Environment

General Issue Category
(industry agnostic)

Disclosure Topics (industry specific) for:
Electric Utilities & Power Generators

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GHG Emissions

Greenhouse Gas Emissions & Energy Resource Planning

Electricity generation represents the largest source of greenhouse gas (GHG) emissions in the world. These emissions, mainly carbon dioxide, methane, and nitrous oxide, are mostly by-products of fossil fuels combustion. The transmission and/or distribution (T&D) segments of the industry are responsible for a negligible amount of its emissions. Electric utility companies could face significant operating and capital expenditures for mitigating GHG emissions as environmental regulations become increasingly stringent. While many of these costs can be passed on to a utility’s customers, some power generators, especially in deregulated markets, may not be able to recoup these costs. Companies can reduce GHG emissions from electricity generation mainly through careful planning of their infrastructure investments to ensure an energy mix capable of meeting the emissions requirements set forth by regulations and by implementing industry-leading technologies and processes. Being proactive in cost-effectively reducing GHG emissions can create a competitive advantage for companies and mitigate unanticipated regulatory compliance costs. Failure to properly estimate capital-expenditure needs and permitting costs, or other difficulties in reducing GHG emissions, could result in significant negative impacts on returns in the future in the form of asset write-downs, costs of obtaining carbon credits, or unexpected increases in operating and capital expenditures. Regulatory emphasis on this issue will likely increase in the coming decades, as exemplified by the international emissions-reduction agreement made at the 21st session of the United Nations Conference of the Parties that took place in late 2015.

Air Quality

Air Quality

Fuel combustion in electricity-generation operations generates hazardous air pollutants (HAPs), criteria air pollutants (CAPs), and volatile organic compounds (VOCs). HAPs, CAPs, and VOCs have more localized, but nonetheless significant, human health and environmental impacts compared with the global impacts of greenhouse gases (GHGs). The most common and impactful are nitrogen oxides (excluding nitrous oxide), sulfur oxide, particulate matter (PM), lead, and mercury. Emissions of these localized air pollutants are often strictly regulated, creating significant risks for electricity generators. Regulatory and legal risks are higher for those companies operating near large communities. A company’s energy-generation mix is the best indicator of its relative risk related to air quality. Harmful air emissions from operations may result in regulatory penalties that affect extraordinary expenses, higher regulatory compliance costs, and new capital expenditures to install best-in-class control technology. In some cases, such expenditures can be prohibitive to the continuation of a facility. Companies can manage air quality concerns through internal actions to reduce emissions, as well as by working with regulators to establish priorities and incorporate risks into short- and long-term capital planning.

Water & Wastewater Management

Water Management

Electricity generation is one of the most water-intensive industries in the world in terms of water withdrawals. Thermoelectric power plants—typically coal, nuclear, and natural gas—are dependent on large quantities of water for cooling purposes. The industry is facing increasing water-related supply and regulatory risks, potentially requiring capital investment in technology or even resulting in stranded assets. As water supplies tighten in many regions—and electricity generation, agriculture, and community use compete for water supplies in the coming decade—power plants may increasingly be unable to operate at their full capacity, or at all, because of region-specific water constraints. The availability of water is a key factor to consider when calculating the future value of many electricity-generating assets and for evaluating existing proposals for new generation sources. Heightened water scarcity—due to factors such as increasing consumption and reduced supplies as a result of climate change, which could result in more frequent or intense droughts—could prompt regulatory authorities to limit companies’ ability to withdraw necessary amounts of water, especially in regions with high baseline water stress. Furthermore, companies must contend with the growing regulations related to the significant biodiversity impacts that such large withdrawals can cause. To mitigate risks, companies can both invest in more efficient water-usage systems for existing plants and place strategic priority on assessing long-term water availability, as well as water-related biodiversity risks, when siting new power plants.

Waste & Hazardous Materials Management

Coal Ash Management

Electricity generators must safely dispose of the hazardous by-products of their operations. Coal-fired electricity generation is a major source of hazardous waste because of its by-product, coal ash. Coal ash can have a significant effect on company value in the power-generation segment of the industry. This issue will affect companies differently, depending on the extent to which they generate electricity from coal. Coal ash is one of the largest industrial waste streams in the world. It contains heavy metal contaminants that have been associated with cancer and other serious diseases, especially when they leach into groundwater. Coal ash can have beneficial uses when recycled or reused, such as in the creation of fly ash concrete or wallboard, creating revenue opportunities for electric utilities. Safe handling of coal ash, location of coal ash impoundments that minimize harm to human life and/or the environment, strong monitoring and containment of coal ash, and the sale for beneficial uses of coal ash are important strategies to reduce regulatory compliance costs as well as penalties for non-compliance. There can be significant litigation and/or remediation costs if the coal ash leaches into the surrounding environment.

