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UTILITY WEEK | 6TH - 12TH OCTOBER 2017 | 15 Finance & Investment former and Scottish Power parent company Iberdrola second on low-carbon readiness in its 2017 study of the sector, Charged or Static. SSE and Centrica come fih and sixth respec- tively, so SSE is the top UK performer. SSE considers risks and opportunities arising from climate change in its annual report with a longer discussion in its sustain- ability report. Unusually, it has modelled the resilience of its business against three core future energy scenarios, where global temperature rises to 2 degrees Celsius, 1.5 degrees Celsius and business-as-usual – in line with 3-4 degrees Celsius. The analysis showed the likely events that would take place if each scenario played out and how SSE would respond. Meanwhile, Centrica claims it is in a key position to influence consumer action on cli- mate "by providing them with more insight and more tools with which to use less energy and to have more choice to produce, store and save it". However, its loss of customers and declining market share suggest the busi- ness has not yet effectively managed the risk originating from energy efficiency policies in its efforts to move towards distributed energy and consumer-facing products. "Energy consumption has been falling and there are new market entrants on the scene at the same time as Centrica has been shiing to energy services. But it could still make money in the process. The company should have had a bit of foresight in forecast- ing demand," says Fletcher While most companies employ conven- tional economic metrics to justify decisions in financial filings, European utilities in particular express carbon pricing. This can be perceived as another way to consider risk exposure to carbon market changes or other regulation that could arise from carbon pric- ing, and to test a company's resilience in that light. Most EU utilities assessed are now applying internal carbon prices as an input to capital investment decisions. Leaders apply a significant shadow carbon price, and stress test investment options versus a num- ber of carbon price scenarios. CDP finds RWE's profitability is most exposed to carbon pricing, so that its carbon costs reduce its earnings before interest and tax by 13.7 per cent, assuming a 2015 average traded carbon market price of €7.70. By con- trast, the comparable figure for Centrica and Iberdrola is less than 1 per cent. The TCFD report thus comes at a time of transition. Most utilities are talking about climate risk. Some are acting to manage both the regulatory and physical risks of climate change, others are paying lip service. An obvious example of directional shi is Cen- trica, which is making major investments (£1.2 billion in 2016-20) in smart solutions such as the connected home and distributed energy. The company recently established Centrica Innovations (£100 million over five years) to help accelerate new technologies. The taskforce wants more. If the corpo- rate community systematically adopted its recommendations, balance sheet, income statements and strategic reports would most likely need modifications. "Including climate risk would sharpen disclosures on the impairment of cash flows arising from assets," says CFD's Picot. As in the SSE case, investors would be able to access a set of comparable sector scenario analysis relating at least to a 2C scenario as well as, for instance, scenarios related to Nationally Determined Contributions and business-as- usual (greater than 2C) scenarios. However, the actual frameworks have yet to be shaped. "We need to see a period of experimentation. Three or four years down the road we could potentially be assessing what is useful in the voluntary disclosures, and see it codified by institutions through, for example, stock exchange guidelines," says Picot. However, he suggests the most signifi- cant progression would be found in strategic discussions in financial statements. "This is not going to result in a huge data drop by companies but rather a thoughtful narra- tive description from board directors. It will hopefully be used as an engagement tool as well as a divestment tool," he says. A move towards less carbon-intensive business mod- els could result. However, says Picot: "We're not saying they should alter their business model but that the information needs to get out there so that the market can decide." Disclosures on climate-related risk are less unusual in this heavily regulated sector than in other carbon-intensive industries. Arguably, the risks to financial performance are considerable if a company moves away too quickly from its traditional business model or abandons its store of expertise. This is a highly politicised topic. Private- sector utilities may well improve the quality of disclosures on future carbon emissions or physical resilience. However, they still have considerable power to influence the future of the climate, rather than fend off the risks associated with its fluctuations. Lis Jeffries is a freelance journalist GENERATION BY RESOURCE TYPE, AVERAGE 2015/16 (RHS) Company Coal Gas & Oil Nuclear Hydro Other Other Emission Intensity renewables (tCO2/GWh) - 2016 (LHS) Verbund 3.5% 2.2% 0.0% 91.6% 2.7% 0.0% 31.0 EDF 5.0% 7.5% 77.8% 7.4% 2.2% 0.0% 77.0 Centrica 0.0% 35.9% 60.6% 0.0% 3.5% 0.0% 137.0 Iberdrola 5.7% 38.8% 17.9% 13.2% 24.4% 0.0% 176.0 Fortum 3.8% 32.5% 31.5% 30.6% 1.1% 0.4% 184.0 EDP 29.6% 6.6% 1.8% 27.2% 34.3% 0.4% 270.0 Engie 18.3% 50.8% 12.5% 12.5% 4.3% 1.8% 298.0 Eon (i) 20.2% 26.1% 38.0% 6.0% 9.4% 0.3% 325.2 EnBW (i), (ii) 35.5% 1.5% 44.0% 15.4% 3.0% 0.5% 330.0 Enel 28.6% 26.1% 11.5% 24.2% 9.4% 0.1% 395.0 SSE (i), (ii) 20.3% 47.2% 0.0% 14.5% 18.0% 0.0% 397.0 Endesa 32.1% 19.2% 35.2% 9.8% 3.7% 0.0% 415.0 CEZ 49.0% 1.9% 41.7% 3.7% 3.6% 0.0% 500.0 RWE 57.3% 22.5% 14.6% 1.0% 3.2% 1.4% 686.0 (i) Generation: EnBW and SSE average for 2015 – H1 2016, Eon – 2015 only but accounting for 47% ownership of Uniper (ii) Emissions intensity for 2015 for EnBW and SSE. Source: CDP data, company reports EMISSIONS INTENSITY OF ELECTRICITY GENERATION (i) For 2014-2015 only. 2016 data was not released by some companies in time for this report's publication. (ii) For 2016 only given change in company structure. Eon's figure based on 47% share of Uniper and assumption that 2016 emissions from Russia segment of Uniper same as 2015. Source: CDP data, company reports Emissions intensity (metric tonnes CO2e/GWh) – median 2014-16 0 100 200 300 400 500 600 700 800 RWE (ii) CEZ SSE (i) ENGIE Endesa ENEL EnBW (i) E.ON (ii) EDP Iberdrola Fortum Centrica EDF Verbund