view. For the electricity industry,
accelerate emerging technologies to to lower energy usage directly and
these effects are likely to bring
commercial scale. lower and spread peak usage. A
increasing pressures, for example:
smart way of achieving this would
be to implement smart grids (which
IBM sees the need for three areas
• Significant changes in the could help to lower emissions by
of action to happen consecutively,
demand for electricity. Increasing 14% by 20205), smart meters,
not sequentially.
urbanisation will be driven in part remote operation and automated
by climate change with people operation of electrical appliances
migrating to find water, food and • Optimise: Apply smart solutions and goods
work, etc. Energy infrastructure to optimise and extend existing
will be placed under increasing capabilities, making the most • Encouraging people to collaborate
pressure. For many urban areas the efficient use of the assets that with utilities in generation –
capacity to meet growing demands already exist to buy time and take expansion of micro generation, for
will be inadequate or non-existent appropriate adaptation action. example CHP, photovoltaic, solar
Examples could include: asset heating, etc., has the potential
• Significant changes to the supply life extension and optimisation to provide an almost infinitely
chain. Access to and transportation programmes, and new, cleaner controllable electricity generation
of raw materials, commodities and fossil-fuel plants. capability able to meet demand
goods will be affected by changes more closely than the current
in climate creating disruptions to • Grow: Rapidly grow existing centralised approach.
supply chains. We are already seeing commercialised capability through
conflicts between users for water smarter design and operation
Change is needed now to
with competing demands to grow providing ‘low-regret’ solutions
enable prosperity in a much
crops, provide drinking water and with potentially large benefits, for
different future
cool power plants. In addition, as example: factoring changing climatic
urban centres change and expand, conditions into the design stage for Successful electricity companies over
it is likely that food and water will new cooling systems; developing the next 10 years will be those that act
have to be transported over longer transmission systems to cope now upon the clear signals that climate
distances requiring ever greater with increased temperatures and change is underway.
energy inputs provide greater access to remote
renewable energy assets; new-
• Significant shifts in the availability build nuclear programmes; They will have recognised the risks
of natural resources. Climate change automated and intelligent smart and opportunities arising from a
will alter the productivity, economics grids; smart metering and demand changing climate and will have created
and operational feasibility of management technologies; and business models that understand the
renewable and non-renewable new regulatory incentives. changing nature of supply, demand
power generation in different and control in the electricity sector.
areas of the world. • Accelerate: Nurture and accelerate
new capabilities to commercial
They will have a fully integrated
scale, whilst at the same time
There is a confluence of conflicting approach to the challenges of the
maintaining options that allow further
pressures: a variety of restrictions energy revolution, reducing emissions
adaptation actions in the future.
to generating additional supplies of and adapting to climate change.
Examples could include: carbon
electricity; a growing demand for They will use the lessons gained from
capture and storage, deep-water
more energy; a changing geographic the present financial crisis and from
wind, tidal and wave power, micro-
demand for energy; changing climate history to avoid the even greater and
combined heat and power (CHP),
and environmental conditions on entirely ‘predictable surprise’ created
more efficient home wind and solar,
a geographic basis; and a need to by climate change.
distributed on-shore wind, waste
reduce greenhouse gas emissions.
and bio; various forms of storage;
electric vehicle infrastructure; and The industry must behave differently
Consumers must help with intelligent home devices. Other to address pro-actively the immediate
the supply side and utilities industries will need to transform the and longer term impacts of inevitable
with demand energy efficiency and demands of climate change while continuing to
the products and processes both deal with today's immediate pressures.
Electricity is a complex system-of- to ease pressure on the electricity
systems and it requires an integrated industry and reduce their risks to
approach to fundamentally redesign Senior executives in the sector
increasingly stressed supply. must take the lead and drive
the way the industry works if it is to
meet the challenges of a changing their companies towards this
climate. Optimising this system-of- transformation.

iii 5 The Climate Group and McKinsey & Co., “Smart 2020 Report”.

Executive Summary

Electricity companies must assess • Reductions in agricultural and The present financial crisis is driving
the risks and opportunities arising fisheries yields many companies to take stock and
from inevitable climate change as revisit their business models. This
• Increasing stress and competition
well as taking essential action to provides the ideal opportunity for
for water resources
reduce emissions. The focus so far, companies to look at the strategic
as evidenced by responses to the • Enhanced migration to urban areas and operational issues they will need
Carbon Disclosure Project, has been to address if they are to become
primarily on electricity companies • Changing disease patterns climate resilient.
reducing emissions and secondarily • Geo-political risks.
on understanding the risks posed by The successful electricity companies
climate change. Companies should of the future will be those that act
recognise the need for action in the These impacts add up to significant
changes in the demand for electricity now upon the clear signals that
near term to build business resilience climate change is underway. They
to manage the risks and capitalise against a backdrop of supply
challenges, ageing assets, new will have a fully integrated approach
on the opportunities that inevitable to the challenges of the energy
climate change brings. technology, prescriptive regulation
and impacts on asset performance revolution, reducing emissions and
and efficiency. adapting to climatic change. They
This century will see unprecedented will use the lessons gained from the
urbanisation and intense competition present financial crisis to avoid the
for scarce resources, driven by Although there is uncertainty in the even greater and entirely ‘predictable
population growth and economic knowledge we have about the extent surprise’6 created by climate change.
development. A revolution in energy and rate of future climate change, Acclimatise and IBM have jointly
generation, supply and demand there is sufficient information to assess prepared a set of Prepare-Adapt
is needed with companies taking impacts on business models and questions to help electricity companies
an integrated approach to the enable robust decisions to be taken take the right steps towards building
challenges through: as a result. The successful electricity corporate resilience to inevitable
company of the future is taking climate change.
climate risks into account today, and
• The optimisation of existing is developing adaptive strategies and
infrastructure assets, systems and actions to manage the uncertainties.
information The existence of uncertainties
• Growth of existing capabilities regarding the business risks arising
from climate change, should by itself
• Acceleration of emerging act as a catalyst for companies to
technologies to a commercial scale. quantify the risks, monitor the impacts
as they arise and be prepared for
There is scientific consensus that changes to their business models.
the world’s climate is changing due
to human activity and that whatever Consumer preferences and needs
steps we take to limit GHG emissions will change; markets will open up in
we are now faced with several new locations and for new products
decades of increasing global and services. Those businesses
temperatures and a far longer period that do not respond will lose out
of rising sea levels. We are already to their competitors, whilst those
seeing the impacts of these and other that recognise the opportunities will
climatic changes on social, economic become electricity sector leaders.
and environmental systems. The
impacts will become more severe
over time creating, for example:

6 A predictable surprise describes a situation or circumstance in which major issues are marginalised to satisfy short-term
expediency. Predictable surprises can be defined as issues that:
• at least some people are aware of,
• are getting worse over time, and
• are likely to create a crisis,
• but are not priorities for decision makers or have not elicited a response fast enough to prevent severe damage.
See M. Bazerman and M. Watkins (2004) ‘Predictable Surprises: The Disasters You Should Have Seen Coming, and
How to Prevent Them’. iv

Contents
IBM Viewpoint ii
Executive Summary iv

1 Introduction 1

2 Climate change is underway 2

3 The energy revolution 4

4 What are the impacts for the 9
electricity sector?
Extreme events and incremental 10
change
Change drivers for corporate 11
action
How are companies 13
responding?

5 What actions should 15
companies take?
Developing an integrated 16
approach
Prepare-Adapt: 10 questions 17
for senior executives in the
electricity sector

Appendix 1: The future 19
electricity sector value chain

Appendix 2: Examples of 21
the impacts of inevitable
climate change for the
electricity sector

References and 25
further reading

v

1 Introduction

In this report we explore the issues Those companies focussing their The Information Request was sent
that electricity companies are climate change activities exclusively on to the world’s largest 218 electric
beginning to face in response to a reducing GHG emissions (and many utilities globally (based on market
changing climate and the actions companies have yet to understand capitalisation). Acclimatise has
being taken. the urgency for action in this area) analysed the responses to assess
are only considering half the picture. the business resilience of companies
The report draws upon an analysis of By failing to build resilience they will to a changing climate. A separate
the responses from global electricity miss significant business opportunities technical appendix is available online
companies to the 2008 Carbon created by the energy revolution. at www.acclimatise.uk.com with the
Disclosure Project (CDP). Examples results from the analysis.
of actions and issues taken from the The report includes a series of
responses are provided. Prepare-Adapt questions prepared Acclimatisation Index
by Acclimatise and IBM to help
The analysis of the responses to the
As the most carbon intensive industry senior electricity company executives
CDP Information Request has been
in the world, the electricity sector is identify the steps they need to take
undertaken using our Acclimatisation
simultaneously a significant contributor towards building corporate resilience
Index methodology. This enables
to and victim of climate change. to inevitable climate change.
a semi-quantitative analysis of the
Reducing the greenhouse gas (GHG) responses recognising the scope
emissions of the sector is central to The Carbon Disclosure Project of the questions. The Index can
achieving a low-carbon economy7 take into account information from
CDP is an independent not-for-profit
and requires “nothing short of other sources to provide a more
organisation which holds the largest
an energy revolution.”8 Ensuring comprehensive analysis.
database of corporate climate change
the resilience of the generation,
information in the world. The data is
transmission and distribution
obtained from responses to CDP’s The Acclimatisation Index has
network and shifting the focus to
annual Information Requests, issued been used to analyse the resilience
renewable sources of energy, low
on behalf of 475 institutional investors, of global electricity companies
carbon generation and more dynamic
to more than 3,700 corporations to climate change in response to
balancing of supply and demand will
across the globe. Since its formation questions contained within sections
require levels of investment that will
in 2000, CDP has become the gold 1 and 49 of the CDP questionnaire.
transform the industry.
standard for carbon disclosure
methodology and process, providing
Many of the climate changes that we primary climate change data to the
will see over the next 30 to 40 years global market place. CDP plays a
are already built into the climate vital role in encouraging companies
system due to GHG emissions. to measure, manage and reduce
Mitigation efforts to reduce emissions emissions and climate change impacts.
are vital if we are to keep climate
change from surpassing a dangerous
The CDP Information Requests
and rapidly approaching threshold.
include a series of questions seeking
This has been called avoiding the
disclosure on the physical impacts
unmanageable. However the effects
of climate change on existing and
of climate change are already upon us
future company performance and
and are growing rapidly. A significant
the management responses. (A copy
reduction in emissions is essential,
of the questions is available on the
but, we must also prepare for and
CDP website: www.cdproject.net
respond to the impacts – we must
together with a list of the investors).
adapt to manage the unavoidable.

