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Climate
Risk Desk
More Than 150 Companies From Around the Globe “Took the Pledge”
this month to adopt voluntary and publicly announced targets for
emission reductions and energy efficiency improvements, agreeing
as well to report annually on their progress. They included major
energy-intensive industrial firms and big international labor unions,
consumer advocates and other groups.
The pledge took place at the UN Global Compact Leaders Summit in
Geneva, an invitation-only private meeting for senior executives
of 1,000 international firms, governments, unions and UN agencies.
The group meets to discuss corporate social responsibility, and
these days climate change is near the top of the agenda that includes
corporate human rights, labor standards, corruption and other business
issues.
The companies signed on to the Global Compact’s “Caring
for Climate: The Business Leadership Platform” declaration,
which calls for “practical climate change solutions”
and the need for all businesses, governments and citizens to take
steps to address climate change. At the meeting, Alcan’s VP
of business sustainability, Mathieu Bouchard, said his company believes
a market-based solution like emissions trading is an effective way
to address the issue, and said the declaration “recognizes
this and urges governments to facilitate these systems with clear
and effective legislation.”
UN Secretary-General Ban Ki-moon told the Geneva meeting that business
leaders “need to work much harder” on climate change
issues, and use their influence to prompt positive action around
the world. And according to a study the Global Compact released
at the meeting, companies can actually benefit from this. The report,
drafted by Goldman Sachs, the UN and McKinsey & Co., says that
companies that are considered the frontrunners in environmental,
social and governance issues “have outperformed the general
stock market by 25 percent since August 2005.” It says 72
percent of those companies have also outperformed their industry
peers – in a diverse range of businesses that includes energy,
mining, steel, food, beverages and media.
The fact is, according to UN Global Compact Executive Director George
Kell, companies leading the sustainability and social responsibility
charge are seeing long-term business value and are rewarded by the
markets. “Fundamentally, for companies and investors, this
is about managing risks and opportunities presented by globalization,”
Kell says.
The CEO survey found that over the past five years, more than 90
percent of executives have strengthened the role of environmental,
social and governance issues in their strategy and operations. Nearly
three-fourths think corporate responsibility should be “fully
embedded” into strategic decisions, but only about one-half
say their firms successfully do so. Nearly 60 percent think it should
be part of the global supply chain, but only 27 percent say they
are actually able to achieve that.
These findings dovetail with PricewaterhouseCoopers’s recently
released annual utilities survey. The poll of the heads of 114 power
companies in 44 countries found that energy efficiency, renewables
and nuclear power are top of mind in energy boardrooms worldwide.
Last year less than 20 percent thought wind energy and nuclear power
would be an increasing part of the fuel mix. Today that has increased
to 48 percent (wind) and 45 percent (nuclear).
“Climate change,” says PwC, “appears to have cemented
its place in utility company strategies.”
But energy companies around the world continue to push for some
consistent regulatory guidance and market frameworks. The utility
CEOs told PwC that absent these two elements, the shift to more
nuclear and wind power may be “limited.” According to
PwC global utilities leader Manfred Weigand, “Economic signals
and incentives will be critical for utility companies to be able
to make a big shift. An effective signaling of carbon prices will
need to exist across all regions, crucially covering high-emitting
and high-growth countries such as the US, India and China.”
The energy business is committed to the idea that new technology
can provide major advances in energy efficiency. The number of power
companies that believe this has jumped from 41 percent to 62 percent
worldwide over the past year. Notably, in Europe the change of heart
rose from 33 percent in 2006 to 43 percent this year. In America
the shift was much more dramatic: from 22 percent to 81 percent.
Overall, 72 percent are investing in demand-side energy efficiency
to some extent.
PwC’s Weigand calls it “working up,” not “waking
up” to climate change.
The report also found pressure from the demand side in another way.
The survey talked to the big leaders on the demand side for the
first time this year: the major industrial energy users in key sectors
like metals, chemicals and paper production. All have prioritized
energy efficiency and many want to start their own on-site energy
production, often from renewable sources. Many are considering relocating
their production facilities to areas with lower energy costs, and
the majority said power companies could “do more to structure
their tariffs around the needs of their big energy consumers.”
Yet another survey that pinged CEOs on climate change found that
93 percent of electricity industry execs expect to see climate legislation
by 2014 and 70 percent expect to implement some kind of large-scale
global climate strategy and commit capital to it by 2013. Less optimistic
CEOs expect climate change legislation to pass by 2009 and 43 percent
expect to take “significant climate action” by late
next year, according to the annual GF Energy Electricity Outlook.
