A drive by dozens of US electricity utility holding companies to provide 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.
ESG impacts credit, loans
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. Sustainability or ESG linked loans have emerged as the latest innovation for bank loans, both investment grade and speculative grade.
The S&P 500 ESG Index was developed to serve as a benchmark for index-linked investment products. The methodology of the S&P 500 ESG Index was constructed with two objectives, S&P Global has said: to provide a similar risk/return profile to the S&P 500; and to avoid companies that are not managing their businesses in line with ESG principles, while including companies that are.
As of October 31, 2019, the S&P 500 ESG Index had 315 constituents, with 190 constituents of the S&P 500 excluded. These exclusions comprised 26.32% of the S&P 500 index’s market capitalization as of the same date.
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, noted the pro-renewables group, the Energy and Policy Institute, in a June report.
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.
US ELECTRIC UTILITY CO2 EMISSIONS REDUCTION GOALS (%)*
One of the seven is Duke Energy, which in September announced an updated climate strategy with a new goal of net-zero carbon emissions from electric generation by mid-century. The company said it was accelerating its near-term goal by cutting its carbon dioxide emissions by half, or more, from 2005 levels by 2030. Xcel Energy, based in Minnesota, said earlier in May that it is on pace to reach its interim goal to cut carbon by 80% by 2030, with its longer-term goal being the delivery of 100% carbon-free electricity by 2050.
Warren Buffet’s Iowa-based regulated utility MidAmerican Energy has installed so much wind generation that it has said it might be able to reach 100% reduction by next year. Numerous other electric power companies have slightly lower CO2 emission reduction goals. Dominion Energy has said it is “committed to reduce carbon emissions from its power stations 55% by 2030 and 80% by 2050, and to cut methane emissions in half by 2030.”
On November 5, the CEO of Vistra Energy presented analysts with a 10-year fundamental outlook, reflecting Vistra’s announced goal to cut carbon dioxide emissions by more than 50% by 2030 from 2010 levels. The Dallas-based company has already completed or announced plans to retire 14 coal plants and three gas plants, which should cut CO2 emissions by 42%, CEO Curt Morgan said, adding that “our fundamental analysis would suggest that future retirements of this magnitude will be warranted based on economics alone.”
Even in the Midwestern part of the country, ESG sustainability reports have become de rigeur. Alliant Energy, based in Madison, Wisconsin, has said it is targeting a 40% reduction in carbon emissions below 2005 levels by 2030 and an 80% reduction by 2050. The WEC Energy Group, based in Milwaukee, Wisconsin, said in July that its long-term goal is to reduce total carbon dioxide emissions by 80% below 2005 levels by 2050.
A national price on carbon
The Democrat-led House Energy and Commerce Committee adopted a bold target earlier this year to achieve a 100% clean economy by 2050. In an October 31 hearing, the committee chairman, Democrat from New Jersey Frank Pallone said, “In the power sector, there are clear, achievable ways to get to 80% decarbonization, but it’s the last 20% that will, by far, be the biggest challenge.”
Pallone said, “Getting to 100% will require a balanced portfolio of low- and zero-carbon technologies — including solar, wind and nuclear power — as well as energy storage and carbon capture technologies. Without this balanced portfolio, deep decarbonization will happen at a slower pace and at a higher cost to homeowners and businesses.”
However, according to PSEG President and CEO Ralph Izzo, “The shortest path to a net-zero economy requires setting a national price on carbon.”
“This is what will drive the innovation needed to achieve our goals. This is what allows us to end technology-specific subsidies that layer on additional costs,” he said. “And this is what will help drive emissions reductions through market mechanisms not just from the power sector but economy-wide.”
In early October, the New York Independent System Operator, or NYISO, proposed embedding the social cost of carbon dioxide emissions into the wholesale price of electricity. NYISO may end up providing the model that will be used by regulated power markets and grid operators.
Pushing the clean agenda
Deloitte, the audit and consulting firm, released a report in early October on a survey it did of 308 executives from eight industries, not including the US power sector. Deloitte said that 45% of the executives from those industries have a target year to increase renewable energy sources in their electricity consumption. Six companies indicated they were aiming at 100% renewable energy.
One non-energy company, Amazon, issued in mid-September what it called a climate pledge committing it to 100% renewables by 2030 and net zero carbon emissions by 2040. Amazon said it will speed up its adoption of renewable energy with the goal of converting 80% of the company’s energy sources to renewable energy by 2024.
Coal plummets, renewables soar
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.
NET SUMMER GENERATION CAPACITY BY FUEL TYPE
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. Currently, there is only 30 MW of offshore wind installed in US waters.