7
http://www.eurelectric.org/CEO/CEODeclaration.asp
8
IEA, 2008.
9
Excluding question b ‘Individual Performance’ of section 4 which focused on performance towards GHG targets. 1

2 Climate change
is underway
There is scientific consensus that the The IPCC has recommended that
“Even with drastic cuts in emissions world’s climate is changing due to urgent action is required to limit
in the next 10 years, our results human activity and that whatever steps the concentration of GHG’s in the
project that there will only be around we take to limit GHG emissions we atmosphere and prevent global
a 50% chance of keeping global are now faced with several decades of average temperatures rising above
temperature rises below 2°C. If the increasing global temperatures and a 2°C. A temperature rise above 2°C will
world fails to make the required far longer period of rising sea levels. be difficult for contemporary societies
reductions, it will be faced with to cope with, and will cause major
adapting not just to a 2°C rise in social, economic and environmental
temperature but to 4°C or more In 2007, the Intergovernmental Panel
on Climate Change (IPCC) – the most disruptions through the rest of the
by the end of the century.” A 2°C century and beyond. There are also
increase in global temperatures will authoritative scientific body on climate
change – confirmed the scientific concerns that increases above 2°C
create severe stress in many parts significantly increase the risk of large
of the world.” evidence that climate change is
already under way10 : scale, irreversible system disruption.11

Dr Vicky Pope,
Head of Climate Change Advice • “Warming of the climate system Limiting temperature rise to 2°C is
at the UK Met Office is unequivocal, as is now evident looking increasingly challenging and if
from observations of increases we fail we are faced with further rises
in global average air and ocean in temperature and an even greater
temperatures, widespread melting adaptation challenge.
of snow and ice, and rising global
mean sea level.” (see Figure 1)
• “At continental, regional, and ocean
“Climate change is increasingly basin scales, numerous long-term
recognised as a key strategic issue changes in climate have been
for the electricity generation sector… observed. These include changes
in Arctic temperatures and ice,
The opportunities and compulsion widespread changes in precipitation
for carbon reduction and adaptation amounts, ocean salinity, wind
strategies for this sector are patterns and aspects of extreme
therefore considerable and warrant weather including droughts, heavy
particular attention from investors.” precipitation, heat waves and the
intensity of tropical cyclones.”
Global Climate Disclosure
Framework for Electric Utilities,
Institutional Investors Group
for Climate Change

10 IPCC ‘Climate change 2007: synthesis report’.
11 Scientific Symposium on Stabilisation of Greenhouse Gases – Avoiding Dangerous Climate Change Exeter February 2005.
2 Executive Summary of the Conference Report.

Carbon Disclosure Project Report Global Electric Utilities

Figure 1: Comparison of observed continental- and global-scale changes in surface temperature with results
simulated by climate models using either natural or both natural and anthropogenic forcings12

Europe
Temperature anomaly (˚C)

1.0
North America Asia
0.5

1.0 0.0 1.0

0.5 0.5
1900 1950 2000
Year
0.0 0.0

1900 1950 2000 Africa 1900 1950 2000

Year Year
1.0
South America Australia
0.5

1.0 0.0 1.0

0.5 0.5
1900 1950 2000
Year
0.0 0.0

1900 1950 2000 1900 1950 2000
Year Year

Global Global Land Global Ocean



1.0 1.0 1.0

0.5 0.5 0.5

0.0 0.0 0.0

1900 1950 2000 1900 1950 2000 1900 1950 2000
Year Year Year

Models using only natural forcings

Models using both natural and anthropogenic forcings

Observations

12 IPCC ‘Climate change 2007: synthesis report’. 3

3 The energy revolution

It is important that any consideration Challenges Increasing temperatures will increase
of the impacts of climate change be the demand for energy and place
National energy security concerns.
set against the context of the other great pressure on existing assets.
Secure long-term access to fuel and
challenges already faced by the global Companies will be faced with more
energy supplies is a key element of
electricity sector. difficult supply reliability issues. Figure
energy policies for most developed
2 shows averaged European summer
countries and increasingly for the
Whereas the eighteenth century temperatures as observed (black line),
emerging economies.
may have been characterised by the and simulated by the Hadley Centre
industrial revolution and the twentieth Model (red line) from 1900 to 2100.
Supply reliability. Failure in the security The observed average European
century by globalisation, this century
of supplies to customers, interruptions summer temperature for 2003 is
will see unprecedented urbanisation,
and longer term outages cause major marked with a black star. The return
shortages of food and water and
financial losses not to mention adverse period for the 2003 heatwave under
intense competition for scarce
social impacts and constraints on climate change increases from a 1 in
resources, driven by population growth
economic prosperity and growth. In 500 year event in 2003 to a 1 in 2 year
and economic development. Climate
the USA it has been estimated that the event by 2040. 2003 will be a normal
change is being driven by the use of
annual cost to the economy arising summer in the 2040s and a relatively
fossil fuel based energy sources to
from power interruptions is $80 billion. cool summer by the 2060s.
meet these challenges.
A large proportion of these costs are
attributable to the combined effect
The responses to these challenges of asset age and the impacts of
will require a revolution in energy weather events.
generation, supply and demand.
The challenges and how they will be
affected by a changing climate are
considered in the following section.

Figure 2: Observed and modelled changes in temperature in Europe13

8

50N
45N
6 40N
35N
30N
10W 0 10E 20E 30E 40E
Temperature anomaly (K)

4
0 1 2 3 4

2

0

-2
1900 1950 2000 2050 2100

Year

13 Stott, P.A., Stone, D. A. and Allen, M. R. (2004) Human contribution to the European heatwave of 2003.
4 Nature, Vol 432, pp 610-614.


Figure 3: Increasing energy demands from emerging economies16 “Besides the efforts of reducing
greenhouse gas emissions from its
Exhibit 1 End-use energy demand by region,1 quadrillion British thermal units (QBTUs) operations to limit climate change
Higher energy E.ON acknowledges and plans for
productivity Potential 25% decline in energy CAGR,2 CAGR,2 both the effects of gradual warming,
demand in 2020 from base 2005-20, 2005-20, as well as an increased frequency
case – larger than today's total % base case % with energy
energy demand in China productivity of extreme weather events. We
380 93
capture expect that these seasonal and

}
27 10
5 weather-related fluctuations
14
7
11
in revenues and demand will
29 +3.4 +1.4
14 continue. As a response we will
32
45 287 improve our grid management and
22 +3.7 +2.3
36 29
optimize the usage of our power
231 +3.6 +1.6
Africa 16
stations. We have also undertaken
30 +4.5 +1.8
India 23
42 operational and infrastructure
30 +2.3 +0.9
Middle East 23
52
improvements to increase the
31
Southeast Asia 26 +3.2 +1.1
resiliency of our generating assets
Latin America 26 38 +1.4 -0.7 and transmission and distribution
Eastern Europe3 42 networks to these extraordinary
138
106 +4.2 +2.4 conditions. E.ON has made these
China 74 mitigation and adaptation efforts
a part of its Business Continuity
2005 energy Projected Demand Potential lower Management processes.”
demand 2020 energy abatement energy demand
demand, opportunity in 2020
base case from energy Matthias Hansch,
productivity
investment VP Climate Protection
and Environment,
1 Figures may not sum to totals, because of rounding
2 Compound annual growth rate E.ON AG
3 Includes Belarus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Russia,
and Slovakia.

Source: McKinsey Global Institute analysis

Increase in global demand for energy. Energy underpins our social and
Energy demand is expected to grow economic systems. Access to reliable “People really need to understand
by 1.6% per year on average between and increased supplies of low-carbon that the average global surface
2006 and 2030, an increase of electricity are essential to meet the temperature is like the temperature
45%14. Although the current financial adaptation needs arising from, for of your body – and if you have
crisis has affected energy demand, example, increasing urbanisation, a fever of 40.5°C, even though
the underlying growth in demand agriculture (to improve yields and that’s only three and a half degrees
is expected to continue over the manage drought), transportation, the above normal, it’s potentially fatal.
medium-long term. Between 2007 built environment (to cool buildings), Everything that is expected to
and 2030, around 13.2 trillion US$ of potable water supplies, drainage and result from global climate change
cumulative investments are forecasted waste water treatment. driven by greenhouse gases is not
to be required in the power sector to only happening, but it’s happening
maintain supply and respond to the It is not clear from the scenarios faster than anybody expected.”
increased demand for electricity15. developed by organisations such
The increasing energy demands from as the International Energy Agency Dr. John Holdren,
emerging economies and developing if these additional energy needs Chief Scientific Adviser
countries, relevant to that from the driven by climate change impacts to President Obama,
OECD countries, is a key challenge and adaptation responses have been 6 February 2008
(see Figure 3). included in demand estimates.

