Sectoral Risk Briefings:

Insights for Financial

Institutions

Climate Risks
in the Power
Generation Sector

This resource is part of the

UNEP FI Risk Centre offering May 2024
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© Maps, photos and illustrations as specified
Suggested citation: United Nations Environment Programme (2024). Climate Risks in the
Power Generation Sector. Geneva.
Production: United Nations Environment Programme Finance Initiative.
Cover image: elements.envato.com/power-plant-at-night-D2PAXB8

Climate Risks in the Power Generation Sector 

Acknowledgements

Authors
UNEP FI
David Carlin Maheen Arshad
Head of Risk Climate Risk Manager
[email protected] [email protected]

The authors would specifically like to acknowledge the contributions, inputs, and support-
ing research that have enabled the completion of this report:
Aoife Martin, UNEP FI
Amina Naidjate, Williams College
Hikaru Hayakawa, Williams College
Ben Lawrick, Williams College

Project management
The project was set up, managed, and coordinated by the UN Environment Programme
Finance Initiative, specifically: Remco Fischer ([email protected]) and David Carlin
([email protected]).
The project has been supported by the following financial institutions as members
of the UNEP FI convened Climate Risk and Taskforce on Climate-related Financial
Disclosures Programme:
ABN-AMRO Danske Bank KBC
Access Bank Desjardins Lloyds
AIB DNB NAB
Bank of Ireland EBRD NIB
Banorte Farm Credit Canada Scotia Bank
BBVA Goldman Sachs Sovcom Bank
Bradesco ING Standard Bank
CIBC Intesa Sanpaolo TSKB
Citibanamex Itau

Climate Risks in the Power Generation Sector iii

Contents | Acknowledgements
Contents

Acknowledgements.......................................................................................................................iii
Purpose of this document.............................................................................................................1
Introduction......................................................................................................................................2
Sector overview...............................................................................................................................3
Section A: Transition risks............................................................................................ 6
1. Increasing carbon prices......................................................................................................8
2. Other public policy shifts................................................................................................... 15
3. Rise in low-carbon technologies and technological risks........................................... 19
4. Consumer and societal pressure.................................................................................... 26
5. Shifting investor preferences........................................................................................... 29
6. Market risk and asset stranding...................................................................................... 32
7. Reputational risk................................................................................................................. 34
8. Emerging legal risks........................................................................................................... 35
9. Transition risk guidance.................................................................................................... 37
Section B: Physical risks............................................................................................42
1. Rising temperatures and heat stress.............................................................................. 44
2. Droughts and water stress............................................................................................... 47
3. Wildfires................................................................................................................................ 57
4. Intensifying storms and floods........................................................................................ 59
5. Rising sea levels ................................................................................................................ 65
6. Physical risk guidance ...................................................................................................... 69
Bibliography................................................................................................................................... 73

Climate Risks in the Power Generation Sector iv

Contents |
List of figures and tables
Figures
Figure 1: Changes in electricity generation in the IEA’s Net Zero Scenario
Figure 2: Unextractable reserves of fossil fuels by region in 2050 and 2100 under a 1.5°C
scenario
Figure 3: Impact of a carbon tax of USD 100/tCO2 on sectors in the Netherlands
Figure 4: Examples of various ETSs from 2018–2023
Figure 5: Global carbon price shown in the NGFS Net Zero 2050 scenario
Figure 6: Electricity generation from coal, oil, and gas as a percentage of 2021 levels in
the NGFS Net Zero 2050 scenario
Figure 7: Types of energy subsidies as percentage of global GDP
Figure 8: Incentives for renewables compared to subsidies for coal-fired electricity in
2017 as end-user prices
Figure 9: Global annual investment in the power generation by selected technology,
2020–2023e
Figure 10: Change in LCOE of solar and wind in comparison to fossil fuels from 2010 to
2022
Figure 11: Solar Energy Capacity and Production in Egypt 2012–2020
Figure 12: Comparison of power generation with CCS with other alternatives based on
their LCOEs
Figure 14: Changes in global electricity generation by source between 2022 and 2025
Figure 15: Decreasing power generation costs (2010–2023)
Figure 16: Number of banks with active coal policies
Figure 17: Status of coal-fired power plant projects as a result of lost financing from
2011 to 2023
Figure 18: Global clean energy investments compared to fossil fuel investments from
2018 to 2022
Figure 19: Pathways for global coal capacity and stranded assets: (a) coal capacity by
development stage; (b) coal capacity pathways under 1.5°C and 2°C goals
(lines) or if plants outlive their historical average lifetimes (shaded regions); and
(c) asset stranding under 1.5°C and 2°C scenarios
Figure 20: Stranded assets of coal plants by region under a 1.5°C policy scenario if all
plants in the pipeline are developed
Figure 21: Exposure of various sectors to physical risks
Figure 22: Electricity price hike in France after heatwave

