Climate change is one of the most pressing issues of our generation and one that will have massive effects on the power sector. Power companies face two key challenges: firstly, to substantially reduce their greenhouse gas (GHG) emissions (referred to as climate change mitigation) and secondly, to shore up the resilience of their assets and operations to the impacts of climate change (referred to as climate change adaptation). The focus of this article is this second challenge – exploring the impact of weather and climate events on the power sector and providing a suggestion of priority actions companies should consider in order to manage their climate risk exposure and increase the resilience of their business. Due to the fact that the vast majority of power investment decisions have long lead times and long-lasting effects, taking action now to improve resilience makes economic sense, especially in the context of climate change.
Globally, across multiple sectors, the pace of progress on both climate change mitigation1 and adaptation2 is too slow to keep pace with climate impacts. Across the board, relatively low levels of investment in adaptation and resilience building means that globally we remain unprepared for climate impacts. Climate change is expected to affect the entire power sector, including fuel mining or production, fuel transportation to power plants, electricity generation, high voltage transmission through grid networks and low voltage distribution to consumers. Patterns of energy load growth and end-use demand by consumers will also be altered by climate change.
It is important to highlight upfront that climate change does not necessarily create ‘new’ risks or opportunities for power companies. The sector is very experienced and well-equipped to identify and manage risks and climate-related risks are likely to have been on companies’ radars for a long-time, particularly from an operational and business continuity perspective. Climate change acts to change existing risk profiles, by altering the frequency of occurrence, severity of consequence and/or spatial distribution.
Effective climate risk management is also about identifying opportunities. There is a clear need for companies to be innovative in their response to climate change, in order to optimise performance and operational efficiencies, support better decision making, gain market share, improve brand equity and build positive and collaborative relationships with others. Companies that successfully increase the resilience of their operations and supply chain are likely to position themselves as a supplier of choice and gain competitive advantage, fulfilling commitments to security of supply, competitive pricing and product quality. There are also clear opportunities for companies to build strong stakeholder relationships by collaborating with and supporting others (e.g. customers, suppliers, third party infrastructure operators, governments, peers, local communities and ecosystems as well as society more broadly) to collectively adapt to the impacts of climate change.
Across the world, more frequent and extreme weather and climate events are being experienced, along with gradual shifts in other climate-related factors (rainfall patterns, sea levels, sea ice, glacial retreat). Regardless of the success and rate at which global greenhouse gas (GHG) emissions are controlled, some man-made climate change is locked into the earth’s climate system over coming decades and centuries. If global GHG emissions continue to increase at the current rate, global warming is likely to reach 1.5°C by around 2040 (Figure 1) and up to 4°C by the end of the century3. However, this warming won’t be globally uniform; many regions of the world and seasons of the year will experience significantly higher rates of warming than the global average. Without action, climate change has the potential to cause notable changes to our world. Keeping temperature rise within a threshold of 1.5°C above pre-industrial levels will be safer than even a 2°C threshold4; risks from droughts and heavy precipitation events, for instance, are projected to be higher at a 2°C threshold.
The power sector is particularly exposed to the physical impacts of climate change due to a number of inherent, core characteristics, including:
In recent years, the resilience of power infrastructure has been tested by extreme weather. Between 2000 and 2017, over half (55%) of all recorded power outage events in the US were caused by natural shocks (e.g. storms, flooding, heavy snow, and droughts), compared to non-natural causes6. Furthermore, outages due to natural shocks are observed to last significantly longer than those due to non-natural shocks, for example, more than 4.5 times in Europe7. Flooding in particular can have long lasting consequences for infrastructure networks and cause widespread disruption. Although there is uncertainty about the exact changes in future extreme weather events, advances in attribution science are increasing our ability to link such events to climate change. In a synthesis of numerous (122) studies of extreme heat from around the world, 92% found that climate change made the event or trend more likely or more severe8.