The direct and indirect impacts of The IPCC Synthesis Report provides
climate change (see Figure 4) will examples of the impacts associated
increase the demand for electricity and with global average temperature
affect the resilience of assets to meet change (see Figure 4). The black
the changing demands. The impacts lines link impacts; broken-line arrows
will also increase the competition indicate impacts continuing with
for water resources between the increasing temperature. Entries are
electricity sector and other users (for placed so that the left-hand side of
example, agriculture, fisheries, drinking text indicates the approximate level
water, industry, and natural habitats). of warming that is associated with
the onset of a given impact.
14 International Energy Agency World Energy Outlook 2008. Paris.
15 CDP, 2008.
16 Farrell D. And Remes. J (2009) Promoting energy efficiency in the developing world. McKinsey Global Institute. 5


High rate of asset retirement. In of which 40% (65GW at a cost of $155
“Climate change is a significant global developed countries with ageing billion) was in renewables (excluding
challenge and its solution will have a generation, transmission and large hydro).19
profound effect on how we produce, distribution assets, many assets
distribute and consume energy in are nearing their design life and
the future. But the challenge before Lead time for new assets. The
investment is required now to maintain appraisal, design and construction of
us is not solely about greenhouse supplies. Many existing nuclear and
gas emissions. Physical risks from major assets can take many years.
fossil fuel power stations are due for Securing regulatory consents is
changes in climate such as potential retirement creating a supply demand
water scarcity that impedes our becoming increasingly difficult in many
gap. Asset retirement is also driven areas of the world as environmental
ability to produce electricity and by pollution legislation, for example
changing temperatures that increase and sustainability concerns become
in the European Community by major political issues. Building new
our summer peak demand for the Combustion Directive17. Asset
electricity could significantly affect power stations can be difficult in
retirement rates are high in many countries with high environmental
our business. We are addressing developed countries (including the
these issues by studying our water standards, active NGOs, and complex
U.S., UK and Germany). In the UK regulatory and consenting processes.
needs to ensure we are using this alone, a generation shortfall of 20%
precious resource most efficiently. Political issues regarding the building
is predicted by 2015.18 of new nuclear and fossil fuel power
And we are seizing the opportunity to
advance technologies that improve stations, and the right financial
our own use of energy and help our Development of new assets with new conditions for the development of
customers to manage theirs. As the technologies (including a growing alternative renewable energy sources
largest coal consuming electric utility renewable energy sector). Significant create further delays.
in the western hemisphere, we have investment is required in new assets
a responsibility to lead on this issue.” to meet the growing energy demands Reducing GHG emissions. Current
from the developing and transition actions to reduce emissions are
Dennis E. Welch, countries, replace ageing assets in the insufficient to limit average global
Executive Vice President, OECD countries and meet emissions temperature increase due to
Environment, Safety & targets. $250 billion was invested anthropogenic climate change to 2°C.
Health and Facilities, globally in 2008 constructing 157GW
American Electric Power of power generation from all sources,

Figure 4: Examples of impacts associated with global average
temperature change

Global average annual temperature change relative to 1980-1999 ( °C)
0 1 2 3 4 5° C

Increased water availability in moist tropics and high latitudes WGII 3.4.1, 3.4.3
WATER Decreasing water availability and increasing drought in mid-latitudes and semi-arid low latitudes 3.ES, 3.4.1, 3.4.3
Hundreds of millions of people exposed to increased water stress 3.5.1, T3.3, 20.6.2,
TS.B5

Up to 30% of species at Significant † extinctions 4.ES, 4.4.11
Increasing risk of extinction around the globe
T4.1, F4.4, B4.4,
Increased coral bleaching Most corals bleached Widespread coral mortality 6.4.1, 6.6.5, B6.1
Terrestrial biosphere tends toward a net carbon source as: 4.ES, T4.1, F4.2,
ECOSYSTEMS -15% -40% of ecoystems affected F4.4
4.2.2, 4.4.1, 4.4.4,
Increasing species range shifts and wildfire risk 4.4.5, 4.4.6, 4.4.10,
Ecosystem changes due to weakening B4.5
of the meridional overturning circulation 19.3.5

Complex, localised negative impacts on small holders, subsistence farmers and fishers 5.ES, 5.4.7
Tendencies for cereal productivity Productivity of all cereals 5.ES, 5.4.2, F5.2
FOOD to decrease in low latitudes decreases in low latitudes
Tendencies for some cereal productivity Cereal productivity to 5.ES, 5.4.2, F5.2
to increase at mid-to high latitudes decrease in some regions

Increased damage from floods and storms 6.ES, 6.3.2, 6.4.1,
6.4.2
About 30% of
global coastal 6.4.1
COASTS wetlands lost ‡
Millions more people could experience
coastal flooding each year T6.6, F6.8, TS.B5

8.ES, 8.4.1, 8.7,
Increasing burden from malnutrition, diarrhoea, cardio-respiratory and infectious diseases T8.2, T8.4
8.ES, 8.2.2, 8.2.3,
Increased morbidity and mortality from heat waves, floods and droughts 8.4.1, 8.4.2, 8.7,
HEALTH T8.3, F8.3
Changed distribution of some disease vectors
8.ES, 8.2.8, 8.7, B8.4
Substantial burden on health services 8.6.1

0 1 2 3 4 5° C
†
Significant is defined here as more than 40% ‡
Based on average rate of sea level rise of 4.2mm/year from 2000 to 2080.

17 EC Directive 2001/80/EC.
18 Hewer, 2006.
19 Global Trends in Sustainable Energy Investment 2009, UN Environment Programme's (UNEP) Sustainable Energy
6 Finance Initiative.


Reducing the GHG emissions of therefore becoming largely an urban
the electricity sector is central to phenomenon concentrated in the “Cemig has developed strategies
achieving a low-carbon economy and developing world. and undertaken projects to
restricting global average temperature minimize impacts on its business
increases. Electricity companies related to extreme climate events
The trend for increasing urbanisation caused by global warming. About
are faced with implementing new is expected to be accelerated as
generation technologies, energy 97.0% of Cemig’s electric energy
people move from failing rural areas generation system is composed
efficiency and demand management under increasing pressure from climate
measures to meet emissions targets. of hydroelectric plants. Therefore,
change to cities. Urban areas already extreme droughts or heavy rains
Investments are needed in new face power shortages in many areas
assets, retrofit technologies to clean may result in alterations in the
of the world. Electricity companies generation, transmission and
legacy assets, transmission and will face major challenges in providing
distribution strengthening for resilience distribution of energy and impact
new generation capacity and supply the company. With this issue in
and distributed generation, and reliability within urban areas to meet
control technologies (smart grid, mind, Cemig has been working to
the increased demands from domestic improve its initiatives in respect to
smart metering, distributed/micro customers, essential urban utilities
generation, virtual power plants, both monitoring and communicating
(for example water and sewerage), hydrometeorological events and
demand management). and the technological changes in atmospheric discharges and has
transportation (for example the been studying and simulating raised-
Increasing urbanisation. More than increased use of electric vehicles). flow events in order to guarantee the
half of the world’s population now Ability to pay by an increasing security of its generation system and
lives in cities. According to the proportion of urban populations of the surrounding communities.”
2008 Revision of the official United who are poorer and disadvantaged
Nations population estimates and will become a significant issue for Djalma Bastos de Morais,
projections, the world population is electricity companies, particularly CEO, Cemig, Brazil
projected to reach 7 billion early in in emerging economies.
2012, up from the current 6.8 billion,
and surpass 9 billion people by Water resources. Global fresh water
205020. The population living in urban resources are under increasing stress.
areas is projected to gain 3.1 billion, Less water, declining water quality,
passing from 3.3 billion in 2007 to and growing water demand are
6.4 billion 2050. The urban areas of creating immense challenges to the
the world are expected to absorb all electricity sector which is a major user
the population growth expected over of water (see Figure 6). The sector has
the next four decades while at the historically taken clean, reliable and
same time drawing in some of the inexpensive water for granted. These
rural population. trends are creating operational issues,
restrictions on abstractions, more
Furthermore, most of the population stringent water quality regulations,
growth expected in urban areas will pressure to move towards full-cost
be concentrated in the cities and water pricing, and increased public
towns of the less developed regions. scrutiny of corporate water practices.21
Asia, in particular, is projected to The electricity sector requires a
see its urban population increase by consistent supply of water – in the
1.8 billion, Africa by 0.9 billion, and USA it accounts for 39% of total
Latin America and the Caribbean freshwater abstractions.22
by 0.2 billion. Population growth is

Figure 5: Population change and urbanisation

9.0
8.0
7.0
Population (billions)

6.0
5.0
4.0
3.0
2.0
1.0
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

World Rural Population World Urban Population World Total Population

20 United Nations (2008) Department of Economic and Social Affairs. Population Division. World Urbanization Prospects:
The 2008 Revision. United Nations 2008.
21 Ceres, Pacific Institute ‘Water scarcity and climate change: growing risks for businesses and investors’ 2009.
22 Energy Demands on Water Resources: Report to Congress on the Interdependence of Energy and Water,” U.S. Department

of Energy, December 2006.


Figure 6: Water consumption by type of energy generation23 Financing the energy revolution.
Power-sector investment in the
short-term is expected to be severely
Water consumption required
Total water consumed per megawatt for U.S. daily energy affected by the current financing
Energy type hour (m3/MWh) production (millions of m3)
difficulties. In the longer term the
Solar 0.0001 0.011 scale of the investment required
Wind 0.0001 0.011 to meet the energy challenge is
Gas 1 11 significant. A recent study by Ernst
Coal 2 22
Young26 concludes that £234 billion
of new investment is now required to
Nuclear 2.5 27.5
meet the UK’s energy goals. These
Oil 4 44 additional investments will double the
Hydropower 68 748 value of the UK’s total energy supply
Biofuel (1st generation) 178 1958 asset base (after taking into account
depreciation) by 2025.

A particular area of concern for the Delivering and treating clean drinking Clear national government policy.
electricity sector is the impact of water together with safe sewerage and In addition to the technological
climate change on water resources. waste water treatment systems to an challenges, the electricity sector
The IPCC Synthesis Report released increasing global urban population is faced with an uncertain regulatory
in 2007 states24: will create significant increases in landscape and in many cases a
the demand for electricity. vacuum in national government policy.
“Climate change is expected to Governments are slow to agree and
exacerbate current stresses on water Current global financial situation. The implement the policies needed to
resources from population growth International Energy Agency estimates create the certainty required by
and economic and land-use change, that global electricity consumption the companies and their investors.
including urbanisation. On a regional could drop by as much as 3.5% in The timelines do not match that
scale, mountain snow pack, glaciers 2009 – the first annual contraction required to close the growing
and small ice caps play a crucial role since the end of the Second World supply – demand gap.
in freshwater availability. Widespread War.25 There is a risk of complacency
mass losses from glaciers and creeping in as the recession decreases New regulatory landscapes. Although
reductions in snow cover over recent demand, obscures the greater new regulatory provisions are being
decades are projected to accelerate challenges from the energy revolution developed in many countries in
throughout the 21st century, reducing and climate change and delays action. response to these challenges, there
water availability, hydropower Investment is needed to invest in remains a great deal of uncertainty
potential, and changing seasonality of assets now during the downturn to regarding the scope, content and
flows in regions supplied by meltwater prepare for the future. A prolonged format of future legislation. Greater
from major mountain ranges (e.g. depressed financial situation will certainty about the future regulatory
Hindu-Kush, Himalaya, Andes), where delay investment and create further landscape is required to encourage
more than one-sixth of the world pressures for electricity companies companies to invest. New regulatory
population currently lives.” and for societies and economies. pricing structures will be required
in some countries to encourage
“Changes in precipitation and greater energy efficiency and demand
temperature lead to changes in management measures.
runoff and water availability. Runoff
is projected with high confidence to
increase by 10 to 40% by mid-century
at higher latitudes and in some wet
tropical areas, including populous
areas in East and South-East Asia,
and decrease by 10 to 30% over some
dry regions at mid-latitudes and dry
tropics, due to decreases in rainfall
and higher rates of evapotranspiration.
There is also high confidence that
many semi-arid areas (e.g. the
Mediterranean Basin, western United
States, southern Africa and north-
eastern Brazil) will suffer a decrease
in water resources due to climate
change. Drought-affected areas are
projected to increase in extent.”

