Anne Euler & Thomas Krick, Two Tomorrows, UK
Climate change and associated political, market and regulatory trends have already had, and will continue to have, a significant influence on the global power generation industry. More than anything else, this is due to the industry’s significant contribution to climate change.
Energy generation causes 25 per cent of the world’s carbon dioxide (CO2) emissions, the largest man-made contributor. This means that, as governments continue to set legally binding frameworks for reducing absolute CO2 emissions, utility companies will have to play a large part in efforts to meet these targets.
However, as more consumers around the world adopt modern lifestyles, the demand for energy and other natural resources continues to soar. This puts pressure on utility companies to take a lead in influencing stakeholders and customers to create the required shift towards lower carbon lifestyles.
Higher energy prices have disproportionate effects on customers with lower incomes and others classed as ‘vulnerable customers’, such as the elderly, disabled and others requiring medical care. Their response is often to simply cut back considerably on heating their homes, with proven negative effects on health.
Many utility companies have introduced special ‘social’ tariffs that provide these customers with lower prices, although they now face difficulties in establishing who actually should be on these tariffs. Further social and environmental impacts that want to be managed exist within utilities’ supply chains. Resource extraction, for example, goes hand in hand with significant environmental impacts and challenging health and safety conditions.
So there are a number of social, environmental and broader economic issues, whose associated risks and interdependencies, utility companies need to understand and manage. As a result, they have to perform the balancing act of responding to customers and society’s social and environmental concerns, while also ensuring the affordable pricing of energy. Where companies are not perceived to get this balance correct, governments will face increasing pressure to adopt more stringent regulations. So how well are the world’s largest utility companies addressing these ever more pressing challenges?
How well are the UTILITIES doing?
The Tomorrow’s ValueTM Rating is a new research programme launched by the international sustainability consultancy Two Tomorrows. It utilizes companies publicly disclosed information, e.g. sustainability reports, websites, annual reports, as well as submissions to the carbon disclosure project, to develop a comprehensive understanding of how well the biggest players in major industry sectors address the broad range of social and environmental issues facing a sector. Here we look at the results of the first Tomorrow’s Value Rating assessment of the ten largest power utilities in the world, and thereby seek to provide a comprehensive overview of the state of sustainability management in the sector.
The companies leading the Tomorrow’s Value Rating (Figure 1) are EDF and Centrica, both with a comfortable lead over most of their competitors. E.ON, GDF Suez and RWE follow in third to fifth place. Scottish & Southern Energy and Enel are still relatively close to this group, while TEPCO’s score of 34 is already significantly lower than the sector average of 39 (out of 100). State Grid Corporation of China and China Southern Power Grid trail far behind.
Figure 1: Tomorrow’s Value Rating scores for utilities. EDF and Centrica score highly due to stakeholder engagement Source: Two Tomorrows
China Southern Power Grid makes hardly any information on its sustainability approach available, thereby making it impossible for stakeholders to assess its performance. In the Tomorrow’s Value Rating, this means that the company scores extremely low, because the rating relies on public disclosure for its assessments. The transparency of efforts to address stakeholders’ concerns is seen as a primary building block of the corporate responsibility the rating seeks to promote.
An average score of 39 out of a possible 100 seems relatively low for a sector that has been engaging with the sustainability agenda for a considerable time now. However, the rating has been designed to be extremely challenging, and thereby provide a suitable benchmark for sustainability performance for some time to come.
In order to earn a full score in the strategy domain, for example, companies not only need policy responses to all relevant social and environmental issues, but also measures of performance (where feasible), evidence to demonstrate improvements of performance over time, as well as targets for future performance.
Other sectors, in fact, perform considerably worse. Indeed, our recent assessment of the hotels sector resulted in an average score of only 23 per cent, and an assessment of the oil & gas sector resulted in an average score of 34 per cent, with only food & beverage companies, averaging 44 per cent, scoring slightly higher than utilities.
Looking behind the scores
So what’s behind these overall scores? The rating looks at companies sustainability efforts in five key areas or assessment domains.
Firstly, strategy: the degree to which strategically significant sustainability issues are recognized, responded to on the policy level, and managed throughout the companies global operations. Secondly, governance: the rigour and quality of top-level governance and oversight of sustainability issues.
Next, engagement: the extent to which stakeholder concerns are understood and acted on. Fourthly, the value chain: the degree to which the company tries to have a positive influence on its suppliers and customers practices. Finally, innovation and leadership: the effectiveness of efforts to adopt and develop new processes, products and services that address social and environmental challenges.
Looking more closely at those domains reveal where individual companies are demonstrating best practices (Figure 3). In the Strategy domain, differentiation is relatively limited. EDF stands out because of a very systematic discussion of how it engages with its stakeholders. It also achieves the sector’s highest score in the Innovation and Leadership domain.
