Global Utilities Decarbonization

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BI Theme Book

Global Utilities Decarbonization

Environmental, Social & GovernanceAugust 2019

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With Climate in the Balance, Utilities Fail to Right CO2 Scales

Utilities worldwide are responding to investor and regulatory concerns over climate change by setting goals to reduce carbon dioxide emissions, but will fall short of the cuts needed to keep warming to 2 degrees Celsius by the end of this century. NiSource and Orsted are among leaders in efforts to eliminate carbon, while EU utilities will achieve the most significant reductions in CO2 intensity by 2030, followed by the U.S. and Japan. China will remain the furthest from targets called for by the International Energy Agency’s Sustainable Development Scenario.

Besides contributions to climate change, utilities are susceptible to the impacts of a warming world, including water scarcity and extreme weather. Despite the strong links between the industry and climate, a lack of comparable disclosure on CO2 persists.

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Topic Takeaways

Global Utilities Decarbonization

Only a couple of U.S. and EU utilities, such as NiSource and Orsted, have emission-reduction targets that match the level required to avoid a 2-degree Celsius temperature rise. This is compounded by low disclosure and failure to adopt targets in Japan and China. Utilities are increasingly susceptible to the physical risks of climate change, including water scarcity and extreme weather.

Utilities' Decarbonization Doesn't Match What the Climate Needs

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• Orsted, NiSource Lead on Decarbonization; Peers Miss IEA Targets

• To Limit Warming to 1.5 Degrees Celsius, Power Must Slash CO2

• Climate Change Enhances Water Risks for Power Generators

• Risks to Utilities' Physical Assets Will Rise With the Seas

• Uneven Data Challenge Carbon Analysis

• NiSource and NextEra to Achieve SDS

• RWE, Uniper, PGE to Remain Major Polluters in 2030

• Kyushu, Kepco Lead Peers on Emissions Cuts

• Nuclear Plants Generate Lowest Emissions

Orsted, NiSource Lead on Decarbonization; Peers Miss IEA Targets

Utilities in the U.S. and EU have set ambitious carbon-reduction targets, but almost all fall short of the International Energy Agency’s (IEA's) Sustainable Development Scenario (SDS). In our view, Orsted and NiSource are the only companies to establish targets that will lead to carbon-intensity reductions in-line with the SDS. Orsted plans to reduce its carbon intensity by 98% from 2006 levels by 2025. NiSource plans to reduce carbon emissions by 90% from 2005 levels by 2030. Other companies, including NextEra, will achieve SDS with minimal goals, based on less carbon-intensive portfolios. Utilities in Japan have aligned with national targets, which are above SDS levels, while Chinese utilities have lagged behind in developing goals.

Target-Based 2030 CO2 Intensities

Source: Bloomberg Intelligence5

To Limit Warming to 1.5 Degrees Celsius, Power Must Slash CO2

According to the Intergovernmental Panel on Climate Change (IPCC), net anthropogenic CO2 emissions must decline by 45% from 2010 levels by 2030 and reach net zero by 2050 to maintain warming below 1.5 degrees Celsius. Given that more than 40% of CO2 emissions derive from power generation, significant reductions will be needed industrywide. Based on current projections, U.S. and EU utilities will be closest to meeting the IEA's global SDS, though both will fail to achieve regional scenarios. Japan trails and China remains the furthest from meaningful CO2 reductions. The IEA's global SDS indicates that emissions from power generation need to decline from 13,587 metric tons (Mt) a year in 2017 to 7,839 Mt in 2030. The reduction must be achieved even as total power generation increases to 31,160 terrawatt hours (TWh) from 25,679.

Regional CO2 Intensities vs. Global IEA Scenarios


Climate Change Enhances Water Risks for Power Generators

Power plants are prone to climate-related water risks, including scarcity and rising temperatures. The threat is highest for nuclear power plants, which need 2,725 liters per megawatt hour (MWh) for cooling vs. 1,890 for coal and 719 for natural gas. The Fourth National Climate Assessment predicts that by 2050, rising water temperatures in the U.S. could curb output at river-cooled power plants by 7-13%. Similar scenarios will plague power generation across regions.

In India, where thermal power accounts for more than 80% of electricity, 40% of these power plants are located in areas of high water stress, according to the World Resources Institute. The institute found that in 2013-16, 14 of the country's 20-largest utilities experienced at least one shutdown due to water shortages, costing $1.6 billion.

Water Intensity for EU Utilities


Risks to Utilities' Physical Assets Will Rise With the Seas

The utilities industry is among the most vulnerable to the increasing severity and frequency of extreme weather events associated with climate change. According to analysis by McKinsey, a group of 10 U.S. utilities with exposure to hurricanes will typically face $1.4 billion in storm costs and lost revenue over a 20-year period. Researchers estimate that this number will increase to $1.7 billion by 2050, suggesting greater risk. In the U.S., a one-meter sea level rise could expose 25 gigawatts of operating or proposed generating capacity to 100-year floods, according to the Fourth National Climate Assessment.