23 Linking Water, Energy Climate Change: A proposed water and energy policy initiative for the UN Climate Change
Conference, COP15, in Copenhagen 2009,” DHI, Draft Concept Note, January 2008.
24 IPCC ‘Climate change 2007: synthesis report’.
25 OECD and IEA The impact of the economic and financial crisis on global energy investment May 2009.

8 26 Ernst Young (2009) Securing the UK’s energy future – meeting the financing challenge. London.

4 What are the impacts for
the electricity sector?
Successful electricity companies Companies should recognise that
already cope with climate risks, climate change will have both direct “As climate change takes hold, few
ranging from day-to-day and seasonal and indirect impacts. It is vital that businesses will be able to escape
changeability in weather and extreme companies do not limit their risk the impact of greater competition
events. Assets have been designed assessments to the direct physical for resources. As nations become
to operate within thresholds and impacts of climate change. The more protective of their assets, and
margins to: compound impacts are likely to markets become more volatile, it
reverberate through a company’s can no longer be business as usual.
business model – creating a ‘pinball Business strategy and operations
• Meet the climatic differences across will be increasingly impacted and it
the various regions in which they machine effect’ as the impacts in one
area rebound and have consequential is critical that companies and their
operate insurers work to understand these
impacts elsewhere in a company’s
• Maintain environmental and health business systems for example affecting: interdependencies now, and begin to
and safety regulatory requirements reflect them in their business plans
and approach to risk management.”
• Deliver against financial performance • Natural resources and raw materials
standards Dr Richard Ward,
• Procurement supply chains and
• Meet operational performance and logistics Chief Executive Officer,
customer service delivery standards. Lloyd’s
• Asset design and construction

Most companies have practical • Asset operation, performance and
strategies in place to manage climate maintenance
uncertainty and minimise disruption, • Markets and customers
including taking out insurance,
maintaining updated contingency • Products and services
plans, and hedging wholesale • Workforce
electricity and fuel supplies.
• Local communities and the
environment.
These strategies continue to be
important in coping with natural
climatic variability. However, the
baseline climate is changing, and
business decisions and practices will
need to evolve as a result. Electricity
assets have been designed on the
basis of historic climate data and a
period of relatively stable weather.27
These design assumptions together
with those thresholds and margins set
for regulatory, operational and financial
performance requirements will constrain
the future effectiveness of assets to
deliver under climate change.

Two main types of climatic changes
will affect the electricity value chain28 :

• More frequent and intense extreme
or ‘acute’ weather
• Incremental or ‘chronic’ climatic
changes.

27 Power Systems Engineering Research Center (2007) The Electric Power Industry and Climate Change: Power Systems
Research Possibilities. Illinois, USA.
28 An overview of the components of the electricity sector value chain is provided in Appendix 1. 9

4 What are the impacts for the electricity sector?

Extreme events and incremental These events, combined with
“CLP’s facilities were affected by change the availability of increasingly
three extreme weather conditions sophisticated climate change models,
in the past 12 months. Heavy rain Both ‘acute’ and ‘chronic’ climate have generated greater interest in
and flooding in Paguthan, India in change effects will impact the bottom planning for more severe and frequent
late June/early July of 2007 caused lines of electric utilities by influencing: climatic events. In contrast the
loss of life and heavy damage in ‘creeping’ average changes are
the township near our GPEC power • Operational performance as a much harder to recognise and are
plant…the plant was shut down result of degraded site conditions, more likely to be overlooked.
for 3 days due to a decline in the damages to assets, decreased
electricity demand. efficiencies of operations, reduced Figure 7 illustrates the importance
availability and quality of raw materials of identifying climatic sensitivities
“[In addition]…severe snowstorms in and natural resources, effects on
China in late January/early February and critical thresholds for assets
workforce health and safety and business systems. These provide
of 2008 resulted in widespread
electricity outages and hardship. • Social performance because the boundaries between tolerable
We shut down our Anshun II power of increased competition with and intolerable levels of risk.
station for several weeks because local communities for access to Information and data on current
the grid was unable to take the climate-sensitive natural resources and future climate conditions can
power, although the plant was and changes in socio-economic then be assessed against the asset
capable of running.” conditions thresholds, to evaluate the likelihood
of their being exceeded.
• Environmental performance through
CLP Holdings changes in habitats, flora and fauna,
impacts of discharges and use of Acute (extreme) events. Setting the
natural resources. critical thresholds for asset design
and operation is essential, but there
is always an event (for example an
Disruptions to energy supplies and extreme event or a change in demand
the increase in energy prices driven during a heatwave) greater than
by recent extreme events (for that for which protection has been
example, the 2003 European heat provided. Climate change (as indicated
wave and drought in Australia and by Figure 7) is predicted to increase
the USA in 2008) serve to illustrate the risk of extreme events exceeding
the vulnerability of assets to events critical thresholds. Companies
“Demand for electricity in Australia greater than the industry’s current should assess their risks and develop
is heavily dependent on economic asset design, engineering and strategic plans to expand the ‘coping
growth and temperature. As the operational standards. range’ of their assets through
economy grows so does demand for adaptation measures.
energy, and as temperatures rise, so
too does the demand for electricity…
because of higher utilisation of Figure : Impact of extreme events and incremental change on critical
air conditioning. As demand can asset (or business system) thresholds29
change quite rapidly due to higher
temperatures, prices at peak
demand times can often increase
New extremes will be more severe
by several thousand percent.”
Existing extremes will become
AGL Energy Limited ‘business as usual’
Climate variable

Critical threshold

An extreme event ‘today’

Stationary climate Changing climate

Past Present Future
Implement adaptation
measures

Planning time horizon

Coping range plus
Coping range Vulnerability
adaptation

29 Willows, R.I. and Connell. R.K. (Eds). (2003). Climate adaptation: Risk, uncertainty and decision-making. UKCIP Technical
10 Report. UKCIP. Oxford.


Business continuity and crisis- Change drivers for Prescriptive action is also inevitable
management responses are corporate action with regard to other key resources
appropriate to manage the impacts used by the electricity sector. For
Inevitable climate change will
of extreme events but have little example, the increasing stress
have impacts for all companies,
relevance to incremental change. The placed on fresh water resources from
but electricity companies are
latter requires companies to carry out competing demands driven in part by
particularly vulnerable.
fundamental reviews of their business climate change will change the way in
models and check that processes which water is priced and regulated.
are ‘fit for purpose’ and climate-proof The key drivers for adaption will It is inevitable that water will become
under new operating conditions. be experienced through regulatory a highly regulated and state controlled
and legal liabilities, changes in cost resource, with electricity companies
profiles, market transformations, having to understand the future
Chronic (incremental) changes. These
stakeholder interest and governance regulatory and cost implications
changes to our climate are more subtle
(Figure 8). within their business models.
and their impacts on business models
and assets may pass undetected
until critical thresholds are breached. Figure 8: Change drivers for The wider geo-political risks
The responses may result in ‘step- arising from access to scarce
corporate action30
changes’ for a company, increasing water resources should be considered
operational costs beyond forecasts, for those companies operating in
falling revenues, unplanned capital Regulatory/Legal Costs/Revenue sensitive areas.
investment and additional balance
sheet financing to manage the The wealth of information on the
consequences. impacts of climate change from the
Governance
scientific community, academia,
Assets and operational processes Organisation research institutions, government,
designed without any allowance trade associations, and NGOs is so
for incremental change may fail to Management great that no company or director,
meet design criteria, operational senior manager or professional advisor
performance targets, key performance could claim ignorance in a legal
indicators (KPIs) and future regulatory challenge. As the financial impacts of
standards. Understanding the Other Stakeholders Markets climate change are further recognised,
incremental changes in the climate we are likely to see litigation used to
and a company’s current thresholds, recover costs incurred from changing
sensitivities and vulnerabilities are Some examples of how these drivers climatic conditions.
significant issues to be considered are beginning to affect electricity
in any analysis of a company’s future companies, and how they are There are examples of lawsuits
financial performance. They should anticipated to change over the against power companies aimed at
feature in corporate assessments next few years are given in the securing compensation for damages
of strategic, operational and project following paragraphs. resulting from extreme events (and
risks. This is a particularly important which are projected to become more
area for companies to focus on when Regulatory and legal drivers frequent under climate change).31
undertaking asset and capability As the impacts of climate change The legal costs and reputational
optimisation actions. become more direct we are likely to damage associated with defending
see governments resort to prescriptive such climate–induced legal actions
Examples of observed and potential regulation and statutory controls to could be significant.
impacts of climate change across ensure that electricity companies
the electricity value chain have been providing essential infrastructure take New regulatory approaches
provided in Appendix 2. appropriate action on adaptation. Early are required that maintain
indications of action by governments competition whilst allowing more
are already evident. In the United collaboration. Regulation is also
Kingdom the Climate Change Act 2008 required to provide incentives and
gives the government the power to funding to support research and
require electricity companies to assess implementation of technologies.
and disclose the impacts climate
change might have on their business.

