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



Th...
Acclimatise reference        CDP001/02

This document should be referenced as:
Acclimatise (2009). ‘Building Business Resi...
IBM Viewpoint

IBM believes the electricity industry is                        Energy Agency1. This is due not only       ...
IBM Viewpoint




Scientists inform us that climate          systems means more dynamic control                           ...
Executive Summary

Electricity companies must assess                                   • Reductions in agricultural and   ...
Contents
             IBM Viewpoint                     ii
             Executive Summary                iv

           1 ...
1 Introduction

In this report we explore the issues                             Those companies focussing their          ...
2 Climate change
  is underway
                                          There is scientific consensus that the           ...
Carbon Disclosure Project Report Global Electric Utilities




Figure 1: Comparison of observed continental- and global-sc...
3 The energy revolution

    It is important that any consideration                                         Challenges    ...
Carbon Disclosure Project Report Global Electric Utilities




Figure 3: Increasing energy demands from emerging economies...
3 The energy revolution




                                            High rate of asset retirement. In                 ...
Carbon Disclosure Project Report Global Electric Utilities




Reducing the GHG emissions of                              ...
3 The energy revolution




Figure 6: Water consumption by type of energy generation23                                    ...
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
Carbon Disclosure Project:  Climate Change & Global Electric Utilities
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Carbon Disclosure Project: Climate Change & Global Electric Utilities

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The UK Carbon Disclosure Project takes a look at Global Electric Utilities & Climate Change

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Transcript of "Carbon Disclosure Project: Climate Change & Global Electric Utilities"

  1. 1. Carbon Disclosure Project Report Global Electric Utilities Building business resilience to inevitable climate change The Adaptation Challenge Report prepared by: Report sponsored by:
  2. 2. 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 Hexgreave Hall, Upper Hexgreave, Farnsfield, Nottinghamshire, NG22 8LS T: +44 (0) 1623 884347 E: enquiries @ acclimatise.uk.com W: www.acclimatise.uk.com 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
  3. 3. 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
  4. 4. 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”.
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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.
  9. 9. 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 Temperature anomaly (˚C) Temperature anomaly (˚C) 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 Temperature anomaly (˚C) Year Year 1.0 South America Australia 0.5 Temperature anomaly (˚C) Temperature anomaly (˚C) 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 Temperature anomaly (˚C) Temperature anomaly (˚C) Temperature anomaly (˚C) 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
  10. 10. 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.
  11. 11. Carbon Disclosure Project Report Global Electric Utilities 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
  12. 12. 3 The energy revolution 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.
  13. 13. Carbon Disclosure Project Report Global Electric Utilities 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.
  14. 14. 3 The energy revolution 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.

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