Climate Risks in the Power Generation Sector v

Contents |
Figure 23: Map of US power plants located in drought areas
Figure 24: Changes in precipitation in the Middle East and North Africa from 2081 to
2100 under SSP2–4.5 scenario
Figure 25: (a) Projected change in water scarcity across regions with existing dams in
2050 under a 3.5°C warming scenario
Figure 25: (b) Projected change in water scarcity across regions with projected dams in
2050 under a 3.5°C warming scenario
Figure 26: Drought along the Paraná River Basin
Figure 27: The ‘Dixie Fire’ spreading through Genesee, California, in 2021
Figure 28: Proportion of existing hydropower dams at risk of flooding under three
scenarios—optimistic (1.5°C warming), current trend (2°C warming), and
pessimistic (3.5°C warming
Figure 29: (a) Projected change in flooding across regions with existing dams in 2050
under a 3.5°C warming scenario
Figure 29: (b) Projected change in flooding across regions with projected hydropower
dams in 2050 under a 3.5°C warming scenario
Figure 30: Flooding in Germany in 2021
Figure 31: Additional exposure of US power plant sites to extreme sea-level rise without
additional mitigation action
Figure 32: Exposure to sea-level rise of nuclear power plants in Florida
Figure 33: Cities with power plants vulnerable to coastal flooding due to a sea-level rise
of 0.5 metres in the 2050s

Table
Table 1: Key climate risks for the power generation sector
Table 2: Germany’s energy transition targets
Table 3: Estimated change in end-user prices without coal subsidies

Climate Risks in the Power Generation Sector vi

Contents |
Purpose of this document

This detailed briefing note explores relevant climate risks for the sector, supported by
illustrative examples from firms in the form of case studies featured in the main text.
These case studies showcase how firms in the sector are recognising and confronting
climate risks through disclosure examples from their annual reports.
It is important to note that this brief specifically delves into the potential impacts of
climate change on the sector. Therefore, exploring the reverse—how the sector impacts
climate change—is not the primary purpose of this document. Additionally, the scope of
this brief is narrowed to focus solely on climate risks, excluding a broader examination of
potential environmental and social risks for the sector. A future series may incorporate
these other important risks and considerations of double materiality.
This brief also provides guidance and recommendations aimed at assisting financial
institutions in effectively managing both their own risks and those of their clients, with
the aim of accelerating a sustainable financial and economic system.