30 Adapted from the “Energy Efficiency Framework,” IBM Climate Change Centre of Excellence.
31 For example, a power company responsible for maintaining the transmission lines in Victoria (Australia) is being sued in a
class action suit introduced by victims of a wildfire allegedly caused by a fallen power line. The claim is made “on the basis of
negligent management of power lines and infrastructure”. 11


Cost drivers Pressure for disclosure is increasing.
“As an electric utility we are highly All of the impacts identified in In the USA, Xcel Energy and Dynegy
dependent on weather, both the business impacts tables have agreed in 2008 to disclose all climate
concerning demand and production, a potential cost implication. For risks, including physical climate
and therefore also on climate. Lower example, operational costs will change impacts, in their Securities and
demand for heating but higher for increase in response to changes in Exchange Commission (SEC) filings.
cooling, more precipitation in the equipment efficiency and resilience
north and increasing frequency under higher temperatures, lower
of severe weather situations are Market drivers
air pressure and modified humidity. Electricity companies will need
likely scenarios. Planning under Changes in security and quality of
uncertainty requires preparing to review their current strategies
water supplies used for cooling will for generating, transmitting and
for risks as well as openness to have significant cost implications
harvest possible benefits. Vattenfall distributing energy to meet the
for water-intensive thermoelectric changing expectations and demands
is reinforcing hydro power dams generating facilities.32
and substituting exposed overhead from their customers. Increasing
power lines with underground cables urbanisation driven in part by climate
as well as developing businesses to Electricity prices can be expected to change will change the demand
meet new challenges on the industry become more volatile as the impacts profiles for electricity.
and our customers. of climate change affect asset
performance, the cost of raw fuel Peak demands will increase in summer
Agneta Rising, Vice President, sources, and water abstraction. The months in response to increasing
Environment, Vattenfall AB cost of maintaining system reliability to temperatures and the need for energy
meet growing customer expectations for cooling. Changes in electricity
will increase particularly during extreme consumption for space heating,
events and peak demand periods. transportation and other climate-
sensitive processes such as pumping
Emerging technologies have a water for agricultural irrigation and
low investment viability currently other industrial and domestic uses will
exacerbated by limited global finance. also occur in the near-future under a
Assistance from national governments changing climate.
through regulation and incentives
is required to enable electricity Governance
companies and others to bring to The impacts of inevitable climate
market low carbon technology. change and the drivers for change
“Verbund´s experts are currently Incentives are also required to both
analysing historic trends in will place increasing pressure on
electricity companies and consumers companies to demonstrate that their
precipitation and possible impacts to conserve energy.
on generation and profitability using system of governance is adequately
Monte Carlo simulation models. assessing and managing the risks
First results show positive effects Stakeholders and capable of taking advantage of
on profitability due to a shift of Stakeholders – including investors, the opportunities.
generation from summer to winter. lenders, insurers, market and
Further calculations will include financial analysts, governments and Investor groups are challenging
inputs from downscaled regulatory agencies, consumers, local companies, through initiatives such as:
climate models. communities and NGOs – are already
starting to place greater pressure
on electricity companies to address • Carbon Disclosure Project (CDP),
Verbund Global Framework for Climate Risk
climate risks and opportunities.
Disclosure and the Global Reporting
Initiative (GRI)
Corporate operations are increasingly
scrutinised in the context of climate • The Investor Network on Climate
change, for example: Risks (INCR) and Ceres in the USA.
• The Institutional Investors Group on
• The impacts of climate change Climate Change (IIGCC) in Europe.
on the economic, social and
environmental performance of • The Investor Group on Climate
hydropower schemes is increasingly Change (IGCC) in Australia and
being questioned New Zealand.

• Securing land-use planning and • The Association for Sustainable
other environmental costs is and Responsible Investment in
becoming more challenging. In Asia (ASrIA).
the USA companies have been
refused consents due to increasing
competition for water resources.33

32 Each kWh of electricity generated via the steam cycle requires approximately 25 US gallons (about 95 litres) of water
(Wilbanks et al, 2008).
12 33 Wilbanks et al., 2008.


Ceres, IGCC, IIGCC and GRI have all questions to be answered then clearly The impacts of climate change on
issued reports aimed at the electricity senior executives should be ensuring operational performance are rarely
sector. The disclosure requirements in that the correct questions are being reported. Companies did however
these reports cover issues such as: asked within their own companies. recognise that the climate impacts
on the availability and quality of water
• Climate change strategy and How are companies responding? was a risk. ATCO Ltd. reported that
processes for managing climate “reduced cooling water availability
Companies are beginning to may require the addition of air cooling,
change risks and opportunities
identify risks which would be an additional cost,”
• Impact of regulation Respondents most often identify while Dominion Resources noted that
both ‘acute’ and ‘chronic’ climate “droughts can result in reduced water
• Quantitative data (both historical and
risks to assets and natural resources. levels that could adversely affect
projected) related to their exposure
Companies operating renewable operations at some of the company’s
to climate change (for example
energy assets such as hydroelectric power stations.”
generation mix and electricity
and wind power installations highlight
production).
risks to natural resource availability.
Changing stakeholder perceptions
and expectations regarding supply
In each of these reports the
Impacts of climate change on reliability, price and the economic,
importance of communications
transmission and distribution assets social and environmental sustainability
and disclosure in financial reports,
are also reported. For example, Duke of new assets are rarely reported. For
sustainability reports, analyst briefings
Energy noted that “its local electric example, water availability for cooling
and mandatory reports to securities
distribution systems are vulnerable to processes has effects not only
regulators such as the U.S. Securities
damage from extreme weather events on generation processes but also
Exchange Commission is emphasised.
such as ice storms, tornados and on community relations and social
The use of shareholder resolutions
severe thunderstorms – the types of licences to operate. In several American
to encourage companies to address
weather events that could potentially states concerns about water supplies
climate change risks has increased
be impacted by climate change”. have led to permits not being granted
dramatically. Ceres noted that a record
for new thermoelectric power plants.34
high of 57 climate-related resolutions
were filed with U.S. companies during Companies also report changes to
the 2008 proxy season. Of that figure, markets, demand and price. These Companies are reporting direct climate
almost half were withdrawn because include increased energy price impacts and particularly those created
the businesses positively addressed volatility, episodes of higher peak by extreme events. There is less
the issues involved in the resolutions. demand and overall seasonal demand coverage of the indirect impacts
changes. Consolidated Edison wrote or of risks created by incremental
that it is at risk from these impacts, climatic changes.
The external challenge for greater
noting that “increases in temperature,
disclosure should act as a catalyst
in particular, the frequency and
for internal action by companies to Actions to manage risks
severity of heat waves, would result in
assess, manage, integrate and engage Companies report investing in more
increased electric and steam demand.”
on the consequences of climate climate-resilient materials and designs,
change. If investors believe there are such as coastal sea defences,
sustainable drainage systems, dam
reservoir overflow management or
“disaster-resistant configurations such
Table 1: The most frequently mentioned risks identified by companies as power system networking and the
and those that they are being addressed (Source: CDP Information multiplexing of power facilities” (Chubu
Requests 2008) Electric Power, Japan). Verbund
in Austria has revisited the level of
security of its hydropower dams:
Top 10 risks identified Top 10 risks managed “dam security was re-calculated
1. Distribution grids negatively affected by extreme events 1. Distribution grids negatively affected by extreme events for flood levels of HQ 5000 (a level
2. Changing levels of precipitation leading to variable river levels for hydro 2. Assets compromised by extreme weather events reached every 5000 years).”
3. Assets compromised by extreme weather events 3. Changing levels of precipitation leading to variable river levels for hydro

4. Increased energy demand for air conditioning and refrigeration in 4. Disruptions to offsite utilities (e.g. communications, water, waste Actions are being taken by some
summer treatment, etc.) companies to respond by optimising
5. Reduced river flows and efficiency of cooling processes 5. Rising temperatures will increase energy demand for air conditioning and their existing assets, for example
refrigeration in summer
by generation companies improving
6. Wholesale and retail energy prices will remain volatile 6. Wholesale and retail energy prices will remain volatile their cooling water processes.
7. Milder winters will result in less demand 7. Customer expectations of secure energy provision will place increasing
pressure on companies

8. Disruptions to offsite utilities (e.g. communications, water, waste 8a. Increased interruptions to transport systems
treatment, etc.) 8b. Restrictions on water abstraction and efficiency of cooling

9. Changes in sea level and flooding will compromise assets 9a. Changes in sea level and flooding compromising assets
9b. Increase of wholesale and retail energy prices because
10. Changes in wind pattern that could affect the wind energy production of restrictions in supply
9c. Litigation becomes more significant

34 Wilbanks et al., 2008. 13


There is however less evidence that A number of companies have identified
companies are assessing the wider optimisation responses and refer to “Exelon has long had to deal with and
operational impacts of climate change the implementation of demand-side prepare for the effects of extreme
on generation, transmission and controls that automatically load- weather conditions. These conditions
distribution performance and taking shed non-priority customers on peak have a direct impact on electric and
action to manage the risks. Some demand days. Actions such as these gas usage and hence peak demand.
companies report having diversified minimise the risk of system failures Thus, we need to address weather
plant locations, purchased additional and assist with supply reliability. as a component of both short-
or more comprehensive insurance, term and long-term planning…”
or made arrangements with other Energy East Corporation “is investing
companies to purchase electricity in “In the short term, on a daily basis we
in major transmission initiatives that need to ensure energy is available
case of supply disruptions. Chugoku will…address reliability issues.”
Electric Power Co., Inc. in Japan, for to meet customer demand on a
Similarly, Dominion Resources wrote real-time basis. We also have to
example, is “…involved in exchanging that its “…retail business unit offers
of summer temperature change risks project those needs into the daily,
customers products that can be weekly and monthly scheduling
(weather derivatives).” utilised in the face of severe weather. of resources. Over the long term,
Some of the products offered we have to engage in resource
Opportunities remain to be exploited include a variety of home generators planning that will meet the projected
Table 2 presents the opportunities (permanent, portable, etc.) and surge future demand of our customers. In
that companies most frequently protection products.” addition, weather events can impact
recognise and address through our operations due to the potential
assessment and management actions. Climate change adaptation remains for damage to our capital assets.”
Companies report fewer opportunities to be mainstreamed into corporate
in comparison to the number of risks governance and management Exelon Corporation
reported. This is consistent with other Almost all electric utilities report
business sectors and reflects the early assigning responsibility for climate
stages of adaptation to climate change change to an executive body (91%).
where the focus is on risk. It is not clear however, if companies
are integrating adaptation into risk
The two most recognised management processes and
opportunities were highlighted decision making.
by 25% of respondents.
Regarding policy engagement, “In Nordic conditions [the potential
10% of companies identified the more than half of the companies implications of climate change
business opportunities from renewable responding noted that they lobby and adaptation needs to physical
energy generation. Endesa for lawmakers and/or participate in trade risks] include…a changing annual
example, plans to take advantage of associations or cooperate with their production pattern of hydro power
potential changes in water resources competitors regarding climate change and decreased need for heating
and precipitation patterns in South policy, without providing any specific energy. As many of our power
America to develop new hydropower information on the issue of adaptation plants are situated on the coastal
generation plants. and climate change resilience. area the sea level rise may impose
risk for the operation of the plants
and there is need to reconsider
Table 2: The most frequently mentioned opportunities identified by gradually the dimensioning of the
companies and those being addressed (Source: CDP Information location (from sea level) of plants
Requests 2008) and plan flood protection and
cooling water pumping. There
is also need to consider more
Top opportunities identified Top opportunities managed frequent and stronger storms in
1. Increased demand for electricity because of hotter summers 1. Increased potential for renewable electricity generation the distribution operations.”
2. Increased potential for renewable electricity generation 2. Increased demand for electricity because of hotter summers
Fortum
3a. Higher peaks in extreme weather conditions 3a. Increased market for water efficient generation and cooling technologies
3b. Consultation services for plant operation in changing weather conditions 3b. Market for new transmission technology
3c. District cooling expertise 3c. Bring power to vulnerable communities
3d. Sales in times of extreme weather events (e.g. short-term 3d. Improve species mitgration and adaptation by reviewing site strategies
power stations) and project locations
3e. Reduce capex in future extreme events by improving reliability
of transmission grid