The “Texas freeze” in February 2021 is a good example to highlight the power sector’s sensitivity to unexpected, extreme weather events. The blast of Arctic air that engulfed much of central USA, bringing freezing conditions and record low temperatures to many states, resulted in many grid operators being hit by power outages and struggling to provide electricity to millions of residents9. Historical evidence suggests that cold snaps such as the one experienced in February 2021 have been fairly common in Texas’ history10, highlighting the need for infrastructure design to robustly consider historical information and how such events may change in the face of future climate change. The key to successful climate change adaptation is identifying and implementing actions that perform well over a wide range of conditions experienced now and projected in the future.
A word of caution however; the generally well-documented nature of extreme events has generated greater interest in planning for more severe and frequent climatic events. In contrast, the ‘creeping’ average changes in incremental climate conditions are much harder to recognise and are more likely to be overlooked. For instance, rising temperatures can have cumulative impacts, as small efficiency losses affect a broad range of equipment such as pumps and compressors. It is recommended that companies seek to identify the risks associated with both incremental changes and extreme events.
There are increasing requirements placed on corporates to comply with existing and new disclosure requirements, regulations and duties, and bring broader sustainability and societal benefits to the areas in which they operate.
Climate and environmental risk management initiatives in the corporate and financial services sector are rapidly growing in number. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD)11 has proved to be a landmark initiative, leading to a clear step-change in the need for corporates to act on climate change. The TCFD, set up in 2015, has published a framework for companies to voluntarily report climate-related risks and opportunities, for the benefit of investors and financial decision-making; close to 1,500 companies have shown support for the voluntary disclosures. Regulators are also following suite, through frameworks such as Network for Greening the Financial System (NGFS)12, whose members are central banks and supervisors globally and, for instance, the Australian Securities and Investment Commission (ASIC). The NFGS scenarios are increasingly being used by central banks and other financial institutions in their own climate stress tests.
Disclosure of climate risks is increasingly moving towards mandatory reporting and companies will be expected to understand and manage their climate risk exposure in increasingly sophisticated ways. The momentum behind climate risk reporting continues to grow. Driven by central banks and regulators, investors, insurers and banks are expected to facilitate the transition to a low-carbon, climate resilient economy by moving capital; this in turn is increasing pressure on corporates to understand, manage and disclose their climate risk exposures.
A number of influential sustainability/climate standard-setters are emerging, including the Global Reporting Initiative (GRI)13 and Sustainability Accounting Standards Board (SASB)14, which are complementary and mutually reinforcing of the TCFD recommendations. In April 2021, SASB issued an updated Climate Risk Technical Bulletin15, which serves as a practical tool for companies to use when implementing the TCFD recommendations, enabling investor-focused disclosure of climate-related risks and opportunities. We are observing an increasing trend for climate risk reporting to become mandatory in many key jurisdictions, including the UK, USA, Canada, Australia and Europe.
There are also greater expectations and heightened levels of scrutiny from other stakeholders on corporate’s progress to address climate risks. Around the world, national governments continue to introduce climate-related targets and legislation, insurers have stated that the terms and conditions of insurance contracts will change in response to a changing climate and many non-governmental organisations are advocates for community climate change resilience. A high level of citizen interest is also increasing pressure on corporations to take action on climate change, which is reflected in the retail investor market and through shareholder pressure.
Given the context outlined above, planning now for the impacts of extreme weather and a changing climate makes good business sense – both to minimise the risks and capitalise on the opportunities. Here are a set of priority actions we’d recommend to increase the climate resilience of your business.
At a practical level, building climate resilience is about integrating changing climate considerations within existing risk management and planning procedures rather than “reinventing the wheel”. Across the entire project life cycle, climate risk considerations need to be mainstreamed into existing activities. From planning to operation and maintenance to decommissioning, there are multiple opportunities for climate risk considerations to be integrated into studies, plans, strategies and governance processes. This approach is consistent with the types of adaptation action currently being taken by companies in multiple sectors. A 2018 study, which analysed disclosures from more than 1,600 global companies, found that among ‘soft’ risk management strategiesii, planningiii and knowledge generation and information flowsiv were the most common themes, representing 25% and 19% respectively of the strategies disclosed16.