Climate Risks in the Power Generation Sector 1

Contents | Purpose of this document
Introduction

In the past few years, the global economy has been lashed by the COVID-19 pandemic,-
geopolitical conflict, supply chain disruptions, an energy crisis, and high inflation. These
challenges are occurring against the backdrop of the mounting planetary emergency of
climate change. Climate change can exacerbate all other challenges, increasing geopo-
litical conflicts over resources, crippling infrastructure and supply chains, extending
the range of dangerous pathogens, and collapsing the natural systems upon which we
depend. As the US Pentagon presciently stated: “climate change is a threat multiplier”.
While the transition to a sustainable, net-zero future is critical, it demands fundamental
shifts in nearly all economic sectors. These shifts are not without risk for companies and
communities impacted by them.
Financial institutions face an array of risks from this rapidly changing, and often chaotic,
world. Their clients are exposed to physical hazards as well as transition risks, which
can have major credit, market, and operational implications. The prudent financial
institution will explore these climate-related risks and prepare strategies to meet them.
Future resiliency and success are contingent on thoughtful planning and good decisions
today. UNEP FI has been working at the intersection of sustainability and finance for
over 30 years. Its programmes for financial institutions develop the tools and practices
necessary to positively address the most pressing environmental challenges of our time.
UNEP FI’s Climate Risk and TCFD Programme has now worked with over 100 financial
institutions to explore physical and transition risks posed by climate change. Through
this work, a need has been identified to provide financial institutions with a baseline
understanding of climate-related risks and their manifestations across different sectors.
This brief is part of a series of notes that cover major economic sectors and their associ-
ated climate risks.1 Each brief also provides specific guidance and recommendations for
financial institutions to enable them to more effectively manage their risks and those of
their clients. UNEP FI intends for the resources and perspectives included within these
notes to empower financial colleagues to communicate these risks throughout their
institutions and across the financial sector more generally. The hope is that the commu-
nication process will not only enhance awareness of climate risks, but also begin conver-
sations that will lead to tangible changes in strategy and operations. It is the integration
of the insights that will be the truest test of the effectiveness of this series. This particu-
lar brief covers the physical and transition risks facing the power generation sector.

1 Previously published climate risk sector briefs by UNEP FI cover Agriculture, Real Estate, Oil & Gas and Industrials.

Climate Risks in the Power Generation Sector 2

Contents | Introduction
Sector overview

Power generation is the generation of electricity from primary energy sources.2 In 2022,
electricity from fossil fuels generated 40% of the total global carbon emissions (Liu et al.,
2023). In 2021, the power generation sector witnessed the greatest increase in carbon
dioxide (CO2) emissions across all sectors globally, with the sector accounting for 46% of
the rise in emissions (IEA, 2022a). The sector faces high transition and physical risks as a
result of its contribution to CO2 emissions. The power generation sector is therefore one
of the pivotal sectors that must undergo rapid decarbonisation to mitigate global warming.
Despite rapid growth in renewable energy, fossil fuels account for 82% of the global
energy mix (S&P Global, 2023a). In 2020, the global power generation mix was primar-
ily comprised of fossil fuels—namely, coal and natural gas (IEA, 2020a). However, the
global energy mix is expected to shift significantly in the coming decades. The Inter-
national Energy Agency’s (IEA) updated roadmap to net zero by 2050 shows global
electricity generation rising by 3.5% annually from 2022 to 2050. This is due to electri-
fication of end-uses, such as electric vehicles (EVs) and industrial processes, coupled
with economic development and population growth. In the pathway, less carbon-inten-
sive energy sources (such as renewables, nuclear and hydrogen) outcompete unabated
fossil fuels after 2025. These account for 71% of total electricity generation by 2030,
double the share in 2022 (Figure 1) (IEA, 2023a). Therefore, this sector risk brief will
focus on both power generation from fossil fuels and low-emissions alternatives.

Renewables Grids investment Fossil fuels unabated Nuclear

(thousand GW) (Billion USD 2022, MER) (thousand TWh) (GW)
30 1,200 18 900
Oil x2
Natural gas
20 800 12 600
x2
-95%
x3
10 400 6 300
Coal
2022

2030
2040
2050

2022

2030
2040
2050
2022

2022
2030
2040

2030
2040
2050

2050

Figure 1: Changes in electricity generation in the IEA’s Net Zero Scenario (IEA, 2023a)