14

5 What actions should
companies take?
A business will only flourish if its If businesses are to become climate
leaders are adept at weighing risks resilient and meet the challenges of “A fundamental question confronting
and making robust decisions in the the energy revolution then they need those of us in the electric power
face of uncertainty. The successful to draw on the experience of the business is what kind of world we
business of the future is taking current financial crisis. In our report want to leave to our children. Will it
climate risks into account today, and exploring the FTSE35035 we set out be a world given over to rising seas,
is developing adaptive strategies and some of the key challenges for senior stronger storms, widespread drought
actions to manage the uncertainties. executives. These challenges apply and exorbitant energy prices? Or will
Although there is uncertainty in the equally to companies operating in the it be a world where we harness the
knowledge we have about the extent global electricity sector: power of markets to tame carbon
and rate of future climate change, emissions, preserve our environment,
there is sufficient information to enable and strengthen our energy security?”
• The relevance of climate change
robust decision-making to take into to fiduciary responsibilities –
account the possible impacts on FPL Energy
Senior executives need to act in
business models. The existence of accordance with their wider fiduciary
uncertainties regarding the business responsibilities to create sustainable
risks arising from climate change, business growth and return over a
should by itself act as a catalyst longer time scale. Senior executives,
for companies to quantify the risks, who focus on the response to
monitor the impacts as they arise immediate challenges at the expense
and be prepared for changes to their of a balanced position on the risks
business models. facing their business arising, are not
acting in the best interests of their
There is scientific consensus that shareholders, nor of those of their
the world’s climate is changing due employees, customers and the
to human activity and that whatever communities in which they are located.
steps we take to limit GHG emissions
• Governance meeting the challenge –
we are now faced with several
The scientific evidence that climate
decades of increasing global
change is underway, that further
temperatures and a far longer period
climate change is inevitable and that
of rising sea levels. We are already
impacts are already occurring in
seeing the impacts of these and other
social, environmental and economic
climatic changes on social, economic
systems, is overwhelming. It is
and environmental systems. The
incumbent upon all senior executives
impacts will become more severe
to ensure that potential risks to their
over time creating, for example:
business models and value chains
have been identified and assessed
• Reductions in agricultural and to understand the consequences of
fisheries yields decisions and the factors affecting
• Increasing stress and competition their company’s future.
for water resources • Risk disclosure – In most countries
• Enhanced migration to urban areas the regulation of companies under
statute requires some form of
• Changing disease patterns disclosure of future risks, for example:
• Geo-political risks. – In the USA Item 303 in the
Securities Exchange Commission
These impacts add up to significant Act of 1933 requires U.S. publicly
changes in the demand for electricity traded companies to disclose
against a backdrop of supply “where a trend, demand,
challenges, ageing assets, new commitment, event or uncertainty
technology, prescriptive regulation is both presently known to
and impacts on asset performance management or reasonably likely
and efficiency. to have material effects” on the
financial condition of the company.

35 Acclimatise (2009) ‘Building business resilience to inevitable climate change’ FTSE350. 15

5 What actions should companies take?

– In the United Kingdom the Growth of existing capabilities.
“In the context of a sustainable Companies Act 2006 requires Electricity companies have
business, the ability to adapt to that Directors of listed opportunities to rapidly grow their
a constantly changing world is a companies understand the likely existing capabilities using the
necessity. Now that much of the consequences of any decision in technology and information on climate
international scientific community the long term, and disclose the change that is now available through:
has advised governments of the main trends and factors likely to
inevitability of climate change, affect the future development,
businesses should prepare for the • Smarter design and operation
performance or position of the
new future that is predicted. Those company’s business. • The introduction of automated and
that see not only the risks, but also intelligent grids
the opportunities may be ahead
of many. However it is those that Developing an integrated • Smart metering
have already started acting on the approach
• Regulatory incentives (with the
identified risks and opportunities Adapting to the impacts of a changing support of governments)
that will be in a better position to climate requires electricity companies
weather the storm. At CLP, we to take an integrated approach to their • Existing new build programmes
began acquainting our staff with response to the energy revolution. (designing against a future climate).
the concept of adapting to climate New sources of electricity supply,
change through an adaptation together with technological change in Acceleration of emerging technologies
brainstorming workshop whereby transmission and distribution systems to a commercial scale. The energy
staff from across different functional are required. Customers need to revolution and the response to climate
units were provided climate be provided with an ability to make change provide companies with an
change scenarios to which they informed decisions about their use of opportunity to take a ‘step-change’
developed adaptation solutions energy to meet changing demands. in the vision for their business. Those
relevant to their functions.” The relationship between supply and companies that nurture and accelerate
demand also needs to change with new capabilities to market at a
Andrew Brandler, new control systems reflecting, for commercial scale will be the sector
CEO, CLP Holdings Limited example, that future customers can leaders of the future. Opportunities
also be suppliers with their own micro exist in:
and distributed generation capabilities.
• New renewable energy technologies,
Three complementary adaptation for example, deep-water wind and
actions are available to electricity tidal/wave power
companies36 :
• Integrated smart homes, buildings
and cities
Optimisation of existing infrastructure
assets, systems and information. This • Products and added value services
will involve applying smart solutions that will help commercial and
to optimise existing capabilities, for domestic customers predict,
example, through: monitor, and adapt to the impacts
of climate change.
• Asset life extension programmes
It should however be noted that there
• New asset maintenance procedures may be financial and commercial
• Consumption and price information risks for those companies that are
and tariff incentives to influence first to market with new technologies,
demand. products and services. National
governments have a major role to both
incentivise companies and underwrite
Optimisation is essential over the the risks involved as part of their own
next 5 to 10 years as the only strategic adaptation responses to
available adaptation response using climate change.
existing assets. Driving improved
efficiencies and performance from
existing assets and incentivising
demand management and customer
behaviour changes are essential. The
development of new assets through
growth and acceleration will take
time and requires action by national
governments to both regulate
and incentivise.

36 A key challenge facing the electricity sector in meeting the energy challenge is the capacity of the manufacturing sector
16 to meet the potential demand for the construction and supply of new assets.


During 2009 there will be many Prepare-Adapt: 10 questions 3 How sensitive is demand for your
opportunities for companies to for senior executives in the products and services to climate
talk to governments, politicians, electricity sector change impacts?
scientists, trade associations, and
Acclimatise and IBM have jointly
NGOs in the run up to the United
prepared their Prepare-Adapt set of • How will customer needs, buying
Nations Framework Convention
questions to help electricity companies behaviour and ability to pay
on Climate Change (UNFCCC)
take the right steps towards building change and over what timescale?
fifteenth Conference of the Parties
corporate resilience to inevitable
in Copenhagen. Although the main • What are the implications
climate change. A simplified version
emphasis of the conference will be of increasing urbanisation
drawing on a more comprehensive
on reaching a global GHG emissions and changing energy
set of questions is provided below.37
agreement, electricity companies demand profiles?
must become fully engaged in the
discussions on adaptation. Your risks • What are the implications
arising from changes in the
1 What are the operational impacts demographics of the countries
This report has concentrated on on your company of climate in which you operate?
the issues for listed companies in change?
the electricity sector. The impacts
are however not limited to these • What are the implications for
companies alone. They apply equally the operating performance 4 How could current and future
to those countries where the state and efficiency of your existing climate change regulations and
manages generating, transmission assets under changing climatic industry standards affect your
and distribution assets. The impacts conditions? organisation and its reputation?
are also of relevance to the world’s
urban areas dependant upon the • How will the impacts of climate
availability of resilient energy systems change on the other operators in • What is your level of regulatory
in order to function effectively. the electricity value chain affect and financial exposure to the
your business? introduction of prescriptive
legislation on adaptation, together
The successful electricity companies • How will changes in water with further legislation on urgent
of the future will be those that act now resources and water quality mitigation action, as the reality
upon the clear signals that climate together with increased of climate change becomes
change is underway. They will have competition from other users more pressing?
a fully integrated approach to the affect your operational capacity?
challenges of the energy revolution, • How effective and auditable
reducing emissions and adapting is your process for reporting
to climatic change. regulatory and policy
2 Are your current and planned compliance?
major operating assets located • Which areas of your business
in areas vulnerable to climate are sensitive to media, NGO
change impacts and what are and local community concerns?
the implications?

• What steps are you taking to
design new assets against © Copyright Acclimatise (Climate
future climate impacts, what Risk Management Ltd) and
costs would be involved to International Business Machines
relocate (where appropriate) Corporation 2009
and undertake remedial works
to provide resilience to
existing assets?
• What are the implications
of depreciating, abandoning
or writing-off assets or of
extending asset life through
optimisation actions?
• How will the operational
performance of your asset
portfolio change over time?

