Energy Manager

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Changes in climate and water availability adding stress and costs to electricity sector

LONDON — According to an Acclimatise global report, backed by IBM, nearly all electric utilities claim climate change is threatening power outages, higher costs and changes in usage as demand grows to power the world's expanding cities.

Over 90 per cent of global electric utilities that report climate change activity to the Carbon Disclosure Project recognised they are at risk from changes in climate and water availability, which are already adding stress to the sector. However, less than a third claimed to undertake any financial or quantified evaluation to the impact of climate change on their business.

The report suggests the energy industry is rapidly approaching a critical stage of development. As demand is growing from new requirements such as electric vehicles, increased cooling during warmer summer months and rapid urbanisation, utilities need to attract new financial investment to grow existing capabilities and develop emerging technologies in a low carbon way.

Without correct adaptation measures built into business plans, climatic risks could impact a utility company's financial and operational performance, potentially leading to additional operational and capital expenditure. Financial projections made today based on current life, performance and value of assets may not be robust, which could impact a utilities value and interest from investors.

The report "Global Electric Utilities — The Adaptation Challenge" is based on 219 responses to the Carbon Disclosure Project's annual request for investor information from the industry, analysed using the Acclimatisation Index Methodology.

Further key findings:

  • While responding companies seem to have incorporated climate change in general into their governance structures, only a few electric utilities (six per cent) refer to adaptation directly as an integrated element of their governance, reporting and lobbying practices.
  • 48 per cent report to manage their climate risks, however adaptation actions are generally isolated and rarely form part of climate risk management strategies.
  • 31 per cent provide evidence of their climate change risks.
  • Compared to identifying climate risks (93 percent), far fewer electric utilities report that they recognise the opportunities of changing climatic conditions (59 percent).
"Risk management and adaptation planning are crucial to business success as climate change is directly affecting the generation, transmission and consumption of electricity," said Graham Butler, Utilities Sector Lead, IBM Global Business Services UK & Ireland, "The smart electricity company of the future needs to have a fully integrated approach to building resilience. Business leaders will need the ability to gather and mine vast amounts of operational information to make accurate, smarter decisions to face climate change successfully and profitably."

Industry challenges – why adapt?
Many scientists report that climate change is underway and the direct effects of increasing global temperatures, such as changes in precipitation and rising sea levels, are becoming more evident. Climatic issues have the potential to impact how all major electric utilities operate, underpinning the world's major cities, transport and water infrastructures, which are essential to the commercial world and the way we live.

Key challenges the electricity industry faces due to environmental changes:
  • Impact of power outages: Outages caused by the weather can result in failure in the supply of power. Interruptions and longer term outages can cause major financial losses for utilities and the customers that depend on the service.
  • Damage to operational performance: Extreme weather events and incremental change impact the bottom line of electric utilities by degrading site conditions, damaging assets, decreasing efficiencies of operations, reducing availability and quality of raw materials and natural resources. These events can also disrupt energy supplies which can then increase energy prices.
  • Increased demand from urbanisation: The trend toward increasing urbanisation is expected to be accelerated as people move from rural areas. Electricity companies will face major challenges in providing new generation capacity and supply reliability within urban areas to meet the increased demands from domestic customers.
  • Stress on water resources: Changes to the weather and an increasing population is placing global fresh water resources under increasing stress. Less water, declining water quality, and growing water demand are creating immense challenges to the electricity sector which is a major user of water. Delivering and treating clean drinking water, combined with providing safe sewerage and waste water treatment systems to an increasing global urban population will create significant increases in the demand for electricity. The impacts of climate change will also increase the competition for water resources among the electricity sector and other users for example, agriculture, fisheries, drinking water, industry and natural habitats.

Drivers for change – legislation and costs
As the impacts of climate change become more direct, governments are starting to resort to prescriptive regulation and statutory controls to ensure that electricity companies take appropriate action on climate change adaptation.

Early indications of action by governments are already evident. In the United Kingdom the Climate Change Act 2008 gives the government an adaptation reporting power that requires electricity companies to assess and disclose the impacts climate change might have on their business.

The US Securities and Exchange Commission asks publicly-listed companies, including electric utilities, to disclose climate threats to their bottom lines in annual reporting. Voluntary agreements on climate risk disclosure have also been signed between electric utilities and governments, such as New York City.

The issue of cost is also an important factor. For example, operational costs could increase in response to changes in equipment efficiency under higher temperatures, lower air pressure and modified humidity. Changes in security and quality of water supplies used for cooling will also have significant cost implications for water-intensive thermoelectric generating facilities.

Due to the increasing legislation and cost implications stakeholders that include investors, lenders, insurers, market and financial analysts, governments and regulatory agencies, consumers, local communities and NGOs are already starting to place greater pressure on electricity companies to address climate change risks and opportunities. If plans for expansion are to be achieved, stakeholders and increased investment are crucial to the development of the global electricity industry.

John Firth, Chief Executive Officer and Co-Founder, climate change adaptation specialists Acclimatise said: "The successful electricity companies of the future will be those that act now upon the clear signals that climate change is underway. They will have a fully integrated approach to the challenges of the energy revolution, reducing emissions and adapting to inevitable climatic change."

Guide for electric utilities to start adapting to climate change
Acclimatise and IBM have jointly prepared a set of Prepare-Adapt questions to help electricity companies take informed steps towards building corporate resilience to inevitable climate change.

The first step is to assess the operational impacts across the business - focusing on assets located in areas and products that are sensitive to climate change. The next step is to assess the benefits that can be realised from better managing the response to climate change. This includes judging how well structured the approach is for managing climate change while demonstrating that a climate business resilience plan is realistic and financially viable.

"The Electric Utilities sector is one of the most advanced in its understanding of climate change related impact to its operations, said Paul Dickinson, CEO, Carbon Disclosure Project. "The impact of a carbon price has driven awareness around mitigation. However it is also important that the industry focuses on adapting to climate change and issues including changes in water availability and extreme weather events. These all have an impact on the sector and those companies which plan ahead, will be the best positioned."

For a full copy of the report visit www.ibm.com/uk/green/cdp2009/.