2 Energy available in its resource form before it has been transformed.

Climate Risks in the Power Generation Sector 3

Contents | Sector overview
The power generation sector faces vulnerabilities from physical risks owing to the
increased frequency and severity of extreme physical hazards caused by climate change.
For example, the combination of stronger storms and rising sea levels threaten to flood
energy production facilities. Similarly, wildfires can cause significant damage to facilities
or even destroy them. Greater uncertainty in physical conditions will lead to decreased
performance and reliability of power-producing assets, causing greater risks of down-
time and blackouts as well as higher capital and insurance costs for firms in the sector.
As nations ramp up their transition to a low-carbon economy in efforts to meet net-zero
pledges, the highly reliant fossil fuels power generation sector will face exposure to
transition risks, especially through the implementation of carbon prices and other types
of policy restrictions. The increasing availability of alternative energy sources and their
decreasing costs will also impact the market share of traditional power generation
companies. Other types of transition risks can range widely from shifts in consumer and
investor preferences to increasing legal and reputational risks as awareness of climate
change and the sector’s role grows among societies.
Below, we explore in depth the key transition and physical risks faced by the power
generation sector (Table 1).

Table 1: Key climate risks for the power generation sector

Risk Summary

Transition risks Increasing carbon As a major contributor to global emissions, the sector
prices will be significantly impacted by the implementation
of carbon pricing schemes. Carbon prices will
increase the cost of emissions, raising production
costs for firms and moving energy prices. Higher
energy prices raises concerns about the affordability
of electricity for households.
Other public policy An increasing number of countries have pledged to
shifts stop power generation from coal and reduce fossil
fuel subsidies. Such government actions threaten the
ability of power producers reliant on coal to operate
and generate profits.
Rise in low-carbon Advancements in low-carbon technologies have
technologies and resulted in greater capacity and lowered costs
technological risks of fossil fuel alternatives, such as renewables,
thus increasing competition for traditional power
generation firms.
Consumer and Increased awareness of climate change and its
societal pressure impacts is driving a shift in consumer preferences
from fossil fuels to alternative energy sources,
potentially causing a decrease in demand for fossil
fuel-based power generation.
Market risk and asset To limit warming to 1.5°C, newly developed and
stranding existing plants must be retired. As a result, owners
will be at high risk of stranded assets.

Climate Risks in the Power Generation Sector 4

Contents | Sector overview
 Risk Summary

Transition risks Shifting investor Investors are increasingly taking climate change into
cont... preferences consideration for decision-making. Many financial
institutions have announced disinvestment policies
for coal financing. As a result, firms in the sector
could face greater difficulties in receiving financing for
carbon-intensive projects.
Reputational risk Power generation companies face increased scrutiny
by the public due to the emissions produced from
their operations.
Emerging legal risks Firms in the sector are growing increasingly
susceptible to lawsuits from activists and
governments on climate-related issues.
Physical Risks Rising temperatures Higher temperatures reduce the operational capacity
of power plants, while adding extra pressure on the
sector to meet rising energy demand.
Droughts and water Power generation, especially hydropower, requires
stress large amounts of water and is threatened by rising
drought conditions and water scarcity.
Wildfires Wildfires can damage power infrastructure and can
decrease the efficiency of solar power generation.
Furthermore, power lines and other equipment have
frequently contributed to wildfires for which power
generation firms have been held accountable.
Intensifying storms Increased frequency and severity of extreme storms
and floods and flooding can increase operational costs of firms
in the sector due to damage to infrastructure and
constraint supplies of raw materials.
Rising sea levels Power plants located along coasts are exposed
to rising sea levels, which threaten power plant
infrastructure, including damaging electrical and
cooling systems. Such damages will increase
maintenance and repair costs for firms.

