Electric utilities are a key contributor to greenhouse gas emissions, and have been thinking about climate change and climate policy longer than any other sector. This presentation to the Executive Committee of an electric utility in North America walks through the key issues and questions in developing an effective risk management strategy.

1. This presentation was delivered to the Executive
Committee of an electric utility. Its purpose is to
explore climate change risk in the absence of clear
climate change policy. Observers commonly
conclude that without policy there’s little risk for
utilities, but that is a particularly risky assumption
for utility executives to make.

2. 2
Source: 2011 World Economic Forum Global Risks Survey
Climate change has been
repeatedly identified by the
World Economic Forum as a
leading risk facing business.

3. 3
This graphic flags the
interactive nature of key
elements of climate change
risk, pointing out the key
question of what will come
first, the chicken(s) or the
egg(s).

4. 4
To set the science stage - the temperature of each
planet in the solar system is determined by the same
small set of well understood variables.

5. 5
We know (no debate) that naturally occurring
greenhouse gases (GHGs) keep the Earth 59o F
warmer than it would otherwise be. Without GHGs,
the Earth would be a frozen planet.

6. 6
Nitrous oxide
Water vapor
Carbon dioxide
Methane
Sulfur hexafluoride
We know how GHGs warm the earth’s
atmosphere. Note that water vapor is
a powerful greenhouse gas, but the
amount of water vapor in the
atmosphere depends on temperature.
There is no way to intentionally
influence water vapor levels, which is
why policy targets the others.

7. 7
278 ppm = = 59o F
The term “greenhouse effect” suggests an almost solid wall of GHGs. In reality, the pre-
industrial CO2 concentration of 278 parts per million is the equivalent of just one of the red
dots shown here against the total surface area of the slide. In other words, one dot of CO2
per “slide area” of atmosphere is responsible (a bit simplistically) for the planet being 59o F
warmer than it otherwise would be. That’s known, and suggests a planet quite sensitive to
GHGs. The uncertainties surrounding climate change involve what will happen to
temperatures as CO2 becomes two, three, or four dots on the slide. It’s by no means a
linear relationship, and it’s a complicated question to answer in detail. But the common
sense answer is obvious, and the basic physics have been understood for more than 100
years (see next slide).
= ?o F+

8. 8

9. 9
A Changing Atmosphere
150 100 50 0
Thousands of Years ago
Predicted Level
of Business-as-
Usual Scenario
in 2100
Current Level
Pre-Industrial
Level
Current
Temperature
There is no controversy regarding the rate of
accumulation of CO2 in the atmosphere, or
the nearly vertical nature of today’s CO2
growth rate when put into the context of the
ice core record of the last 200,000 years.

10. 10
2
Required Reductions:
20 GT From Today’s Levels?
50 GT From Business as
Usual Emssions in 2050?
What would it mean to try and
stabilize the atmospheric
concentration of CO2? It would mean
shifting global emissions from the
trajectory on the left to the trajectory
below (ultimately a >90% reduction).
That’s not going to happen soon, and
even if it did the concentration of CO2
would stabilize at about 450 ppm (up
from 400 ppm today).

11. 11
One Gigaton (a GT or 1 billion tons) is equivalent to more than 15x all
the CO2 avoided each year by all the world’s wind farms. A GT is a big
number, and today’s CO2 emissions exceed 30 GTs.

12. 12
A Tragedy of the Commons occurs when multiple parties
have an incentive to over-use a resource. Such tragedies
are common – fisheries are a great example under “catch
it or lose it” thinking. Climate change is another, where
contributors bear only a fraction of the costs of their
actions. Allocating common property rights is one solution,
and underlies the notion of fishing quotas and emissions
permits.

13. 13
Climate change is far more than a Tragedy of
the Commons. Several characteristics of the
climate change issue and discussion are
reflected in this Wordle chart.

14. 14

15. 15
Number of Days Over 100ºF
Recent Past
Higher Emissions Scenario, 2080-2099
Lower Emissions Scenario, 2080-2099
One measure of climate change is how much
more common will hot days become in the U.S.

