Utilities are undergoing a fundamental transformation as they wrestle with the challenges of climate change. The earth is warming and that can cause large, potentially hazardous changes in the climate and weather and have a widespread impact on human and natural systems. Utilities’ infrastructure, scattered across wide areas and often outside, is particularly exposed to the impacts of climate change, with coastal grid and generation infrastructure at risk from severe weather and rising sea levels. Because the electricity and heat generation sector is the largest emitter of global greenhouse gases (43 percent), it is of critical importance that utilities commit to significantly reducing emissions over the coming years and formulate a plan of how best to do this.
Worldwide legislation is compelling all industries to make more environmentally friendly decisions. In April 2016, 175 countries signed the United Nations’ Paris Agreement, which aims to limit warming to “well below 2°C above pre-industrial levels” and seeks to limit the temperature increase to 1.5°C. Additional targets include the long-term global goal of a 100 percent carbon-neutral world. Moreover, many countries have their own, often even more stringent, climate regulations.
Not only is electricity generation the single largest contributor to greenhouse gas emissions, its emissions are fairly concentrated in clearly identified sites (compared to other sectors such as transportation or agriculture). This makes it an easy target for governments looking for a place to start with emissions reduction.
Undeniably, these goals put pressure on utilities to address global warming, but as utilities already know, there is more at stake for them than compliance. For example, changes to the environment have an unknown impact on fossil fuel reserves, unpredictable weather can cause fluctuations in demand, an increase in hurricanes and coastal storms can lead to more power outages, and unpredictable weather can create health and safety risks.
Stranded assets risk is another example. Decarbonization goals out to midcentury will influence utilities investments today. Indeed, a new fossil-fired power station today would be expected to have a useful life of about 25 to 40 years. With the Paris Agreement comes long-term pathway planning to ratchet up emission reduction ambitions, in the long term, enforcement of strong greenhouse gas limitations could leave utilities with fleets of redundant, high-emitting fossil fuel power stations they can no longer operate. A power plant that looks like a good investment today may not be such a lucrative asset in a few decades when its operations are limited or stopped by a high carbon price, carbon tax, or stringent regulation. Regulators will consider climate goals when making decisions on which assets utilities should invest in, especially if depreciation extends beyond the horizon for full decarbonization. Power plants and other electric infrastructure have long operating lives, so the decisions made today will impact the fuel mix and carbon emissions for decades to come.
Let’s take a look at three major areas for improvement: energy efficiency, demand-side management, and renewable energy.
Scenario modeling by the International Energy Agency predicts 40 percent of the emission reductions needed to meet global goals will come from energy efficiency. This makes energy efficiency one of the key areas on which utilities can focus. It is also the cleanest, most economical energy resource — if energy isn’t being used, it doesn’t need to be transmitted, generated, or distributed. It is the so-called negawatt.
Utilities can reap big benefits from improving efficiency, including lower costs for energy generation, transmission, and distribution, more reliable systems (because of less stress on equipment), and reduced dependence on scarce resources. A good place to begin with is in increasing the efficiency of energy-consuming processes and products in both supply and demand.
Demand-side management programs seek to influence consumer behavior. Technology advancements such as smart meters and other intelligent devices allow utilities to collect data that gives consumers visibility into their energy use. This allows them to make informed decisions on how they consume energy and the information can encourage them to make more efficient choices such as reducing the amount of energy they use or consuming at off-peak times. Utilities can also encourage the use of energy-efficient appliances (e.g. heat pumps), electric devices (e.g. LEDs), and building designs (e.g. passive or bioclimatic architecture).
Demand response programs and aggregators are improving flexibility by managing electricity use, which allows utilities to better adapt the demand for power rather than adjusting the supply. This has the added benefit of potentially lowering the cost of electricity in wholesale markets. The objective is to better align energy use with its availability.
Renewable energy, particularly solar and wind energy, is the fastest growing source of electricity, especially distributed generation. It is expected to overtake coal as the largest source of electricity by the early-2030s and accounts for more than half of all growth over the period from now until 2040. In addition, the cost of renewable generators continues to drop, fueling renewables’ growth, and its integration into traditional grid networks is ongoing. Although the continued shift to renewables can be challenging, utilities moving toward the smart grid will find the benefits outweigh the negatives.
The same can be said about all the upcoming environmentally motivated changes. Yes, they’re required and necessary, but rather than looking at a carbon-neutral world as a barrier to operations, utilities should focus on the many opportunities the changes will bring.