In 2019, PG&E filed for Chapter 11 bankruptcy due to $30 billion in liabilities related to wildfires in 2017 and 2018. It was determined that PG&E's equipment caused the 2018 fire, but warmer, drier weather contributed.

U.S. Power Plants Exposed to 100-Year Storm Surge


Uneven Data Challenge Carbon Analysis

The availability, consistency and comparability of greenhouse gas emissions data continue to improve. Yet challenges remain when analyzing how the global utilities are performing with respect to CO2 emissions. Companies across the industry use different baseline years to determine reduction targets. Further, there are inconsistencies in how CO2 emissions are reported, with some providing direct emissions associated with power generation, and others providing Scope 1 or even total emissions. The availability and granularity of disclosure also vary significantly across regions.

In the U.S., the development of the Edison Electric Institute ESG/Sustainability reporting template has improved consistency and comparability of reporting for many member companies.

Utilities' CO2 Emissions Data Across Regions


NiSource and NextEra to Achieve SDS

NiSource and NextEra are likely to be the only utilities that will achieve carbon intensities below the levels called for by the IEA's Sustainable Development Scenario (SDS) by 2030, suggesting reduced risk associated with future limits on greenhouse-gas emissions. NiSource's goal to reduce CO2 emissions by more than 90% by 2030 brings it in-line with the SDS, while NextEra's current intensity requires less-aggressive reductions to maintain levels below the SDS. Xcel, FirstEnergy and AES are among companies with significant reduction targets, but which will fall short of the 2030 SDS intensities.

In February, several of the top U.S. pension funds asked electric utilities to detail their plans for achieving carbon-neutral electricity by 2050, suggesting that those that don't could risk access to capital.

U.S. Utilities Leading on 2030 IEA Scenarios


RWE, Uniper, PGE to Remain Major Polluters in 2030

RWE, Uniper and PGE are likely to remain among the most-polluting utilities in Europe a decade from now, even as they reduce carbon intensity. Germany, Britain, France and Benelux plan to phase out coal, which should help reduce the carbon intensity of their power- and heat-generation assets amid partial switching to gas, biomass and renewables. So will the modernization of older units and replacement of aging thermal generation capacity with more efficient units. The re-launch of Berezovskaya and commissioning of the Datteln 4 coal-fired power plant would limit reductions in carbon intensity for Uniper.

Carbon Intensity: Tonnes of CO2 equivalent per MWh

Source: Bloomberg Intelligence, company filings, 201911

Kyushu, Kepco Lead Peers on Emissions Cuts

Kyushu Electric and Kansai Electric had the lowest greenhouse-gas emissions intensity of their peers during the year ended March 2018, partly due to the beneficial impact of their nuclear plants. Kyushu Electric could achieve the national target of 0.37 tons per MWh in fiscal 2019, in our view, as its proportion of nuclear-generated power rose to 38% of the electricity it sold. The company is likely to source more clean energy such as solar and wind to further cut emissions, as its nuclear units already operate at more than 70% of capacity. Kansai Electric's clean-emissions push centers on restarting its Mihama and Takahama nuclear plants.

Both utilities face the near-term risk of having to pause operations to allow their plants to be retrofitted with anti-terrorism safety equipment.

Japan’s Utilities' CO2 Intensity vs. IEA Scenarios


Nuclear Plants Generate Lowest Emissions

Among listed Chinese electric companies, thermal utilities China ShenhuaEnergy, Huaneng Power and Datang International Power are likely to maintain above-average greenhouse-gas emissions over the long term, as they largely burn coal for fuel. We expect nuclear providers CGN Power and China National Nuclear, as well as hydropower supplier China Yangtze, to have the lowest carbon output through 2030.

Major Chinese Utilities' Emissions


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Utilities CO2 Forecasts By Region

Source: Bloomberg Intelligence

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Contributing Analysts

Research Management

David Dwyer Research Director, Global

Drew Jones Deputy Research Director, Global

Patricia Wilson Content Promotion & Marketing, Global

Lead Analyst

Eric Kane is a senior Environmental, Social and Governance (ESG) analyst for Bloomberg Intelligence. Mr. Kane’s research focuses on identifying and analyzing current and future trends, including climate change, resource scarcity, and data security, and linking performance to financial value. Mr. Kane also specializes in understanding ESG disclosure and how key metrics can be incorporated in traditional company analysis.

Before joining Bloomberg, he was the health care analyst at the Sustainability Accounting Standards Board (SASB) and a senior analyst at Innovest Strategic Value Advisors. He is also an assistant professor at Pratt Institute's Design Management graduate program.

He holds a master’s in public administration from the NYU Wagner Graduate School of Public Service and a degree in political science from Bates College.

Eric KaneSenior ESG AnalystNorth America

Rob BarnettGovernment, Energy, North America

Simon ChanTechnology, APAC

Shaheen ContractorESG, North America

Elchin MammadovUtilities, EMEA

Sam FazeliResearch Director, EMEA

Gina Martin AdamsChief Equity Strategist, Global

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Global Utilities Decarbonization

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