16. 16
Many scientists
say climate
change is
progressing more
rapidly than
predicted just 15
years ago.
Source: 2011. Degrees of Risk – Defining a Risk Management
Framework for Climate Security

17. 17
Source: 2011. Degrees of Risk – Defining a Risk Management Framework for Climate Security
We tend to
assume
uncertainty cuts
both ways. But the
distribution of risk
is actually much
more skewed, as
also suggested by
the acceleration of
key “climate
change indicators.”

18. 18
Source: 2011. Degrees of Risk – Defining a Risk Management Framework for Climate Security
The best case “today” is 2-3o C of
global temperature change by 2100,
but “business as usual” is much
higher (5-8o C).

19. 19
“Black swan” is a metaphor for big but generally unanticipated
outcomes. When it comes to climate change, scientists say we
should expect a lot of “black swans.”

20. 20
We’ve seen many environmental black
swans, from the London Fog to burning
rivers and the ozone hole. Many led to
fundamental policy and regulatory change.

21. 21
Last time T was 2ºC
above 1900 levels,
sea levels were 4-6 m
higher than today.
Last time T was 3ºC
above 1900 levels,
sea levels were 20-
30 m higher than
today
Source: IPCC
No one is predicting
that sea levels will
change so dramatically
in the near term, but
they could rise much
faster than generally
anticipated.The worst
case is currently put at
about 16 feet by 2100.
70% chance already committed to 2ºC.
Committed to 3ºC by ???

22. 22
Earth’s climate has fluctuated over the last 500,000 years, with generally through natural
“forcing” variables like solar intensity that act over thousands of years. Today, the “forcing” by
GHGs is more than an order of magnitude greater than anything seen before. What will happen?

23. 23
Our societies, agricultural systems, and other support systems
have evolved within an extremely narrow global temperature
range for 10,000 years. By moving outside that band, black
swan events become more likely and more damaging.

24. 24
Climate Impacts
Climate Policy
Permanent Change
One way to think about the accumulation of GHGs in the atmosphere is as “climate stress.” As
in earthquakes, this stress must eventually be released, in this case through climate change.
But the impacts will be permanent. Will climatequakes cause major shifts in climate policy?

25. 25
There are many ways that
climate change and climate
policy can materially affect
electric utilities, although their
regulated status adds a layer of
complication to assessing risk.

26. 26
Climate Risk Impacts on Utility Welfare (Stock price or other measure)
As discussed earlier, societal climate risk is best visualized
as a risk distribution. The same idea applies to climate risk
at the corporate level, but different utilities will face quite
different risk (and opportunity) distributions (based on
generation mix and many other variables).
__
+

27. 27
NPV of Strategy
Climate Change Near Term?
Policy Scenario
Carbon Price?
Climate Change (Future)
$$
$$
$$
$$
$$
Decision Tree analysis is
a useful way to analyze
complex risk patterns.
What’s notable about
climate risk is how few of
the potential branches
we tend to focus on (the
purple cells here –
shown in next slide).

28. 28
Most corporate climate strategies are premised on a very small number of the
potential branches shown in the larger decision tree. The boxes shown here are the
purple boxes from the prior slide. Most corporate climate strategies assume little
change between the past and the future, both in terms of climate change itself, and
climate policy. Assuming that the future will mirror the past is a common psychological
trait, and a common shortcoming of risk management strategies.

29. 29
• No/Little Climate Change
• No/Modest GHG Targets
• Low/Modest Carbon Prices
What If We Considered
Scenarios in which
Climate Change is
Actually Tackled?

30. 30
Electric utility outcomes that would be interpreted as
Black Swans include more severe droughts, cooling
water shortages, disruptive technology
breakthroughs, aggressive climate policy, civil
disobedience aimed at fossil fuel generation, and
surprise litigation outcomes.

31. 31
Source: 2011. Degrees of Risk – Defining a Risk Management Framework for Climate Security
Key climate change “tipping
points” scientists have
identified are shown here. But
many of them are not
reflected in climate modeling
forecasts because they are
not well enough understood
to be reliably modeled.