Climate Risks in the Power Generation Sector 5

Contents | Sector overview
 SECTION A:
Transition risks
Due to its heavy reliance on fossil fuels for
power generation, the sector has become
a focus for governments, climate activists,
and consumers. As a result, the sector will
encounter significant transition risks in
the form of climate policies, technological
advancements, and shifting investor senti-
ment. The pathway to limiting warming to
1.5°C requires the majority of coal, oil, and
gas reserves to remain un-burned. Accord-
ing to researchers, to limit warming to
1.5°C, 60% of oil and gas and 90% of coal
will need to remain unextracted (Figure 2)
Welsby et al., 2021). However, many power
generation firms have invested heavily in
the infrastructure and equipment needed
to generate power from fossil fuels. As the
impacts of climate change worsen, power
generation firms that contribute high levels
of emissions will also be susceptible to
reputational damage due to their contribu-
tion to climate change and due to lawsuits
by governments, non-governmental organi-
sations, communities, and individuals.
The transition risks facing the power
generation sector also pose a risk for
workers and communities that rely on the
sector for jobs and income. It is therefore
important to align financing with a just
transition approach that considers the
impact of the transition on groups at risk
to operations in the power generation
sector, including workers, Indigenous
Peoples and local communities.

Climate Risks in the Power Generation Sector 6

Contents | Section A:
Figure 2: Unextractable reserves of fossil fuels by region in 2050 and 2100 under a 1.5°C scenario (Welsby et al., 2021)

Climate Risks in the Power Generation Sector 7

Contents | Transition risks
1. Increasing carbon prices

To decarbonise and limit warming to 1.5oC, governments worldwide are implementing

measures to reduce CO2 emissions. One key mechanism that is being used is the imple-
mentation of carbon prices. A carbon price raises the cost of emissions in order to
discourage firms from carbon-intensive activities by raising the cost of operations. As a
high-emitting sector, power generation will be one of the hardest hit by a carbon price. A
study by De Nederlandsche Bank (DNB), the Dutch central bank, showed that the impo-
sition of a carbon tax of USD 100 would cause the greatest decrease in output in the
power generation sector3 out of all the Dutch sectors (Figure 3) (DNB, 2022).
Percentage change in output

10
compared to baseline

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CT100NL CT100EU+ CT100ALL-

Source: GTAP database, Rabobank simulations

Figure 3: Impact of a carbon tax of USD 100/tCO2 on sectors in the Netherlands
(DNB, 2022)

Countries are implementing a carbon price mechanism through a carbon tax or an

emissions trading scheme (ETS). As part of a carbon tax, the government decides a
price that an emitter will pay for each ton of emission they generate (C2ES, 2018). An
ETS, also known as a ‘cap and trade’ system, works where a limit or cap is placed on
the right to emit specified pollutants. Firms can trade the permits allocated to them,
establishing a carbon price (World Economic Forum, 2022). By 2022, 46 countries had
implemented carbon price mechanism, such as a carbon tax or an emissions trading

3 If substitution with renewables is not possible

Climate Risks in the Power Generation Sector 8

Contents | Increasing carbon prices
scheme, with prices rising as high as USD 90/tCO2 (IMF, 2022a). In 2023, revenues
from carbon pricing reached a record high of USD 95 billion through 73 different pric-
ing schemes (World Bank, 2023).
Globally, the power generation sector has been the main target of many carbon pricing
schemes. For example, as part of the European Union (EU) ETS, all European electricity
producers must buy CO2 emissions’ allowances for each ton of their emissions. In the
fourth quarter of 2023, the carbon price in Europe was EUR 85.48/ton (Ember, 2023a).
South Korea, where the power generation sector accounts for 54% of emissions (IEA,
2020b), has an emissions trading system in place since 2015. The average auction
price in 2022 was almost USD 18 (International Carbon Action Partnership, 2023a). In
2021, China implemented its national ETS, which regulates 2,000 companies from the
power generation sector (International Carbon Action Partnership, 2023b). Switzerland
implanted its ETS in 2008. This now covers many sectors, including electricity genera-
tion. It had a market auction price of USD 80, as of 2022 (International Carbon Action
Partnership, 2023c). Although the United States does not have a nationwide ETS, some
regional initiatives require power generation firms to purchase emission permits, linking
their cap-and-trade system to that of Quebec. Other regions, such as New Zealand and
the United Kingdom, operate emissions trading systems that cover emissions from the
power
Figure 01
generation sector.
Price Evolution in Select ETSs from 2018 - 2022
120

