Impact of ESG on US utility sector could be profound; promised CO2 reductions transformative

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 and, according to the EEI, when measured by market capitalization, more than 90 percent of the US investor-owned electric power industry is currently using the ESG/Sustainability Template to report information to investors.

While ESG disclosure continues to evolve from a ‘nice-to-have' to a ‘must-have,' as one corporate sustainability officer has put it, 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.

The increase in this supplemental information has brought with it a material increase in CO2 emissions reduction goals that, if met, 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 by such companies as Duke Energy and Dominion Energy.

In a December 10 short-term outlook, the Energy Information Administration said wind, solar, and "other nonhydropower renewables" provided roughly 10% of the US' total utility-scale generation in 2019, and said they expect that to increase to 12% in 2020.

Wind and solar generation is expected to grow from 411 billion kWh in 2019 to 471 billion kWh in the US in 2020.

Moody's Investors Service has 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 in 2020 given the utility actions announced in late 2019." The reduction of CO2 is largely due to the decline in coal-fired power generation.

S&P Global Ratings has said that, over the past year, more and more businesses have shifted focus to address issues closely linked to the mitigation of and adaption to climate change.

The ratings agency says that ESG considerations are finding their way into loan pricing and that sustainability or ESG linked loans have emerged as the latest innovation for bank loans, both investment grade and speculative grade.

SURGE IN CO2 COMMITMENTS

Given the absence of a federal climate change policy, a growing number of utilities have been encouraged by investors over the past two years to set their own carbon targets.

There has been a recent jump in ESG reporting, and an increase in climate goals in particular, with at least seven utility holding companies declaring they will reach 100% C02 emission reductions by 2050.

[Some doubts remain about whether a country the size of the US can or even should go 100% renewable, but it is fairly clear that the sprint away from coal generation will continue.

There is approximately 1.1 million megawatts of installed generation capacity of all types that are available to the US grid. Between 2010 and the first quarter of 2019, US power companies announced the retirement of more than 546 coal-fired power units, totaling about 102,000 MW of generating capacity, according to the US Energy Information Administration. "Plant owners intend to retire another 17,000 MW by 2025," said the EIA in a July 2019 report.

The EIA said coal-fired capacity will average 25% of the US fuel mix in 2019, while natural gas-fired generation will rise from 34% in 2018 to 37% in 2019 and 2020.

Since the end of 2007, installed wind capacity across the US has gone from 16,907 MW to 97,963 MW at the end of the second quarter 2019, a nearly six-fold increase.

In 2007 there was 830 MW of solar PV capacity installed in the US. At the end of Q2 2019, the total reached 69,100 MW, according to the Solar Energy Industries Association. During the 12-year period, the combined capacity of US wind and solar has grown from 17,737 MW to 167,063 MW.

A combination of federal production tax credits and guaranteed federal construction loans and cash reimbursements helped spur the growth of wind, while an investment tax credit has aided the development of solar generation.

The question is, how much wind and solar growth can realistically be expected and over what period of time? According to the American Wind Energy Association, there were approximately 20,900 MW of new onshore wind facilities under construction in Q2 2019 alone, with 1,962 power purchase agreements signed, 52% by corporate customers.

One potential new area for zero-emission generation is offshore wind, which East Coast utilities along with European developers have estimated could reach as much as 18,000 MW by 2030.

Offshore wind has held out promise for almost 20 years in the US. Currently, there is only 30 MW of offshore wind installed in US waters.

-- Jeffrey Ryser, jeffrey.ryser@spglobal.com

-- Edited by Jeffrey Ryser, jeffrey.ryser@spglobal.com