32. 32
The politics of climate change, so intractable
today, could turn on a dime under Black Swan
outcomes. What’s considered politically
realistic tomorrow could be radically different
from what is considered politically realistic
today. That’s what scenario planning is for.

33. 33
Physical Impacts?
• Direct temperature impacts
• Direct ocean acidification impacts
• Feedback mechanisms (albedo, clathrates)
• Supply chain disruptions
• Complex interactions (food, refugees, security)
Brand/Stakeholder Impacts?
• CSR and sustainability expectations
• Corporate and product footprints
• Investor perceptions
• Greenwashing risk
• Market share and competitiveness
Policies and Measures Impacts?
• Carbon pricing (taxes, cap and trade)
• Emissions reduction mandates
• Efficiency and renewable energy mandates
• Technology incentives/mandates
• Land use management incentives/mandates
• Indirect supply chain impacts
Three categories of climate risk are briefly profiled here. Any one of
the many variables listed can lead to material corporate impacts.

34. 34
 How May Climate Change and Climate Change Policy Evolve?
 Will I Win Or Lose In A Carbon-Constrained World?
 When and How Will I Be Regulated?
 How Much Will Compliance Cost?
 Do I Face Brand-Related Risk or Opportunity?
 Can A Carbon Management Strategy Materially Reduce Risks?
 Which Risk Management Measures are Likely to be Most Robust?
 Can I Position Myself At Reasonable Cost (Relative To Benefit)?
 What Are The Risks If I Act Too Early Or Too Late?
 How Much Risk Is There In Making Long-term Capital Deployment Decisions?
 Can I Create Competitive Advantage For Myself, And How?
 What Are the Uncertainties I Need to be Aware of?
These are some of the
key questions we have
found companies face
when considering how
to manage climate
risks, and develop
change mitigation and
adaptation strategies.
There is no one-size
fits all assessment of
risk or opportunity.
And no one-size fits all
answer to “what to
do?”

35. 35
Framing the Risk Management Environment
Climate Change
ERMBusiness Continuity RM
Project RM
RM
One way to frame climate
change risk is to relate it to
other risk management (RM)
paradigms, including
Enterprise RM, Project RM,
and Business Continuity RM.
Climate risk is best thought of
a “cloud risk.”

36. 36
Customized Climate Risk Formula (0-10 Continuum)
0 10
Various
responses, from
offsets to R&D
Ramp-Up of
Technology
Plays
Technology
interventions,
from efficiency
to CO2 injection
Planning
and strategy
development
Operational
adjustments,
including
contracting
changes
Risk-Based Milestones (Triggers) and Pre-Approved Responses
Tracking Climate Risk Signposts (Policy, Science, Opinion, Technology)
Risk management outputs above are linked to changes in the
risk environment. Different companies will develop very different
positioning strategies based on their own risk environment.

37. 37
Can We Mitigate Tail Risk?
Will This Reduce Material Climate Change and Policy Impacts in Near Term?
Will This Deliver Near-Term Shareholder Value?
Impact on Corporate Welfare (Stock price or other measure)
Risk cannot be eliminated, but the distribution can be
changed, reducing bad tail risk, and potentially creating new
opportunities on the other side of the risk distribution. Too
much is unknown about the future to be positive how a
specific risk management strategy will play out, but risk
management makes a lot of sense.

38. 38
Impact on Corporate Welfare (Stock price or other measure)
Generation Mix Positioning Strategy
SmartgridAdvanced Efficiency
Advanced Efficiency
Smartgrid
Electric Transport
Climate Branding
Pro-active Adaptation
Technology Tracking
Stakeholder Education
Stakeholder Communications
Low Carbon Teaming
Carbon Pricing
Swanwatching
The most productive climate risk management will often focus on the
“tails” of the risk distribution. It is usually much easier to cut off the most
dangerous part of the “tail” than to fundamentally shift (or eliminate) risk.
Shown here are a variety of measures that can shorten tail risk.
Some risk
management
measures can
shift the risk
distribution to
the right.

39. We hope you’ve found
this presentation
useful and interesting.
We welcome your
questions and
suggestions.
To further explore risk
and climate risk please
visit our website and
blogs.