Figure 3: Energy utilities’ responses to social, environmental and wider economic issues facing the industry
Both domain scores benefited from its reporting on activities across a large number of operating markets – from employee consultation panels in Latin America, Vietnam and Thailand to rural electrification projects in Morocco and Mali, and the on-site installation and maintenance of low-carbon equipment in France.
It may well be that other companies are doing similar things but EDF certainly excels at reporting on these activities in a systematic manner, and has thereby gained an edge in the rating. EDF also has the strongest value-chain management approach as it is one of the few companies in the sector that has begun to monitor supplier performance on sustainability issues.
Centrica is almost on a par with EDF and demonstrates similar strengths, but provides less information on its international operations or its supply chain management. Where Centrica outperforms EDF is with its solid governance arrangements, its efforts to educate customers on environmental issues and with its offering of ‘green tariffs’ in the UK.
E.ON, in third place, demonstrates better than average practices in most areas, and provides a particularly good discussion of its plans for its future generation portfolio. However, E.ON has some work to do in translating its comprehensive policy framework into actual performance improvements across all geographic areas of operation.
GDF Suez, while overall only showing fairly average practices, stands out because of its leading governance approach.
Social, environmental and broader economic issues
We see in Figure 2 the range of social, environmental and broader economic issues that can be seen as relevant to the utilities sector.
Figure 2. Energy utilities’ performance in the Tomorrow’s Value Rating assessment domains
Amongst the most commonly recognized social issues in the sector are health and safety, as well as human resource related issues such as diversity, equal opportunity and freedom of association. These issues are commonly well addressed within the companies’ own operations, as well as amongst on-site contractors.
Ninety per cent of companies recognize that labour standards and health and safety issues also apply to their supply chains. All European companies and TEPCO of Japan have defined minimum standards or codes of conduct that suppliers are required to adhere to. These usually cover the areas of environment, health and safety, labour rights and bribery and corruption.
However, this is still a fairly minimalist management approach when compared to other sectors’ more proactive responsible procurement approaches.
But some good practices do exist. Italy’s Enel goes further by providing selected suppliers with relevant training and EDF has audited suppliers in Europe, Asia and North Africa, using a reference framework based on the SA8000 and ISO 14001 standards. Still, neither of them report having specific programmes for their extractive suppliers – which is where significant environment, health and safety risks are likely to concentrate. The only company that discusses these risks is E.ON, which is also planning to start audits in the near future to check their compliance. RWE is also currently developing an auditing programme.
Climate change takes centre stage
When it comes to environmental issues, climate change clearly takes centre stage. Companies response to climate change is also investigated in the Innovation & Leadership domain, which seeks to assess how companies in the utility sector are reducing emissions not only at source but also how they are contributing to a reduction of energy demand in society.
Here we look for the development of innovative low-carbon technologies and R&D commitments or improvements in operational performance, as well as efforts to encourage customers to reduce energy consumption or the offering of so called ‘green’ tariffs.
Almost all of the utilities recognize the need to reduce their greenhouse gas emissions. Six of the ten companies have made specific quantified carbon reduction commitments.
In its strategy to achieve this target, EDF is focusing mainly on nuclear energy as a way to reduce the CO2 emissions of its energy portfolio, whereas Centrica and Scottish & Southern Energy aim to increase the percentage of renewables. Overall, most strategies disclosed within the sector are characterized more through similarities than differences and therefore it is difficult to point to a clear leader.
The majority of companies have some investments in the energy efficiency of existing coal and gas fired power plants and the development of carbon capture and storage (CCS).
They also discuss renewable energy as a part of the solution to combat climate change and as a way to reduce emissions. E.ON for example, describes its plans to develop a generation portfolio that consists of cleaner coal, gas, nuclear and renewables, and that this will halve its CO2 emissions by 2030 compared with 1990 levels. To achieve this target, E.ON says, the energy portfolio will be made up of one half low-carbon gas and coal fired power stations, and one half zero-emission energy generation, such as nuclear power and renewable energy sources.
Overall, however, more specific plans for the role that renewables are expected to play in the envisaged future generation mix are not disclosed. The most widely discussed renewables are wind power, e.g. offshore wind farms, hydropower, tidal stream energy and wave power plants. Biomass, solar energy and microgeneration seem to be less of a focus for most companies in the sector.
Scottish & Southern Energy is the only company that explicitly states that it is not planning to develop any nuclear capacity whereas the need for a renewed advance of nuclear energy seems to be universally accepted among the other energy utilities.
Discussions of how the waste and security related issues associated with this highly controversial form of energy can be managed are, however, fairly limited.
The lack of more specific plans is also due to a large number of uncertainties regarding the feasibility of specific low-carbon strategies. It is for example not yet fully clear whether technologies such as CCS can be proven to work on a large scale, and the future valuation of carbon reductions is also very difficult to foresee.
Under these circumstances, deciding on the right long-term investments into the development of the generation portfolio is extremely challenging. To gain more certainty, many call for governments to issue clear guidance around the role of new nuclear and CCS, even beyond the European Union’s 2020 targets, to allow for the kind of long-term planning that most new utility assets, such as new nuclear power stations, require.
