Some European utilities are ill-prepared for the transition to more renewables and as such risk losing billions in earnings, writes Kelvin Ross
A report ranks 14 of the largest publicly-listed power generators in Europe on their readiness for a low carbon energy transition.
The study says the 14 major utilities are set to exceed carbon targets by 1.3 billion tonnes of CO2 and could lose almost $15 billion worth of earnings.
The study was carried out by CPD, a climate change research provider used by major institutional investors. It reveals that the 14 major utilities remain heavily dependent on fossil fuels, which is responsible for 43 per cent of their electricity generation.
Almost half are producing more than 20 per cent of electricity from coal and, on aggregate, the 14 companies are set to exceed the 2°C ‘carbon budget’. This comes despite the EU’s target to provide 45 per cent of electricity from renewables by 2030.
Paul Simpson, chief executive of CDP, said EU utilities are at a crossroads and must make some rapid decisions. He said the last year has seen a step change in support for, and engagement with, low carbon policies, but the industry remains heavily reliant on fossil fuels to meet electricity needs. He added that market prices are showing that renewable energy sources like wind and solar power are more cost competitive than ever and utilities should look to capitalize on the strong growth that is forecast for these technologies.
The report finds that Austria’s Verbund, Iberdrola of Spain, Finland’s Fortum and Italy’s Enel are the best performing companies on carbon-related metrics relative to their peers, with Germany’s RWE and EnBW, CEZ of the Czech Republic, and Spain’s Endesa ranking lowest among those who disclose to CDP.
Drew Fryer, Senior Analyst for Investor Research at CDP, says: “In Europe, major utilities must transform their business models to achieve the climate goals laid out in the Paris Agreement.
“Verbund is leading the way in planning for the future, targeting a 100 per cent renewable energy generation portfolio by 2020 and decommissioning remaining fossil fuel assets. But many other utilities remain reliant on coal for a significant share of power generated, and will break their carbon budgets in years to come based on existing fossil fuel assets. Rapid deployment of renewables is critical for the sector as it transitions to a low carbon future.”
CDP assessed several key areas for the League Table:
Transition risks: CDP examined companies’ current share of generation from fossil fuels, their emissions profiles and current carbon costs under the EU ETS, and also introduced a model to measure locked-in emissions between 2015 and 2050 from current fossil fuel assets against companies’ implied carbon budgets to achieve a 2°C transition.
Transition opportunities: CDP assessed companies’ progress and strategy in shifting towards renewable energy assets, as well as smart energy solutions, their CAPEX plans and capital flexibility.
Climate governance and strategy: Emissions reduction targets were assessed, and CDP identified alignment of governance and remuneration structures with low carbon objectives, and actions taken in supporting or opposing policies to achieve a low carbon transition.
CDP says that although progress is being made in decarbonizing EU power generation, “significant additional actions will be required to keep the sector in line with the objectives of the Paris Agreement”.
It finds that the companies in the report are estimated to exceed their implied 2°C carbon budget by 14 per cent or 1.3 billion tonnes CO2e in aggregate between 2015 and 2050. “This raises concerns that accelerated retirement of existing assets could be required,” the report concludes.