Electric Power Companies Face Financial Risks from Climate Change

World's largest power companies could face costs equivalent to over 10 per cent of 2002 earnings if they fail to address global warming and switch to clean energy

Published: 14-Nov-2003

London, UK - The world's largest power companies could face costs equivalent to over 10 per cent of 2002 earnings if they fail to address global warming and switch to clean energy, says a new WWF report launched at the London Stock Exchange today.

The WWF report,Power Switch: Impacts of Climate Policy on the Power Sector commissioned from international financial analysts Innovest, analyses the financial risks and opportunities that 14 major international electric utilities face from upcoming global and national climate policies.

Since the Kyoto Protocol was signed in 1997, industrialized countries have been developing policies to curb emissions of carbon dioxide (CO2), the main global warming gas. While policies vary from region to region, the general effect is, for the first time, to make CO2 emissions costly to polluters.

With the power sector responsible for 37 per cent of global CO2 emissions, electricity-producing companies are likely to be among the most affected firms. The report shows how legislation already in place or under discussion can significantly raise the costs of power production.

The most-affected companies in the European Union are E.ON and Scottish Power, with possible cost increases of up to 9 per cent of their 2002 earnings. In the US, AEP (American Electric Power) could see additional costs of 5 per cent of 2002 earnings, while Canadian TransAlta could face up to 13 per cent increases.

However, the WWF report also shows that power companies could earn considerable profits by switching from coal to cleaner energy sources, such as natural gas and renewables. Iberdrola in Spain for instance has geared up its investment in wind energy, thus reducing its overall CO2 emissions. In a costly carbon market, this will greatly reduce the company's financial risk.

AEP and German RWE could make gains of up to EU50 (US$58) million annually, while Southern, Duke, Endesa, Enel and E.ON could save around EU20 (US$23) million from switching to cleaner energy sources. Scottish Power, for instance, aims to have nearly 3000MW of wind energy operational in the US and the UK by 2010 — showing that a change in strategy is feasible. Firms with proactive and well-thought-out carbon management strategies, therefore, will be the most likely winners in the new operating environment.

"This report sends a strong wake-up call to the power sector and those who invest in it," said Mark Kenber, economist at WWF International. "Financial analysts clearly need to factor in climate policy and the adequacy of management response into their assessment of power companies. Active carbon management and a shift away from coal-based power generation need to be at the heart of business strategies over the next decade. It is clear that with opportune planning, both shareholder value and the climate can be protected."

The readiness of power companies to shift to low-carbon fuels and energy efficient technologies is still in doubt. Climate policy may cause similar disruptions to the power sector as that wrought by electricity market liberalization over the past decade. The WWF report concludes that large quantities of emissions can be reduced cheaply — but that this depends to a great extent on the willingness of firms to switch to low-carbon strategies. Investors and analysts therefore need to engage with utilities at the earliest opportunity to ensure that low-carbon investment strategies are in place.

For further information:
Mark Kenber
WWF Economist
Mobile: +44 79 67 56 17 31
E-mail: mark.kenber@btopenworld.com

Martin Hiller
Communications Manager, WWF Climate Change Programme
Mobile: +41 79 347 2256
E-mail: mhiller@wwfint.org

NOTE:

  • The companies covered in the report are: AEP, Southern, Duke (all from US); TransAlta (from Canada); TEPCO and Kansai (both from Japan); E.ON, RWE, Scottish Power, Scottish and Southern Electricity, Iberdrola, Endesa, Enel, and MVV (all from the European Union)

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