Identifying critical climate-related thresholds is a key early step in physical climate risk assessments. Critical thresholds represent the boundaries between ‘tolerable’ and ‘intolerable’ levels of risk. A critical threshold may, for example, be the height of a dam spillway, a maximum safe working temperature for personnel, or the volume/frequency of local communities’ complaints. Figure 2 to the left demonstrates that a critical threshold may be exceeded more frequently in the future, as the climate changes. In a stationary climate, the threshold may be designed to tolerate infrequent breaches and their consequences; however in a future climate, the threshold may be crossed more often and with greater intensity, leading to intolerable levels of risk. To ensure continued successful operation in the future, adaptation would be required (yellow area) to increase the ‘coping range’ (e.g. by raising the height of the dam spillway). It is recommended that companies review asset plans and operations and identify key thresholds for climate-sensitive activities/plans. These can then be “stress tested” against a range of future scenarios, using the most up-to-date and best available climate projections, as discussed further below.
Scenarios have long been used by planners and decision makers, particularly in the power sector, to analyse situations in which outcomes are uncertain. The purpose of using scenarios is not to predict the future, but to explore both the scientific and real-world implications of different plausible futures. Scenario analysis is an approach advocated by the TCFD as a tool to address challenges and acquire key information18. Scenarios are understood to provide a narrative, either qualitative or quantitative, which “describes a path of development leading to a particular outcome”19. Power companies should explore a range of potential climate futures, representing different global climate change mitigation ambitions. Generally, it is recommended that companies utilise a low and high emissions scenario, such as the 2°C and 4°C scenariosv, which corresponds to Representative Concentration Pathway (RCP) 2.6 and 8.5, respectively (the latter being the current trajectory based on present-day emissions).
Current weather and climate data, and future climate information (termed ‘climate projections’) are an essential input into climate-related risk assessments. Understanding current climate variability and future climate scenarios allows exploration of how climate change may impact assets, operations, local communities, local environments and associated performance criteria. Future climate scenarios should be used to ‘test’ against critical performance thresholds (as described above).
Risk management (adaptation) options can cut across all areas of the business and cover multiple dimensions. The typology of adaptation options presented in Table 2 may be useful framing to ensure that the full suite of available options are identified. Some measures will be high-cost and complex (e.g. new infrastructure, or actions involving multiple stakeholders); others will be low-cost and easier to implement (e.g. operational changes, capacity building and training). Risk management (adaptation) options should be identified that both provide a benefit in the current climate as well as resilience to the range of potential future climates.
Taking early action to improve climate resilience often makes economic sense, particularly considering that most infrastructure assets are long-lived and costly to retrofit once they are built. Infrastructure planning and design should therefore account for the projected changes and uncertainties in the future climate over the rest of the century and beyond for the longest-lived assets. The ideal approach is for infrastructure to be built from the outset in light of relevant climate projections or designed in such a way to allow it to be upgraded cost-effectively as the climate changes (termed a ‘managed adaptive’ approach).
It is also important that the appraisal of risk management (adaptation) options uses both non-financial and/or financial and economic methods. Physical climate impacts will affect external dependencies, such as communities and ecosystems, and monetising any external costs and benefits provides a means for comparing environmental and socio-economic impacts in decision-making and cost-benefit analysis, alongside financial and internal costs and benefits.
Climate change is a complex issue, with inherent uncertainty about the timing, pace and severity of possible impacts; however, this isn’t a reason for inaction. The recommended approach in the face of uncertainty is to develop robust responses to today’s and tomorrow’s potential climate, not necessarily the ‘optimal’ solution20.
By responding to the risks and opportunities associated with future climate change methodically and comprehensively, companies can ensure that they implement prudent and cost-effective actions that both build resilience and deliver strong financial returns. The most innovative and proactive companies will now doubt reap the rewards: by ensuring business continuity, making prudent investments, limiting future liabilities and safeguarding the sustainability of local communities and ecosystems.