37 Please contact Acclimatise or IBM if you would like to know more about the ‘Prepare-Adapt’ questions. 1

5 What actions should companies take?

Your opportunities Your response 9 How can you ensure that your
approach is based on robust
5 What new and enhanced existing How clear and effective are information and assumptions?
products and services can you your internal management
offer your customers? responsibilities for climate change
and your engagement with • How have you integrated the
stakeholders? latest available climate science
• What steps are you taking
to develop new or enhanced and climate change scenarios to
business opportunities that will inform your business planning
• To what extent are your internal
provide competitive leadership? and decisions?
climate change leadership
• How will you develop brand and management roles clearly • Are your management information
stretch to take advantage of defined, supported and systems for raw materials and
changes in customer behaviours empowered to meet fiduciary resources, assets, supply
and develop climate related responsibilities? chains, operations, markets and
markets? customers reporting on and
• How are you sharing information
monitoring climate change KPIs
• Can you provide products and with and influencing governments,
using realtime, interconnected
services that that will help regulatory bodies, NGOs,
and intelligent data?
commercial and domestic consumer groups and the
customers predict, monitor, and media to manage and forecast • Can your information systems
adapt to the impacts of climate exposure? provide an early warning of
change as well as enhance their climate change driven signals
• What actions are you taking
efforts to reduce their emissions of changes in operational
to ensure that the investment
footprint? performance and demand
community, your bankers and
profiles?
insurers understand and support
the steps you are taking regarding
climate risk?
6 What benefits could you realise
from better managing your 10 How can you demonstrate
response to climate change? that your climate business
resilience plans are realistic
8 How well structured is your
and financially viable?
• How can you improve the approach for managing
attractiveness of your company climate change?
to investors, banks, credit • What actions have you taken
rating agencies, employees • How effective is your process to understand and manage
and potential recruits? for exploring longer term future liquidity and ensure
scenarios and identifying risks sufficient contingency funding in
• How will you use the current preparation for more intense and
economic crisis as an opportunity and opportunity signals as
they emerge to plan and act frequent extreme climatic events?
and an incentive to revisit your
business model and respond to accordingly? • How do your business continuity
the growing social, environmental • How are you assessing the and crisis management plans
and economic challenges? vulnerability of your raw materials reflect the changing risk profiles
and resources, suppliers, assets, due to climate change and are
• What are the cost advantages they well-rehearsed?
if you can secure more favourable operations, workforce and
insurance cover by demonstrating markets to changing risks? • What steps are you taking to
strong operational risk • What steps are you taking to involve your employees, develop
management processes ensure that climate change driven new skills and expertise to grow
limiting potential consequential business risks and opportunities your internal capability and
loss claims? are integrated into your decision accelerate the commercialisation
making through optimisation, of new technologies?
growth of existing capabilities,
and acceleration of new
commercial technologies?
© Copyright Acclimatise (Climate
Risk Management Ltd) and
International Business Machines
Corporation 2009

18

Appendix 1

The future electricity sector Fuel/energy sources. A variety of Generation. Electricity is most
value chain sources are used: fossil fuels (coal, often generated at a power station
oil, natural gas), nuclear, biomass, by electromechanical generators,
In this report we explore the impacts
water, solar, tidal, wave, wind primarily driven by heat engines fueled
of inevitable climate change and the
and geothermal. New generation by chemical combustion or nuclear
business resilience of companies
technologies linked to the development fission but also by other means such
operating in the electricity sector.
of commercially viable fuels (e.g. as the kinetic energy of flowing water
The 88 companies who responded38
hydrogen, second generation biofuels, and wind. There are many other
to the 2008 CDP Information Request
algal derived fuels) will become technologies that can be and are used
include companies with fully integrated
increasingly important. to generate electricity such as solar
operations across the value chain, and
photovoltaics and geothermal power.
those concentrating on a particular
part, for example generation. Access to and developing each
of these fuel sources will need to The large fixed assets used in
recognise the effect of changing the generation of electricity with
The sector value chain is in a period
climatic conditions and indirect comparatively long asset lives are
of transition and development in
impacts on asset performance, supply vulnerable to a changing climate.
response to some of the challenges
chains and logistics, interruptions Existing assets will have been
identified in the previous section.
due to extreme events, environmental designed to operate against historic
Energy storage and local, distributed
regulations and local communities. climate data and demand criteria that
power systems are becoming
are no longer robust as a basis for
increasingly important features of the
decision making. New assets must be
value chain in the twenty-first century.
designed to operate against a range of
Figure 9 provides a simplified overview
possible climate scenarios, rather than
of the electricity sector.
absolute values.

Figure 9 – The electricity sector value chain

Energy Storage

Customer
Fuel/Energy
Generation Transmission Distribution Energy
Source
Services

Distributed Power

38 88 companies out of a total 218 electricity companies invited to participate in the 2008 Information Request provide complete
responses to the questions covering disclosure on the physical impacts of climate change on existing and future company
performance and management responses. 19

Appendix 1

Transmission. The bulk transfer of Changes in demand profile,
“Origin creates and protects value by electrical power to demand centres. operational performance and asset
managing a range of risk exposures. A power transmission network integrity together with the use of
For a company exposed to changes typically connects power plants to historic climate data as a basis of
in the weather, and that sells multiple substations near a populated design and operation will also affect
products that rely on the availability area. Electricity is transmitted at the distribution system. Increasing
of water, wind and the sun, the risk high voltages to reduce the energy urbanisation driven in part by climate
of long term changes to our climate lost in transmission. Power is usually change will require distribution
is an important one to manage. transmitted as alternating current systems to be reviewed and rebuilt.
Measures that position us well for through overhead power lines.
a changing climate already form Underground power transmission
an important part of our portfolio Customer energy services. The
is used only in densely populated retail element of the value chain
of risk management activities. areas because of its higher cost of
For example, one of the most providing the customer focus and
installation and maintenance when main contact with users on metering,
significant adaptation challenges compared with overhead wires, and
for the Australian energy sector is billing, new development services,
the difficulty of voltage control on demand management and added
restricted water availability. Origin’s long cables.
Darling Downs gas fired power values services.
station, planned for commissioning
in late 2009, will not only emit about The operational performance and Understanding how climate change
half the greenhouse gas emissions asset integrity of the transmission will affect markets and consumers is
of conventional coal-fired power system are areas where there are vital. The demands from commercial
stations – it will also use less major risks arising from climate and domestic customers will change.
than 3 per cent of the water.” change. Changes in demand peak and The range of services they may require
seasonal demand profiles will place to help them manage and adapt to
Carl McCamish, pressure on grid systems. The integrity the effects of climate change provide
Executive General Manager, of assets will be compromised significant business opportunities.
Policy and Sustainability by changes in the frequency and
Origin Energy Ltd intensity of extreme events. Increasing
temperatures will reduce the efficiency In the future we will need to reconsider
of transmission grids, increasing the traditional value chain model for
the need for compensatory the electricity sector. Developing a
generation capacity. model based on new supply and
demand systems where consumers
can also be suppliers, managed by
Distribution. The final stage in the a central control system to balance
delivery of electricity to consumers. and regulate will be more appropriate.
A distribution system's network carries Adaptation responses should be
electricity from the transmission considered within the context of
system and delivers it to consumers. the changes to the value chain.
Typically, the network would include
medium-voltage (less than 50 kV)
power lines, electrical substations
and pole-mounted transformers,
low-voltage (less than 1000 V).

20

Appendix 2

Examples of the impacts of inevitable climate
A study of the output efficiency of photovoltaic solar
change for the electricity sector
panels in Scandinavia under climate change revealed
In the following tables a high level overview using that, taking into account increased average temperature
examples of observed and potential impacts of climate and reduced ground reflection, a decrease of solar
change across the electricity value chain is provided. radiation of 2% would reduce the electricity output of
The tables are split between the key elements of the solar cells by about 2%.
electricity sector value chain.
Wind
Changes in wind climate characteristics during asset
Generation life times may have significant impact on the generation
profiles from turbines. There are indications that in
Resource impacts due to climate change some areas (for example Northern Europe) wind
speed will increase.
Hydro power
There will be early gains associated with hydropower Wind speeds in the eastern Mediterranean exhibit a
on rivers that are reliant on glacial melt. In the long general increase over land and a decrease over the
term, however, these gains will be counterbalanced by sea, with the exception of a noticeable increase over
a significant decrease in flows as glaciers disappear. the Aegean Sea.

Studies indicate that declining river flows in some areas Fossil
as a result of climate change will lead to declining During Hurricane Katrina in 2005, 109 oil and gas
hydropower production. The IPCC’s Fourth Assessment platforms in the Gulf of Mexico were destroyed or
Report points to a 25% decrease in hydropower capacity damaged, causing oil prices in the U.S. to rise. Three
at existing stations in Spain by the 2070s. months after the event, 47% of U.S. distillates were still
not functioning.
Droughts in Australia have meant that there have been
reductions in output for many hydropower dams, for Up to half of Russia's natural gas reserves are at risk
example the largest dam in Australia, the 180 MW because of permafrost thaw. This will mean that the
Dartmouth Dam – stopped generating electricity in security of supply for electric utilities reliant on gas
2007 and is unlikely to restart before 2011. from Russia is endangered.

Biomass In Queensland, Australia 2008, two major coal mining
Feed material yields can be affected by higher companies had to declare ‘Force majeure’ as a result
temperatures, changing patterns of rainfall and of extreme precipitation causing flooding. Events
soil-moisture deficits. such as this will severely impact the supply of coal
to power stations.
Indirect impacts on pests and diseases and competition
for land for food production will have implications for Nuclear
‘fuel’ crops. Crops that remain viable may be of During the European heat wave of 2003 17 nuclear
reduced quality. reactors in France had to reduce output or were shut
down due to water abstraction and discharge restrictions.
Companies may be faced with potential reputational and
branding issues if large areas of land are taken out of Asset impacts due to climate change
food production in developing countries.
Generic
Climate change may induce farmers to grow other crops Asset locations adjacent to rivers or the coast will be at
with a shorter rotation period, including biomass crops. risk from flooding. Sea level rise, increased precipitation
and river flows can increase flood and coastal erosion
Solar risks. This can lead to asset damage, disruption to
Output is affected by cloud cover, which in turn is operations, and downtime during clean-up operations.
dependent on wind shear, humidity, temperature and
precipitation. Climate change induced changes in these Asset design and operation maintenance procedures will
variables could affect the performance of solar panels need to take into account changing climatic conditions
and seasonal output of solar energy generation. and potential disruptions.

