Climate Risk

Climate change is pushing power, gas and water companies to the frontlines of an intensifying battle against natural disasters that is set to increasingly hit the profits of businesses around the world.

Utilities face the highest combined physical risk from climate hazards like water stress, storms and wildfires among different industries, according to an analysis of data from Trucost. The analysis, which ranks threats to the physical operations of around 15,000 public companies, shows utilities' vulnerability to physical climate risks generally tops other capital-intensive sectors like industrial manufacturing, oil and gas and real estate.

Extreme weather events are likely to become even more frequent and intense as a result of rising temperatures, and experts argue that many businesses are not fully prepared to cope with the physical and financial impacts.

"Physical climate risk really is everywhere," said Christopher Schwalm, risk program director and senior scientist at the Woodwell Climate Research Center, a U.S.-based think tank that works with companies on pinpointing their climate risk. "That hasn't quite achieved the level of resonance it ought to have in the broader corporate world."

Among the seven different physical risk factors assessed by Trucost, water stress ranks by far the highest for utilities. Aside from water utilities and hydropower producers that will see their primary resource stretched by increasing droughts, thermal power generators like coal and nuclear plants also rely on vast amounts of water to cool their systems.

Grid Instability & Resiliency

The California Independent System Operator remains under a flex alert and restricted maintenance operations notice because of expected high loads and temperatures across the footprint with gas supply concerns in Southern California.

The alert and notice started Sept. 8 with the flex alert extended until 9 pm Sept. 9 and the restricted maintenance operations notice extended until 9 pm Sept. 10.

Peakload reached 43.591 GW Sept. 8, the highest in a year, according to CAISO data.

"The ISO is predicting an increase in electricity demand, primarily from air conditioning use," according to a Sept. 8 ISO statement. "The increase can stretch electricity supplies thin and cause strain on our power grid, especially in the late afternoon and evening, when solar production goes offline and wind generation is uncertain, however, temperatures and electricity demand remain high."

There is more natural gas being used than scheduled. SoCal Gas is showing estimated receipts of about 2.4 Bcf/d, with sendout above 2.8 Bcf/d, so storage draw is more than 400 MMcf/d, and it will probably need to pull gas from Aliso Canyon, which usually implies very high prices, said Morris Greenberg, senior manager of North American Power for S&P Global Platts Analytics.

Clean Energy

U.K. Prime Minister Boris Johnson has said 100% of the country's electricity could come from renewables by 2035.

The goal — outlined during the Conservative Party conference on Oct. 4 — builds on the government's target to cut CO2 emissions by 78% by 2035 compared with 1990 levels and comes amid a period of stress in the U.K. energy system caused by rising international gas prices.

S&P Global Platts reporters assess the scale and impact of decarbonizing U.K. power by 2035:

Energy flows

The contribution made by renewables to U.K. power generation has more than doubled since 2014.

Renewables (mainly wind, solar, biomass, hydro) accounted for 43% of the U.K.'s 312 TWh of domestic power generation in 2020.

S&P Global Platts Analytics forecasts renewables plus nuclear will account for 56% of U.K. power demand in 2026, with wind output set to double from current levels to 131 TWh/year.

The U.K.'s single-largest source of power generation is natural gas, with demand rising in periods of low wind -- as in September, when power prices averaged over GBP177/MWh ($241/MWh) as a result.

Gas-fired generation is forecast to account for around 33% of demand in 2026, up from 31% in 2022 under Platts Analytics' latest five-year-forecast published in August.

U.K. gas-for-power use amounted to 17 Bcm in 2020. Norway supplied a third of total U.K. gas supply in 2020 and more than half of total imports. Qatar was the dominant LNG supplier to the U.K. in 2020, representing 48% of total LNG deliveries, followed by the U.S. (27%) and Russia (12%).

All the U.K.'s existing nuclear reactors will have closed by 2028 bar Sizewell B, with only the in-construction Hinkley Point C set to enter operation in the meantime.

Nuclear accounted for 16% of domestic U.K. generation in 2020, down from 21% in 2016.

A funding mechanism for EDF's two-unit Sizewell C project has yet to be confirmed, leaving its 3.2 GW Hinkley Point C as the U.K.'s only nuclear project in construction.

Infrastructure

U.K. offshore wind costs have dropped dramatically in recent years, enabling the government to ramp up target capacities, extend concessions to far offshore sites, and contemplate floating wind technologies.

The U.K. targets 40 GW of offshore wind capacity by 2030, up from 11 GW today. In December, a fourth contract for differences auction is forecast to award around 12 GW of new capacity.