Anna Haworth is an Associate Director at the Climate and Resilience Hub, Willis Towers Watson.
i IPCC (2018). Global Warming of 1.5 °C. http://www.ipcc.ch/report/sr15/ ii Soft adaptation approaches include planning and de-risking processes, finance, knowledge generation and information flows, human resources development, and/or supply chain measures, as substantive yet physically intangible responses to climate impacts. iii Including incorporating climate into long-term planning, factoring risk metrics into facility siting and new construction standards. iv Including assessing risk, research and development and ongoing monitoring and surveillance. v Change in global average temperature by 2100 relative to the pre‑industrial era
1 Climate Action Tracker (2021). New momentum reduces emissions gap, but huge gap remains – analysis. https://climateactiontracker.org/press/new-momentum-reduces-emissions-gap-but-huge-gap-remains-analysis/ 2 Schleussner, C.F. et al., (2021). Pathways of climate resilience over the 21st century. Environmental Research Letters, v16, 054058 https://iopscience.iop.org/article/10.1088/1748-9326/abed79/pdf 3 IPCC (2013). Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Stocker, et al., (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, 1535 pp. 4 IPCC (2018). Ibid 5 IPCC (2018). Global Warming of 1.5 °C. http://www.ipcc.ch/report/sr15/ 6 Rentschler, J., Obolensky, M. and Kornejew, M. (2019). Candle in the Wind? Energy System Resilience to Natural Shocks. World Bank Policy Research Working Paper. Washington DC: World Bank https://documents1.worldbank.org/curated/en/951761560795137447/pdf/Candle-in-The-Wind-Energy-System-Resilience-to-Natural-Shocks.pdf
7 Ibid 8 Carbon Brief (2021). Mapped: How climate change affects extreme weather around the world https://www.carbonbrief.org/mapped-how-climate-change-affects-extreme-weather-around-the-world?utm_campaign=Carbon%20Brief%20Weekly%20Briefing&utm_content=20210226&utm_medium=email&utm_source=Revue%20newsletter 9 Carbon Brief (2021). Media reaction: Texas ‘deep freeze’, power blackouts and the role of global warming. https://www.carbonbrief.org/media-reaction-texas-deep-freeze-power-blackouts-and-the-role-of-global-warming 10 Doss-Gollin, J. et al., (2021). How Unprecedented Was the February 2021 Texas Cold Snap? Columbia Climate School. State of the Planet. https://news.climate.columbia.edu/2021/03/16/unprecedented-texas-cold-snap/ 11 TCFD (2017). Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures. https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Report-062817.pdf 12 NGFS (2021). https://www.ngfs.net/en 13 GRI (2021). https://www.globalreporting.org/ 14 SASB (2021). https://www.sasb.org/ 15 SASB (2021). Climate Risk – Technical Bulletin. https://www.sasb.org/knowledge-hub/climate-risk-technical-bulletin/
16 Goldstein, A., Turner, W.R., Gladstone, J., and Hole, D.G. (2018). The private sector’s climate change risk and adaptation blind spots. Nature Climate Change, v9, 16-25. https://www.nature.com/articles/s41558-018-0340-5 17 Willows, R.I. and Connell, R.K. (Eds.). (2003). Climate adaptation: Risk, uncertainty and decision-making. UKCIP Technical Report. UKCIP, Oxford. 18 Acclimatise (2017). Using scenarios in corporate disclosure of physical climate risk: Acclimatise Briefing Note. http://www.acclimatise.uk.com/wp-content/uploads/2017/11/Acclimatise-Briefing_TCFD-Recommendations.pdf 19 TCFD (2017). Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities. https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Technical-Supplement-062917.pdf 20 Wilby, R., and Dessai, S. (2010). Robust adaptation to climate change. Weather 65: 180-185. https://doi.org/10.1002/wea.543