21

Appendix 2

Turbine performance is affected by increasing ambient located near the coast for cooling water purposes. It
air temperature with reductions in thermal efficiency can lead to asset damage, disruptions to supplies and
and power output. There is a linear relationship between downtime during clean-up operations.
air temperature and turbine efficiency: a 10 degree
Fahrenheit (5.56 degree Celsius) increase in ambient Decommissioning nuclear assets will need to take into
temperature would produce as much as a 3 to 4% account climate change over many centuries. This will
reduction in power output. become a major issue for coastal assets affected by
rising sea levels. Existing decommissioning schemes
Although the impacts might appear ‘small’ in percentage will need to be reviewed against the latest information
of lost efficiency, they could mean significant losses of on sea level rise.
supply. On a global scale, a net reduction in fossil-fuel
based electricity generation of 1% due to increased Regulatory impacts due to climate change
ambient temperature would represent a drop in supply
of electricity of 25 billion kWh. Generic
Increasing competition between stakeholders for
The accounting rules for decommissioning assets under water will place pressure on governments to introduce
IFRS (IAS 37) require a company to recognise a liability regulatory controls and water pricing.
as soon as the decommissioning obligation is created,
which is normally at the time facility is constructed. Early indications of action by governments are evident:
In the UK, the Climate Change Act 2008 gives
Decommissioning provisions represent a significant government the power to require electricity companies
financial risk because the majority of cash flows occur at to assess and disclose the impacts climate change
the end of a project's life. Companies will need to assess might have on their business.
and report the impacts of changing climatic conditions
on the decommissioning costs for their existing and All sectors of the electricity value chain can expect to
planned assets. see regulations used by Governments to provide greater
consumer protection.
Hydro power
Silting of hydropower dams may accelerate due to Biomass
increased erosion and sediment load as a result of Increasing competition between stakeholders over
precipitation and temperature changes. access to agricultural land may result in regulatory
controls to protect food production.
Climate change will alter river flow levels and
velocities. Dams will face changes in flood extremes Nuclear
and return periods. Nuclear power stations require higher levels of water to
operate compared to fossil fuelled electricity generation
Increased sediment load may cause abrasion of (between 20 to 83 % more than for other power
turbine blades requiring increased maintenance, stations). Water abstraction limits by nuclear power
loss of generating efficiency and increased costs. stations may become more regulated as resources are
placed under stress by changes in flow and temperature.
Biomass Increasing competition for water resources from other
Energy generation using biomass requires significant users in response to climate change will also place
amounts of water. pressure on Governments to regulate abstractions
and discharges.
Solar
Solar energy assets located in arid regions may sustain Consumer and market impacts due to climate change
greater damage as a result of abrasion with increasing
wind speeds and more intense storms. Generic
The market impact of hotter, drier summers is already
Wave and tidal reflected in energy demand trends. Across Europe, new
More intense tropical and extra-tropical cyclonic events demand profiles are being seen in summer and winter.
will need to be considered in the design and operation Summer peak demand will be amplified in cities through
of wave and tidal energy assets. Storm surge heights the Urban Heat Island effect.
are expected to increase.
Customer expectations of secure energy provision will
Wind place increasing pressure on companies. Companies
Increasing wind speeds may require turbine can be expected to be the subject of adverse media
design changes. and customer comment.

Nuclear Successive extreme events leading to outages (heat
Sea level rise, increased precipitation and river flows wave, flood, drought) may create a loss of consumer
can increase flood and coastal erosion risks. This is of (and investor) confidence.
particular concern as many nuclear power stations are

22

Electricity companies will face major challenges in providing All sectors of the electricity value chain can expect to
new generation capacity and supply reliability within see regulations used by Governments to provide greater
urban areas to meet the increased demands from domestic consumer protection.
customers, essential urban utilities (for example water and
sewerage), and the technological changes in transportation Consumer and market impacts due to climate change
(for example the increased use of electric vehicles).
The market impact of hotter, drier summers is already
Biomass reflected in energy demand trends. Across Europe, new
There is a developing international trade in biomass fuels demand profiles are being seen in summer and winter.
– which is generally expected to increase and stabilise Summer peak demand will be amplified in cities through
over the next ten years. Some estimates indicate that a the Urban Heat Island effect.
realistic potential for biomass energy generation could
be between 35 and 1130 EJ/y worldwide, with a large A study commissioned by electricity companies in the
proportion of this resource being found in the C.I.S and UK identified system overload in the summer during the
Baltic states, South and North America and the Far East. 2020s, taking account of climate change. Overloads and
power cuts have already occurred in central London.
Fossil The number of cooling degree days in London increased
Restrictions in gas supply due to extreme event by an additional 30-34 days over the period 1961-2006.
disruption are likely to increase wholesale and retail Further increases can be expected.
energy prices.
Electricity companies will face major challenges in
providing new generation capacity and supply reliability
Transmission within urban areas to meet the increased demands
from domestic customers, essential urban utilities (for
Asset impacts due to climate change
example water and sewerage), and the technological
changes in transportation (for example the increased use
Changes in the intensity and frequency of extreme
of electric vehicles).
events will create major issues for assets designed to
cope with historic climate conditions. Changes in wind
speed, icing, temperature and flooding, together with
place increasing pressure on transmission companies.
ground movement following subsidence and heave
Companies can be expected to be the subject of
events and permafrost thaw will increase the risks
adverse media and customer comment.
of asset failure. In Melbourne, Australia during early
2009 explosions caused by extreme heat damaged two
Successive extreme events leading to outages (heat
major 500 KV transmission lines causing blackout for
wave, flood, drought) may create a loss of consumer
500,000 residents.
(and investor) confidence.
In many countries transmission assets are nearing the
The UK grid operator issued a supply shortfall warning
end of their design life. These assets may no longer be
in 2003 and 2006, when the south-east and parts of
performing to their original design criteria and the original
Central London were hit by blackouts due to the impact
design standards may no longer be sufficient to meet the
of higher temperatures and increased demand for energy
impacts of a changing climate.
for cooling.
The efficiency of transmission systems will be affected
by increases in average temperatures and heatwaves. Distribution
Changes in the frequency and intensity of extreme events
will increase the risk of transmission failures. Changes Asset impacts due to climate change
in wind speed and ice formation increase the risk of
transmission line failures. In many countries distribution assets are nearing the
end of their design life. These assets may no longer
Regulatory impacts due to climate change be performing to their original design criteria and the
original design standards may no longer be sufficient to
Early indications of action by governments are evident: meet the impacts of a changing climate.
government the power to require electricity companies The efficiency of distribution systems will be affected
to assess and disclose the impacts climate change by increases in average temperatures and heatwaves.
might have on their business. In Australia the National Changes in the frequency and intensity of extreme
Government is undertaking risks assessments for events will increase the risk of distribution failures.
critical electricity infrastructure.
The significant increases in demand with increasing
As a result of lawsuits filed regarding the efficiency urbanisation due in part to climate change (particularly
of transmissions assets (e.g. March 2009 People of in developing countries) will place major strains on
California v. U.S. Dept. of Energy) tighter regulations assets, leading to overloads and outages.
may be introduced.

23

Appendix 2

Regulatory impacts due to climate change Customer services

Early indications of action by governments are evident: Asset impacts due to climate change
government the power to require electricity companies SMART meters are seen as a valuable first step to
to assess and disclose the impacts climate change creating a ‘SMART grid’, which would enable energy
might have on their business. In Australia the National suppliers to be much more efficient in their use of power.
Government is undertaking risks assessments for
critical electricity infrastructure. Regulatory impacts due to climate change

Regulation may become more focussed on ensuring that Regulation to promote energy efficiency measures
distribution systems are secure and climate resilient. and incentivise action by consumers and electricity
companies.
All sectors of the electricity value chain can expect to
see regulations used by Governments to provide greater All sectors of the electricity value chain can expect to
consumer protection. see regulations used by Governments to provide greater
consumer protection.
Consumer and market impacts due to climate change
Consumer and market impacts due to climate change
The combination of summer peakloads, plus losses in
generation (due to increasing temperatures and cooling Extreme weather events, for example extreme
water restrictions) and losses in transmission and precipitation or flooding, may result in delayed or
distribution (due to increasing temperatures), will add cancelled routine maintenance or other services.
to the growing supply/demand gap. The market impact This could lead to reputational issues.
of hotter, drier summers is already reflected in energy
demand trends. Across Europe, new demand profiles Electricity companies will face major challenges in
are being seen in summer and winter. Summer peak providing new generation capacity and supply reliability
demand will be amplified in cities through the Urban within urban areas to meet the increased demands
Heat Island effect. from domestic customers, essential urban utilities (for
example water and sewerage), and the technological
Electricity companies will face major challenges in changes in transportation (for example the increased
providing new generation capacity and supply reliability use of electric vehicles).
within urban areas to meet the increased demands
from domestic customers, essential urban utilities (for Increased demands to meet air-conditioning and
example water and sewerage), and the technological cooling needs.
changes in transportation (for example the increased
use of electric vehicles). The market impact of hotter, drier summers is already
reflected in energy demand trends. Across Europe, new
Customer expectations of secure energy provision will demand profiles are being seen in summer and winter.
place increasing pressure on distribution companies. Summer peak demand will be amplified in cities through
Companies can be expected to be the subject of the Urban Heat Island effect.
adverse media and customer comment.
Successive extreme events leading to outages (e.g. place increasing pressure on companies. Companies
heat wave, flood, and drought) may create a loss of can be expected to be the subject of adverse media
consumer (and investor) confidence. and customer comment.

Successive extreme events leading to outages (heat
wave, flood, drought) may create a loss of consumer
(and investor) confidence.

The UK grid operator issued a supply shortfall warning
in 2003 and 2006, when the south-east and parts of
Central London were hit by blackouts due to the impact
of higher temperatures and increased demand for energy
for cooling. Consumers will become more vociferous in
their demand for security of supplies.

24

References and
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Oxford, UK Climate Change and the Greenhouse Businesses and Investors. CERES:
Effect – A Briefing from the Hadley Centre. Boston, U.S.A.
Acclimatise and Synergy (2008). Climate
Finance, Business and Community: The Henderson Global Investors, Insight Asset Smith, B., T. et al. (2005) ‘Climate change
Benefits of Co-operation on Adaptation. Management, RAILPEN Investments and and thermoelectric cooling linkages’.
Discussion Paper. Oxford, UK Universities Superannuation Scheme (2008). Potential effects of climate change on
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AEA Technology (2006) ‘Regulation of the investment implications of adapting to National Laboratory: Oak Ridge, Tennessee.
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Change Impact On Wind Energy Resources (2004). ‘Human contribution to the European
In Northern Europe’. Geophysical Indian Institute of Management (IIM) (2005) heatwave of 2003’. Nature. Vol. 432,
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Geosciences Union Energy and Transport in India.
Three Regions Climate Change Group
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businesses Climate Proof? Acclimatise
and UKCIP: Oxford.

25

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