100
Carbon Price (USD/tCO2e)

EU ETS
80

60

40 New Zealand ETS

California/Québec ETSs
20 RGGI
Republic of Korea ETS
China National ETS
0
2018 2019 2020 2021 2022 2023

Year

Figure 4: Examples of various ETSs from 2018–2023 (World Bank, 2023)

Note: Based on data from ICAP Allowance Price Explorer. Pricesfor the RGGI initiative and for California and Québec CaT, come from the primary market, whereas for the other systems the prices reflect
the secondary market

Climate Risks in the Power Generation Sector 9

Contents | Increasing carbon prices
Coal
In the pathway to reach net zero, the Network for Greening the Financial System (NGFS)
Net Zero 2050 scenario (REMIND-MAgPIE model) shows carbon price increasing from
less than USD 10 per ton of CO2 (/tCO2) in 2020 to USD 115/tCO2 in 2030 and USD 451/
tCO2 in 2050 (Figure 5). As the carbon price increases, the scenario also shows a rapid
and significant decrease in electricity generation from fossil fuels. Electricity generation
from coal decreases by more than 80% in 2030 from 2021 levels. By 2050, electricity
generation from coal decreases by 100% (Figure 6).
As coal is more carbon-intensive than oil and gas, coal power plants are particularly
more vulnerable to rising carbon prices. According to economic analysis, the imposition
of a carbon price of USD 30/tCO2 would drive a shift in power generation from coal to
gas in multiple countries. This shift is driven by increased operating costs for coal power
plants, making them less economically competitive compared to natural gas alternatives.
In order to mitigate these costs, some coal plants may explore strategies like retrofitting,
repurposing, or early retirement. In the case of Thailand, for example, the declining costs
of wind and solar energy suggest that these energy sources could become cost-com-
petitive with coal as early as 2025 (IEA, 2021a). Similarly, a study conducted on Indone-
sia’s power generation sector revealed that a carbon price exceeding USD 35/tCO2 could
significantly alter the country’s energy mix, resulting in a reduction in coal-based power
generation (Kamandika and Dhakal, 2023). In Germany, the EU ETS is driving a transition
from coal to natural gas for electricity generation. In 2021, the cost of emission permits
surged by 28% compared to 2020. This increase in permit costs led to higher operational
costs for coal power plants, subsequently reducing their profitability. To adapt, some
power generators made the switch to natural gas. It is important to note that some of
the costs could be passed along to consumers (Reuters, 2021a).
Firms in the sector that rely on coal for power generation will face increased costs from
carbon prices. A carbon price of USD 7 tCO2 could increase the operating cost of an aver-
age coal plant by USD 7 per megawatt-hour (MWh), whereas a carbon price of USD 50/
tCO2 could increase the operating cost of an average coal by USD 50/MWh (Resources
for the Future, n.d). Analysis on carbon taxation by the National Institute for Economic
and Social Research (NIESR) found that a carbon tax of USD 100/tCO2 would quadruple
the price of coal relative to the price of renewable energy. The rise in costs could cause
demand for coal to decrease by 35% globally (NIESR, 2022). High costs can also impact
the lifetime of power plants. For example, in one study, a carbon price of USD 7/tCO2
could reduce the average residual lifetime of Chinese coal plants by 5.43 years (Mo et
al., 2021).

Oil and Gas

In a pathway to reach net zero emissions, the carbon price increases from less than USD
10/tCO2 in 2020 to USD 115/tCO2 in 2030 and USD 451/tCO2 in 2050 in the NGFS Net
Zero 2050 scenario (REMIND-MAgPIE model) to mitigate emissions (Figure 5), electricity
generation from oil decreases by almost 80% in 2030 from 2021 levels. In 2030, electric-