Nukes seek subsidies
Nuclear generation emits no carbon, and the 98,000 MW of installed nuclear capacity in the US makes it a prime baseload generation platform to build on if the goal is reducing CO2. However, the growth of natural gas supply and generation in the US and the rapid rise of renewables have pushed power prices so low that nuclear plants cannot compete and many are being retired.
Several states in the US have chosen to subsidize nuclear generation rather than see it retired. A total of 14 nuclear reactors at 10 plants in five states with combined capacity of 12,400 MW are now receiving state subsidies in the form of zero emissions credits, or ZECs, to keep them operational.
Exelon Energy owns all or a portion of six nuclear facilities that are now receiving ZECs. The Chicago-based holding company in September closed its most famous, or infamous, nuclear facility, the 819 MW Three Mile Island in Pennsylvania, bringing its total fleet down to just under 18,200 MW.
Exelon has long argued, though, that since 90% of its generation fleet is carbon emissions free it has a seat at the table when it comes to discussing deep carbon emission reductions. Many have argued that net-zero emissions in the US cannot be achieved without impacting reliability unless nuclear remains a large part of the generation mix.
Power of public opinion
Prior to the United Nations launching its Climate Action Summit in September in New York, UN Secretary General Antonio Guterres said in a television interview that he believed “public opinion is waking up” to the threats of climate change.
“What we see in the US, even if it’s probably the country where you have a bigger number of people disbelieving [in climate change], there is already a solid majority believing,” Guterres said. “Central banks are including climate change risks. We see rating agencies including climate change risks. We see more and more big asset managers representing trillions of dollars divesting from fossil fuels.”
Guterres said governments follow public opinion. “I am starting to see governments also understanding that they need to act. We still have emissions growing. We are still not there. Climate change is running faster than what we are. But for the first time I’m seeing more and more countries accepting that they have to be carbon neutral in 2050,” Guterres said.
After the summit, London-based fund manager Octopus Investments Limited released a report forecasting that “it will cost the UK alone more than GBP1 trillion to hit net zero carbon emissions by 2050.” Nonetheless, it noted, the UK is now one of over 75 countries that have committed to the zero carbon emissions target.
The Octopus report, titled “The Great Transition: Opening the renewables floodgate,” argued that over the coming decade, institutional investors plan on divesting $920 billion from fossil fuels, “while also ploughing $643 billion into renewable energy.”
The report also said that a survey showed institutional investors “know they can play an important role in tackling climate change, but less than a quarter of respondents have adjusted their portfolios to reflect that.” The report added: “While mounting pressure from external parties is being felt globally, the most common response is to launch ESG products in-house.”
AEP’s about-face on coal, renewables
Columbus, Ohio-based holding company American Electric Power, long one of the country’s largest utilities and coal-fired generators, said in September it wants to cut its carbon dioxide emissions “faster than anticipated” and revised its 60% by 2030 reduction target to 70% from 2000 levels. It also said it was “confident” it could get its emissions down to 80% of its 2000 level by 2050.
AEP emitted 167 million metric tons of CO2 in the year 2000, making it one of the biggest electric power emitters that year.
US CO2 EMMISIONS FROM PEAK YEAR OF 2007 THROUGH 2018
In 2007, when emissions from the US power sector reached a peak of 2,425 billion mt, AEP’s emissions were still as high as 151 million mt. However, since 2011, when its annual C02 emissions totaled 136 million mt, AEP has retired 8,620 MW of its coal-fired capacity, bringing emissions down to 69 million mt in 2018.
AEP has said that through the end of 2019 it expects coal-fired generation to represent 46% of its total capacity, while natural gas-fired generation will represent 27% and nuclear generation 7%. Another 1,450 MW of AEP’s coal-fired capacity is expected to be retired in 2020, and a further 1,300 MW by 2028.
In recent financial presentations, AEP executives told analysts that the company has come a long way since 2005 when coal-fired generation capacity was 70% of its total. In 2019 renewables – hydro, wind, solar and pumped storage – represent 16% of AEP’s fuel mix.
AMERICAN ELECTRIC POWER'S ANNUAL CO2 EMISSIONS
It has said in its integrated resource plan that with generation additions and additional retirements through the year 2030, it expects coal-fired capacity to account for 27% of its fuel mix, natural gas 22% and nuclear 7%, with hydro, wind, solar and pumped storage reaching 40% combined.
Its target of an 80% CO2 reduction from its 2000 level by 2050 translates to just 13.3 million mt of CO2 annually by mid-century.