Asked to list the most important industry issues, 40 percent said
climate change, 37 percent said regulatory certainty and 26 percent
said infrastructure investment. Beyond that, 20 percent cited rising
cost pressures or rate increases, 16 percent said rising and volatile
fuel costs, 13 percent said an aging workforce and 11 percent cited
wholesale market structure uncertainties. It’s striking when
compared to last year’s answers. In fact, back in 2006 climate
change was called “clean air/water” and only came in
seventh on the industry’s key issues list. On the other hand,
in the 1992 survey, compliance with Clean Air Act requirements was
ranked second most important, so it’s clear that industry
CEOs prioritize short-term, capital-related considerations –
and with infrastructure pressures at the forefront, their compliance
requirements under climate regulation are top priority today.
The study makes plain that electricity CEOs have simply had to face
facts: 43 percent say they’ll need new capacity to meet regional
demand by 2009 and 75 percent will need new capacity by 2011. The
survey bears out what industry CEOs have been telling Congress for
a while now: They need to make investment decisions about new generation
and other key infrastructure now, so they need some regulatory certainty
that enables them to price emissions compliance costs into new construction.
The report suggests that they are going to have to make those decisions
before the full climate policy picture becomes clear.
In last year’s GF Energy survey, the CEOs acknowledged the
climate issue; this year they are already thinking about how significant
their capital investment will be. CEOs say rate increases are inevitable
in order to cover their new costs.
The survey authors go a step further, saying 2007 is the most transformational
year the industry has faced. “Until now, competition –
preference for and opposition to – has been the main industry
driver, the litmus test by which we assessed utilities,” the
survey says. “Now we are entering a new era which will also
divide utilities between those most likely to benefit from a carbon-constrained
world and those facing challenges that could lead to more industry
consolidation.”
With climate change driving investment, it’s also providing
justification for higher cap-ex. “Climate legitimizes the
costs of nuclear and advanced coal as well as renewables,”
the report says. “CEOs also believe there will be another
wave of expensive gas-fired generation if we don’t move quickly
enough on other alternatives.” The survey shows that CEOs
are more committed to energy efficiency and demand-response options,
but they are still placing their bets on large base load power sources
instead of relying on “somewhat elusive” demand reduction
potential. We’d say that’s prudent.
When asked to rate the most important climate change technology
strategies, end-use energy efficiency beat out new nuclear power
by a nose. Next were carbon capture and storage, then renewable
power and finally IGCC plants. Most folks said the pace of development
of new nuclear plants has increased (57 percent said it’s
faster, 32 percent said the pace hasn’t changed). “Most
respondents only expect to see a few plants built,” the report
says. It’s also noteworthy that CEOs in the heavy coal-producing
regions think there will be “a window for coal before the
door on pulverized coal closes forever.” But the survey says,
“a greater proportion of respondents than last year have returned
to counting on natural gas.”
This is a big change from 2006, when 75 percent expected more coal
growth in the mid-term and 14 percent thought new nuclear plants
were on the horizon. This year only 62 percent were expecting coal-fired
construction and 37 percent expect nuclear construction. IGCC has
remained in the middle, 30 percent last year and 45 percent this
year. Fifty-seven percent say any climate change legislation will
allow coal-fired plants already on the drawing board to proceed,
but only 29 percent think this Congress will actually be able to
pass a major climate bill. (Only 46 percent think the current Congress
will pass a federal renewable portfolio standard.)
So, what climate change regime makes the most sense? The power execs
don’t agree on this. Just over half think it’s a cap-and-trade
system (52 percent), with 32 percent of those favoring a system
with a safety value. Twenty-five percent think a carbon tax is the
way to go and 16 percent say the solution should be technology-based,
a la President Bush’s proposal. Three percent voted for “other
market mechanisms,” 2 percent want voluntary programs and
2 percent said taking no action was the best option.
There are two key takeaways here. The first is that, with no carbon
regulations on the books, more than one-half of US electricity CEOs
have already made some kind of investment to address emissions issues,
and 91 percent consider environmental issues to be their leading
R&D driver.
The second is that the uncertainty in the industry is genuine. The
majority of CEOs think end-user demand will grow over the next five
years and they will have to commit time and resources to meeting
their customers’ expectations. But the survey also suggests
that those new generation commitments are being deferred.
Meanwhile, the percentage of CEOs who are confident they can meet
their mid-term power demand is only 53 percent – and that’s
a 10 percent drop from last year.