The U.K. also has around 12 GW of onshore wind and 14 GW of solar. Both are re-admitted to the next CFD auction, but must fight over modest funding.

De-carbonized thermal balancing plant, storage and demand response are seen as essential components of a renewable energy power system.

Biomass generation, defined as carbon neutral, averaged 2.3 GW in the year to end-September, the vast majority of this at Drax’s Selby site in North Yorkshire.

Around 3.6 TWh/year of biogas produced from anaerobic digestion is injected into the national gas grid in the U.K. This could top 50 TWh/year by the early 2030s, equal to 6% of the UK’s current gas consumption.

The U.K. aims for 5 GW of low- or zero-carbon hydrogen production by 2030, linked in part to a goal to capture 10 million mt/year of CO2 by then and store it under the North Sea.

Natural Gas in the Energy Transition

Four aeroderivative natural gas turbine generators are now in operation in California following a July emergency proclamation to increase summer capacity, regulatory order for emergency generators and a tariff waiver to increase interconnection capacity.

The four units, totaling 120 MW and located next to existing power plants, were installed at two sites in Northern California following an emergency proclamation by Governor Gavin Newsom that directed the Department of Water Resources to work with the California Energy Commission to develop additional energy capacity to safeguard the state's grid from the impacts of climate-induced drought, wildfires and extreme heat waves. California faces an energy supply shortfall of up to 3,500 MW in 2021 and roughly 5,000 MW in 2022.

"DWR's expertise as the fourth largest power producer in California allowed us to work quickly with the CEC, the California Independent System Operator and our regional partners in Yuba City and Roseville to bring these units online," DWR Deputy Director for the State Water Project Ted Craddock said in a Sept. 29 statement. "DWR is proud to play a role in safeguarding the state's energy grid and doing everything possible to avoid power shortages and outages as a result of climate-induced conditions."

The periods of stress have been in early evening hours after solar generation ramps down yet power demand remains high, CAISO said in its 2021 Summer Loads and Resources Assessment released May 12. Low hydro conditions increase grid vulnerability, particularly in late summer.

U.S. Markets

Seven months after a deadly Arctic blast nearly took down Texas' power grid, state and federal regulators are still trying to create rules to prevent another such disaster as winter approaches.

Federal officials said recently it will take years to update national standards for power plants to protect against severe weather. Texas state regulators have not finalized their beefed-up weatherization rules, mandated by the Legislature in the spring, leaving plant owners in limbo. Grid officials have said a study that will help regulators create the new rules will not be released until the end of January.

New standards for weatherizing natural gas facilities such as pipelines and wellheads, many of which failed to deliver fuel to power plants during the February blast, will not be finalized until two years after the storm triggered blackouts that led to hundreds of deaths in Texas. The timeline angered state lawmakers, who on Sept. 28 grilled Wei Wang, executive director of the Texas Railroad Commission, which is responsible for adopting the rules.

Lawmakers accused the Railroad Commission of creating a loophole for natural gas facility owners, who under a current proposal can submit a $150 application to opt out of being designated as critical infrastructure during weather emergencies.

"I recognize the urgency" of preparing the natural gas supply chain for the upcoming winter, Wang said at the hearing of the Senate Committee on Business and Commerce.

"I don't think you do!" replied Republican Sen. Donna Campbell, who threatened to fold the Railroad Commission into the Texas Public Utility Commission if the former does not hold the gas industry accountable.

PUC Chairman Peter Lake insisted the agency is moving forward with "substantial and rapid rulemaking."

"The bottom line is, we will be going into this winter with a more resilient grid than we had last winter," Lake told lawmakers.



Lone Star deadline looms

Lake said minimum requirements called phase one standards will be in place in November.

"If you're a generator and you're [tasked with] paying all this money for upgrades, and you don't know what all those upgrades will be ... that's kind of hard to implement," Caitlin Smith, an energy policy adviser who used to work for the Electric Reliability Council of Texas Inc.'s independent market monitor, said in an interview.

The PUC is reviewing public comments on the phase one rule proposal. The rules, if approved, would require power plant owners to fix "known, acute issues" that arose last winter. The PUC is also working on a rule that would raise the maximum fine for weatherization violations to $1 million per day.

Global Regulation

China will need to fundamentally revamp its power generation and distribution system by 2060, as part of its roadmap to decarbonize the power sector and accommodate a fuel mix that largely replaces fossil fuels with cleaner energy sources, according to experts at a recent conference in Nanjing.

Further Reading