Affordable and accessible energy
On the social side, affordability and accessibility of energy are seen as major issues by many stakeholders. With rising energy prices, utility bills are becoming an increasingly large share of average household expenditure.
Even though two-thirds of companies in the sector recognize the need for transparency around pricing of electricity and gas, E.ON is one of the few companies that actually discuss the relationship between energy prices for the end consumer, fluctuating wholesale prices, company profits and investments into ensuring supply security.
Several companies such as EDF, E.ON, Centrica and GDF Suez support vulnerable customers in their home markets, as well as in other highly regulated markets where such support is stipulated by law. However, evidence for the global roll-out of such practices, including in markets where such support is not legally required, is not provided.
This will concern some stakeholders because Eastern Europe and other developing economies are set to play a much larger role in the utility companies’ future business portfolios. Only EDF discusses accessibility and affordability in a wider range of geographic markets, while most others focus primarily on their home and other highly regulated markets. EDF also mentions a wider array of customer efficiency initiatives than most companies in the assessment.
However, most companies also have programmes in place to raise customer awareness and advise customers on ways to reduce their overall energy consumption. E.ON and RWE are currently testing smart metering installations, which would also help to reduce household energy consumption.
GDF Suez and TEPCO are both planning a diversification of their service and product portfolio towards more efficient, high-performance energy installations and products like energy efficient heat pumps, air conditioners and water heaters.
However, none of these innovations, to date, have been rolled out at a scale that would make a significant impact on customer energy efficiency in the near future.
Engaging with stakeholders
In the Governance domain, the rating research looks for clearly assigned responsibilities for monitoring and managing non-financial issues and impacts on all levels of the organization, from the supervisory board to day-to-day management and implementation. The methodology also considers whether companies involved or consulted stakeholders during their considerations.
Compared to other sectors’ governance, the utility sectors practices are fairly evolved. Utilities average score of 49 per cent is considerably higher than the 29 per cent achieved by other companies assessed with the methodology to date. GDF Suez, Centrica and EDF are the companies that meet most of the governance requirements, and therefore lead in this domain.
Engaging with stakeholders on non-financial issues has become a major pillar of responsible business practice. It involves understanding the dependencies between stakeholder groups and the company, identifying the concerns of these groups and responding to the key issues, typically through honest debate with stakeholders.
In the utilities sector, the direct workforce, shareholders and customers are engaged by most companies. European utilities also undertake some good quality engagement with local communities, governments and trade unions. EDF reports systematically on stakeholder engagement mechanisms, expectations and the company’s responses to each stakeholder group. However, the actual information provided is fairly limited and rarely demonstrates a systematic global approach to a topic or group.
Centrica takes a similar approach, offering solid information around customers, workforce, trade unions and governments, but only a partial discussion of engagements with suppliers, local communities, non-governmental organizations and international organizations. Furthermore, these discussions rarely address their operations in emerging markets. Engagement appears to be another area of performance where good practices are limited to regions where legal requirements are higher.
A step change required
So what would we like to see from companies in the future? There are a number of key areas that will have to be addressed:
1. Performance and targets: While management systems and corporate policy systems have evolved reasonably well, evidence that these policies translate into actual performance improvements is still rare. For example, while Centrica, Scottish & Southern, RWE, E.ON, EDF and TEPCO have all set targets for carbon intensity reduction, only the three latter companies demonstrate actual intensity reductions over three years or more. The number of companies that set a comprehensive range of targets for other issues is also limited. Only EDF, Centrica and Scottish & Southern have set performance targets for more than a quarter of their main impacts. Setting solid targets and showing actual improvements in performance is therefore a key challenge for the majority of companies in the future.
2. Responsibility in global operations: Increased activity in less developed and regulated countries heightens the requirement for the diligent local management of impacts. While the risks associated with operations in developing markets are high, most companies’ reporting on these operations’ performance is still very limited. Such reporting should not just include social and environmental impacts, but should also describe the companies’ efforts to contribute to the economic health of these operating locations.
3. Supply chain: As the majority of European utility companies tend to source their supplies in home markets, integrating sustainability principles into the supply chain has often not been at the top of the agenda for most of them. As companies are now expanding into less regulated markets, promoting adherence to social and environmental principles amongst its supplier base becomes a growing priority.
4. Security of and access to energy supply for disadvantaged customers and in rural areas: This will also become an increasingly important topic, especially as energy prices continue to rise around the world.
There is an opportunity for one of these companies to ‘break the mould’ and emerge as a leader in sustainable energy generation. This would require a bold new vision and strategy for generating energy in a carbon constrained world, together with practical steps to achieve success.
However given the continued absence of clear long-term governmental guidance, the absence of a robust global regulatory framework and further uncertainties in regards to technological feasibilities, long-term planning security remains elusive. Until these changes are made, any company who did this would have to take a brave bet on what the future might look like.