Climate Risks in the Power Generation Sector 10

Contents | Increasing carbon prices
ity generation from gas decreases by 20% of 2021 levels. By 2050, meanwhile, there is a
full reduction where gas is not responsible for generating electricity (Figure 6).
Firms in the sector that rely on oil and gas for power generation will face increased costs
from carbon prices. A carbon price of USD 7/tCO2 could increase the operating cost of an
average natural gas plant by USD 3/MWh, whereas a carbon price of USD 50/tCO2 could
increase the operating cost of an average natural gas plant by USD 20/MWh (Resources
for the Future, n.d). Analysis by NIESR found that a carbon tax of USD 100/tCO2 would
increase the price of oil and gas by 60 to 70% relative to the price of renewables. The
price increase could overall cause energy demand to decrease by 15% (NIESR, 2022).
As mentioned above, carbon pricing could lead producers switching from coal to gas
power generation due to the cost competitiveness of gas in comparison to coal under a
carbon tax. For example, since the introduction of a carbon tax in the United Kingdom,
electricity generation from coal decreased by almost 93% and was replaced by less
emission-intensive sources, including gas (UCL, 2020). In the United States, the shift
from coal to natural gas is already taking place without the implementation of a carbon
tax. Between 2005 and 2019, for example, the share of coal in the country’s electricity
generation mix decreased from 50% to 23%, while the share of natural gas increased
from 19% to 38% (EIA, 2021a).
500
450
400
uSD2010/tCO2

350
300
250
200
150
100
50
0
2020 2025 2030 2035 2040 2045 2050
Year

Figure 5: Global carbon price shown in the NGFS Net Zero 2050 scenario (REMIND-
MAgPIE model)

Climate Risks in the Power Generation Sector 11

Contents | Increasing carbon prices
Electricity Generation (2021=100%) 120

100

80

60

40

20

0
2000 2010 2020 2025 2030 2035 2040 2050

Year

Coal Oil Gas

Figure 6: Electricity generation from coal, oil, and gas as a percentage of 2021 levels
in the NGFS Net Zero 2050 scenario (REMIND-MAgPIE model) (BNEF Energy Outlooks
Comparison, 2023a)

For power generation by fossil fuels as whole, DNB finds that a carbon tax of EUR 50/
tCO2 increases production costs on average by 0.7% in the short term. However, for
the power generation sector, including electricity and gas, production costs increase
by 8% on average in the EU and 18% in the trading bloc’s Central and Eastern European
member states (DNB, 2021). The increase in costs became a crucial concern for firms
in the sector in 2023 when the price of the EU ETS reached EUR 100/tCO2. Carbon price
for the sector can also cause an increase in electricity prices for consumers (Resources
for the Future, n.d.). In areas where power plants are chosen based on market forces,
a carbon price can lead to higher operating costs for these plants. This, in turn, can
raise the overall electricity prices that consumers pay, especially if these power gener-
ators set the market prices themselves. In situations where power companies earn a
fixed, regulated profit on their investments, the costs linked to carbon pricing may cause
these companies to increase electricity rates for consumers so as to protect their profit
margins (Resources for the Future, n.d.). This occurred in 2021 after natural gas prices
rose sharply. While it is important to note that this increase in prices was primarily driven
by a combination of Russia’s invasion of Ukraine and heightened demand, it is important
to note that the EU ETS price at the time had more than doubled compared to 2020. This
suggests that carbon pricing also had an impact on energy costs. In the Nordic region,
wholesale electricity prices were almost seven times higher in the fourth quarter of 2021
than the same period in 2020. This reflects a complex interplay of various factors, includ-
ing geopolitical events and the influence of carbon pricing (IEA, 2022b). Energy prices in
Europe could have been even higher if it were not for the presence of existing renewable
energy infrastructure, which played a role in mitigating the potential impact on costs.

Climate Risks in the Power Generation Sector 12

Contents | Increasing carbon prices
The affordability of energy for households remains a just transition concern, with carbon
prices comprising one of the notable factors of the transition that could potentially nega-
tively impact consumers.

