Carbon Disclosure Project: Climate Change & Global Electric Utilities

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 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

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 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

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.

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

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.

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.

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.

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.

Carbon Disclosure Project Report Global Electric Utilities 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

4 What are the impacts for the electricity sector? 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.

Carbon Disclosure Project Report Global Electric Utilities 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

4 What are the impacts for the electricity sector? 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.

Carbon Disclosure Project Report Global Electric Utilities 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 Customer expectations of secure energy provision will 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. In the UK, the Climate Change Act 2008 gives 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 In the UK, the Climate Change Act 2008 gives 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. Customer expectations of secure energy provision will 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 further reading Acclimatise (2009). Understanding the Garnaut, R. (2008). The Garnaut Climate Morrison, J., Morikawa, M., Murphy, M. investment implications of adapting to Change Review. Cambridge University and Schulte, P. (2009). Water Scarcity climate change – UK energy generation. Press: Cambridge. Hadley Centre (2005). and Climate Change: Growing Risks for 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 Managing the Unavoidable: Understanding thermoelectric cooling systems. Oak Ridge AEA Technology (2006) ‘Regulation of the investment implications of adapting to National Laboratory: Oak Ridge, Tennessee. Energy from Solid Biomass Plants’. A report climate change. produced for the Environment Agency. Stern, N. (2007). The Economics of Climate Didcot, UK Hewer, F. (2006) A Scoping Study on Change: The Stern Review. Cambridge the Impacts of Climate Change on University Press: Cambridge, 692 p. Barthelmie, R.J. Kjellstrom, E. Mann, the UK Energy Industry. Met Office: J. Pryor, S.C. (2005) ‘Potential Climate United Kingdom. Stott, P.A., Stone, D.A., and Allen, M.R. 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, Research Abstracts Vol. 7. European Climate Change Impacts on Industry, pp. 610-614. Geosciences Union Energy and Transport in India. Three Regions Climate Change Group Bray, C., Colley, M., and Connell, R. (2007). Institutional Investors Group on Climate (2005). Adapting to Climate Change: A Credit Risk Impacts of a Changing Climate. Change (2007). Disclosure Framework for Checklist for Development. Greater London Barclays Environmental Risk Management Electric Utilities. London Authority: London. and Acclimatise: London, UK. IPCC, 2007: Climate Change 2007: Impacts, Totty, M. (2009, February) ‘Smart roads. Bloom, A., Kotroni, V., Lagouvardos, k (2008) Adaptation and Vulnerability. Contribution of Smart Bridges. Smart Grids’. The Wall ‘Climate change impact of wind energy Working Group II to the Fourth Assessment Street Journal: New York. availability in the Eastern Mediterranean Report of the intergovernmental Panel on using the regional climate model PRECIS’ Climate Change. M.L. Parry, O.F. Canziani, UKCIP (2005). A Changing Climate for Natural Hazards and Earth System Science: J.P. 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The forecast predicts and Use in the United States: Synthesis legal liabilities. Practice and Law. Estates Lloyd’s (2006). Climate Change: Adapt or and Assessment Product 4.5. U.S. Gazette: London. Bust. 360 Risk Project. London. Climate change Science Program and the Subcommittee on Global Change Research. Dowden, M. and Marks, A.C. (2005). Come Lloyd’s (2009) Climate change and security: Washington, D.C. rain or shine. Practice and Law. Estates risks and opportunities for business, London Gazette: London. World Business Council for Sustainable McDonald, J. (2008). Leader or follower: Development. (2007). Adaptation: An issue Fidje, A., Martinsen, T., Marstein, E. and Developing the smart grid business case. brief for business. Johannensen, J. C. (2006). Effects of climate IEEE Power & Energy Magazine. November/ change on solar energy. Institute for Energy December 2008. World Business Council for Sustainable Technology. Norway. Development (2008). 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