Why capital markets are continuing to finance utilities facing rising flood and other climate change impacts
Many nuclear and fossil fuel power plants in the U.S. are intentionally sited near a body of water to provide access for various cooling processes while much electrical infrastructure remains above ground, according to the Energy Information Administration. The location of these assets makes them vulnerable to the intensifying impacts of the storms, hurricanes and flooding that have occurred with rising frequency over the past two decades, experts say.
On the Gulf Coast, for instance, companies need to expect what was previously a once-in-100 year severe rain event to now happen once every three years, per an analyst at global management consulting firm McKinsey & Company.
“The probability of the extreme weather events has increased quite markedly,” said Matt Rogers, senior partner at McKinsey.
Within voluntary filings for the CDP, 13 out of 18 U.S. utility respondents examined by Utility Dive identified a physical risk of extreme weather events such as “floods or cyclones.” When estimating the cost of these increasing storms, some utilities tried using recent storm damage as a benchmark for what could be expected: multiplying the costs of damage from a specific storm for the next decade. Utilities sometimes use the costs of storms from the most impactful storms in recent years to forecast damage.
For example, Duke Energy multiplied the damage caused by Hurricane Michael and Florence tenfold to estimate the impact from storms over the next decade, according to its CDP filing. NRG Energy, with one of of its two headquarters in Houston, Texas, used the damage from Hurricane Harvey to benchmark the potential impact of storms on its assets.
As utilities acknowledge increasing climate risks in their financial filings or through voluntary questionnaires, such as CDP’s, interest from investors and capital markets in financing utility mitigation efforts has not waned.
Capital markets not shying away from financing climate impacts
Utilities are not having trouble accessing the capital markets to secure financing for recovery and resilience initiatives despite their increasing vulnerability to climate risks because they are considered a reliable investment asset, analysts say.
“As far as the capital markets, everybody’s aware that there’s climate change,” said Tim Hynes, head of North American research for Debtwire. “The market knows that there’s climate change risk but they’re still willing to provide financing.”
In anticipation of the costs of major hurricane seasons or other worsening natural disasters, utilities can raise additional debt and equity capital, per Debtwire.
Utilities have raised 90% more equity in 2020 than they did in 2019, and also increased the amount of convertible bonds raised 15% between those same years. Several of the utilities involved did so during seasons when extreme weather events were expected, from hurricanes to wildfires, Hynes said, such as Liberty Utilities’ parent company, Algonquin Power & Utilities, and Eversource Energy.
“The markets… are still allowing utilities to raise money despite the environmental risk,” Hynes said, even with the ongoing public health crisis of COVID-19.