Race to zero

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US utilities have stepped up their efforts to provide environmental, social and governance reports with clear emissions reduction goals. And growing pressure to disclose sustainability credentials could help accelerate the shift towards renewables, writes Jeffrey Ryser

The year 2019 may come to be seen as pivotal in the transformation of the US electricity sector.

A drive by dozens of US electricity utility holding companies to provide environmental, social and governance (ESG) reports has brought to the forefront numerous new commitments to zero carbon emission goals, and an accompanying surge in plans to install thousands of megawatts of wind and solar generation over the next few decades.

The preparation and release of ESG reports in the US power sector has jumped significantly this year. The Edison Electric Institute, the US association representing investor-owned electric utilities, had 21 of its members participate in a sustainability report pilot program in late 2017. Now, 35 of its members have posted their own ESG/Sustainability template on their websites.

At the holding company level, EEI has 63 member companies, but when measured by market capitalization, more than 90% of the US investor- owned electric power industry is currently using the ESG/Sustainability Template to report information to investors, according to EEI spokesman Brian Reil.

“As ESG disclosure continues to evolve from a ‘nice- to-have’ to a ‘must-have,’ EEI’s efforts to create a comprehensive reporting template and methodology that respond to the needs of both members and financial institutions are notable,” said Val Smith, global head of corporate sustainability at Citi, following the launch of EEI’s version 2 reporting template in late August.

EEI and its member companies do not necessarily consider all ESG/sustainability information to be financially material, but intend the information provided to be “supplemental” to material financial information provided to the US Securities and Exchange Commission.

Nevertheless, the increase in this supplemental information has brought with it a material increase in CO2 emissions reduction goals that foreshadow a major reshuffling in utility business models with dramatic implications for the US power generation mix, and a potentially large reduction over the next few decades in fossil fuel usage for generation.

“The growing interplay between environmental and social forces will have a transformative impact on the credit quality of these sectors, and will likely translate into balance sheet and/or business model realignment for industry players,” Moody’s Investors Service said in one of its recent ESG Focus reports.

Moody’s estimated that utilities and power companies “are on track to achieve a 27% reduction in CO2 emissions by 2030.” That percentage also appears likely to rise given the utility actions announced this year.

Moody’s said that legislative and regulatory support “drives the pace of carbon transition.” It said that policymakers are influencing the speed of the transition to a more carbon-friendly generation mix “by facilitating investments in renewable energy and, in one instance, the expansion of nuclear generating capacity.”

“Among US corporate sectors, electric utilities and power companies are best positioned to significantly reduce carbon dioxide emissions by 2030,” largely due to the decline in coal-fired power generation, Moody’s said.

It noted that with coal in decline, environmental opposition to natural gas also “is on the rise.” That opposition already has led to a large turn away from natural gas in long-term utility planning.

“A heightened public focus on reducing carbon emissions could prompt state legislators and regulators to accelerate the pace of the power sector’s transition to renewable energy sources. If we were to assume that declining coal-fired generation is replaced by a mix of 20% natural gas and 80% renewable generation (instead of the 60% natural gas/40% renewable mix assumed in our base case), the result would be a net reduction in CO2 emissions of 650 million tons, instead of 532 million tons, representing a 35% reduction from 2018 emissions by 2030,” Moody’s said.

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