Power Utilities: Who's Hot?
18 May 2010
Electricity firms are paying rising costs for pollution. This will have a knock-on effect for their investors and clients: investors need to control risks to fund returns from power generators with poor environmental performance and companies need to measure and manage risks from environmental costs passed on by electricity providers and other suppliers.
Environmental issues create risks and opportunities for power firms
Regulators and market drivers are making environmental performance a major business issue for electricity companies. Pollution abatement and cleanup costs are rising as regulators in major economies step up pollution controls. Efficiency is vital to deal with volatile fuel prices and fluctuating demand. Electricity firms are central to delivering a low-carbon economy. Their ability to change the way that energy is generated, distributed and used will drive competitiveness. Electricity suppliers that deliver low-carbon power efficiently will be well positioned. Risks will be greatest for firms most dependent on fossil fuel-based energy sales.
Businesses will switch to suppliers with lower environmental costs
As electricity companies pass on environmental costs in higher energy prices, energy-intensive sectors such as aluminium, industrial gases, cement and iron and steel will be most exposed to rising input costs. Businesses in all sectors will want to manage financial exposure to these costs being passed through their supply chains.
Investors need to understand how firms are positioned
Carbon-intensive utilities covered by cap-and-trade programmes will find it harder to raise money from capital markets and retain market share. The ability of power companies to manage exposure to carbon and other environmental costs will influence their market position. Investors will want to manage risks to fund returns from carbon-intensive electricity firms and investments in other energy-intensive sectors.
Carbon performance will affect competitiveness
Power firms that are less carbon-intensive than sector peers could gain a competitive advantage. If a company's carbon intensity is much lower than its peers, the rise in costs will be lower, and might be easier to pass on to customers. Trucost has ranked 10 companies with the highest and lowest carbon intensities (see Table 1). The analysis is based on direct (Scope 1) emissions relative to revenue (tonnes of CO2e/US$ mn).
EDF Energies Nouvelles S.A. has the lowest carbon intensity of all 79 power generators analysed, while China Resources Power Holdings Co. Ltd has the highest. Both are among seven companies whose carbon performance improved between 2007 and 2008 - their carbon intensities fell year-on-year.
Many of the most carbon-intensive power firms operate in China, where coal dominates the country's energy mix. China's Government aims to cut carbon dioxide emissions per unit of GDP by 40%-45% from 2005 levels by 2020, using measures including economic policies to drive mitigation. As companies in OECD countries locate plants in China or outsource manufacturing to suppliers in the region, the high-emitting electricity providers could present a major carbon "hotspot" in their supply chains.
Trucost measured the environmental performance of over 107 electricity firms worldwide, examining their emissions of greenhouse gases, sulphur dioxide (SO2) and nitrogen oxides (NOX), nuclear waste, and process water. Trucost also analysed exposure to environmental costs and ranked power generators on carbon intensity.
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