Access & Affordability

Energy Affordability

A de facto objective of regulated electric utilities is to provide reliable, affordable, and sustainable electricity. Companies in the industry are tasked with managing these potentially competing priorities to maintain favorable relations with customers and regulators—and ultimately to earn appropriate returns for shareholders. The affordability of energy is particularly challenging for companies to balance, as it often conflicts with other core objectives. Utility energy bills are widely perceived to be increasingly unaffordable for low-income customers (affordability is determined by both the net cost of energy bills and the underlying customer economics). Ensuring that utility bills are affordable is crucial for utilities working to build trust (intangible asset value) with regulators and customers. Quality of regulatory relations is a key value driver for utilities, and one of the more closely analyzed issues by investment analysts. The willingness of regulators to grant rate requests, rate structure modifications, cost recovery, and allowed returns is a primary determinant of financial performance and investment risk. Effectively managing affordability may enable utilities to invest more capital, favorably revise rate structures, and increase allowed returns. Furthermore, utilities that do not effectively manage affordability are increasingly exposed to customers defecting from the grid (or reducing reliance on the grid) by implementing distributed energy resources or pursuing other alternative energy sources (e.g., industrial customers’ use of combined heat and power). Managing affordability involves operating an efficient business with a well-thought-out, long-term perspective and strategy, as well as working closely with regulators and public policymakers on rate structures and, potentially, bill-assistance programs. While the precise nature of financial impacts of affordability are largely determined by utilities’ business models and rate structures, affordability is a critical business issue for utilities to manage in terms of maintaining (and growing) customer bases, building intangible asset value, creating investment and return opportunities, and ultimately delivering shareholder returns.

Employee Health & Safety

Workforce Health & Safety

Employees of companies in the industry face numerous hazards in the construction and maintenance of electric transmission and distribution (T&D) lines, as well as with the various means of electricity generation. Many of these employees work for extended periods at great heights, operate heavy machinery, and face electrocution risks. While the industry has made significant strides in safety improvements, significant risks and opportunities remain for further improvements. The nature of the industry—as a necessity of modern life and economies, as well as commonly a societally granted monopoly—means that the actions of companies in the industry receive significant public and regulatory scrutiny. Companies need to maintain a culture of safety to ensure adequate working conditions for their workers, ensure strong operational productivity, uphold positive views from the perspective of regulators, and manage potential risks of regulatory penalties.

Business Model Resilience

End-Use Efficiency & Demand

Energy efficiency is a low-lifecycle-cost method to reduce greenhouse gas (GHG) emissions, as less electricity needs to be generated to provide the same end-use energy services. Utilities can partake in a wide range of activities to promote energy efficiency and conservation among their customers. Such strategies include offering rebates for energy-efficient appliances, weatherizing customers’ homes, educating customers on energy-saving methods, offering incentives to customers to curb electricity use during times of peak demand (“demand response”), and investing in technology such as smart meters, which allows customers to track their energy usage—among many other strategies. These efforts, which save consumers money, can also manifest in lowered operating costs for electric utilities because they can reduce peak demand. Furthermore, depending on the sentiment of the utilities commission in a company’s region, energy efficiency can be a regulatory priority before new builds are considered. How an electric utility stands to gain or lose from this trend toward GHG mitigation is significantly predicated on its regulatory environment. Traditional rate structures generally do not give electric utilities an incentive for energy efficiency, and further, they may economically suffer from reductions in customer demand. This is increasingly driving electric utilities, and their regulators and customers, to pursue alternative ratemaking. Such alternative rate design often “decouples” utility revenues from customer consumption, and may also build in explicit incentives for end-use efficiency and demand reductions. Overall, companies whose strategic plan strives to reduce their downside risks from demand fluctuations, gain adequate and timely returns on needed efficiency investments. Further, lowering costs through efficiency initiatives help position utility companies to earn stronger risk-adjusted returns over the long term.

Critical Incident Risk Management

Nuclear Safety & Emergency Management

Nuclear incidents, while exceedingly rare, can have significant human health and environmental consequences as nuclear accidents can be severe if they do occur. While owners of nuclear power plants in many regions have operated for decades without any major public safety incidents, the occurrence of infrequent but high-magnitude incidents anywhere in the world can have major impacts on the entire nuclear power industry. Companies that own and operate nuclear plants could face a loss of their license to operate, either entirely or in the operation of nuclear plants, as well as many other financial consequences in the event of an accident—though companies carry insurance and may have legal protections from certain liabilities. Failure to comply with the safety regulations can be extremely expensive to nuclear power operators; in extreme circumstances it can make the continued operation of the plant uneconomical. As a result of significant financial repercussions, both from ongoing safety compliance as well as the materialization of tail risk incidents, companies that own or operate nuclear plants need to be vigilant in the safety compliance, best practices, and upgrades of their facilities. They also need to maintain robust emergency preparedness training for their staff and a strong safety culture. These measures can reduce the probability that accidents will occur and enable a company to effectively detect and respond to such incidents.

Systemic Risk Management

Grid Resiliency

Electricity is critical for the continued function of most elements of modern life, from medicine to finance, creating a societal reliance on continuous service. There are potentially high societal costs from major disruptions to electricity infrastructure. Disruptions can be caused by extreme weather events, natural disasters, and cyber attacks. As the frequency and severity of extreme weather events associated with climate change continues to increase, all segments of electric utilities companies—and especially major transmission and distribution (T&D) operations—will face increasing physical threats to their infrastructure. This could result in frequent or significant service disruptions, outages, and the need to upgrade or repair damaged or compromised equipment, all of which may result in substantial costs and damaged perspectives of regulators and customers. The increased usage of smart grid technology has several benefits, including strengthening the resiliency of the grid to extreme weather events. However, this technology can make the grid more vulnerable to cyber attacks, as it provides hackers more entryways into infrastructure systems. Companies need to implement strategies that minimize the probability and magnitude of impacts from extreme weather events and cyber attacks. They can remain competitive in the face of increasing external competition by actively submitting compelling rate cases to improve the reliability, resilience, and quality of their infrastructure.

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