Case study 1: Carbon price risk

Capital Power Climate Change Disclosure 2022
Canadian power producer
Transition risk mapping and corresponding mitigation pathways
Key assumptions:
◾ Carbon pricing remains a central mechanism of climate policy in Canada;
prices rise over time while performance benchmarks are increased; comple-
mentary pricing and regulatory mechanisms are implemented and strength-
ened.
◾ Carbon pricing is gradually adopted and expanded across the United States;
pricing is implemented in the long term with material escalation of prices.
◾ Stimulus spending by governments is increasingly focused on energy and
green infrastructure.
◾ Demand growth accelerates globally from recent levels due to increasing levels
of electrification in industry as a way to reduce emissions.
◾ Carbon markets continue to expand across North America.
Risks
◾ Short term
◽ Changes in governments create uncertainty with respect to future climate
change-related policy.
◽ Current portfolio is exposed to carbon pricing; as prices rise, this may result
in higher compliance obligations and reduced margins for existing facilities.
◽ Unexpected variation in carbon prices and regulation may lead to material
variances compared to expectations.

Climate Risks in the Power Generation Sector 13

Contents | Increasing carbon prices
 ◾ Mitigation
◽ Capital Power actively participates in industry groups to monitor and
engage with government officials on emerging policy development relating
to climate change and carbon pricing.
◽ Carbon costs are passed through to counterparties on select power
purchase agreements and are also partly reflected in wholesale merchant
power market prices, thereby minimising exposure to carbon price.
◽ Capital Power actively manages compliance costs through participation in
environmental commodity markets and through continuous investments
in operational efficiencies and enhancements to reduce emissions at our
generating facilities.
◽ Scenarios and sensitivity analysis relating to carbon prices and regulation is
embedded in all commercial decision making and due diligence to ensure
appropriate consideration of climate change-related risks.
◾ Long term
◽ Accelerated decarbonisation of the power sector is being considered by govern-
ments in Canada and the United States
◽ Adoption and escalation in carbon prices continues in response to increasing
pressure to reduce emissions through market mechanisms; prices rise well
above current levels, while performance benchmarks are made more stringent.
◾ Mitigation
◽ Unmitigated thermal assets are increasingly expensive to operate; Capital
Power actively pursues Carbon Capture, Utilisation, and Storage (CCUS),
direct air capture (DAC), and hydrogen blending to minimise exposure to
carbon pricing, with a target of being net zero by 2045.
◽ Capital Power continues to actively manage compliance costs through
participation in carbon markets and investments in operational efficiencies
and enhancements that reduce emissions at its facilities.
◽ Over the longer term, Capital Power will pursue abatement at source, where feasi-
ble, and negative abatement where emissions cannot be reduced at source.
◽ Carbon costs are passed through to counterparties on select power
purchase agreements, minimising exposure to carbon price.
◽ The costs and risks associated with emissions abatement from thermal
assets are considered in all commercial decision making and due diligence;
capital allocation decisions may favour assets and technologies that mini-
mise potential exposure.

Climate Risks in the Power Generation Sector 14

Contents | Increasing carbon prices
2. Other public policy shifts

The power generation sector, especially power generation from coal, is also vulnerable to
policy risk from growing government restrictions. One of the biggest threats to the sector
is countries’ commitments to phase out coal power. Over 200 parties at COP 28 called
for a transitioning away from fossil fuels. The first ever ‘global stocktake’, which aims to
accelerate climate action by 2030, also took place at the conference in Dubai. The global
stocktake calls for the phase down of unabated coal power generation and the phase
out of inefficient fossil fuel subsidies (UNFCCC, 2023; Greenpeace, 2023). Prior to this,
some countries had already set out ambition plans to phase out coal, including Mauritius
and North Macedonia’s pledges to phase out coal by 2030. Aligning with this interna-
tional shift, Montenegro, the Czech Republic, Ukraine, and Bulgaria have committed to
the same goal by 2040 (Energy Monitor, 2023).
Countries are also establishing renewable energy targets, creating further risks for fossil
fuel power producers. Notable cases in point include:
◾ Germany, which has set a target to achieve 80% renewable power by 2030 and 100%
by 2035 (Table 2).
◾ New Zealand, which has a goal to derive 100% of its electricity from renewables by
2030.
◾ The United Kingdom, which plans to decarbonise its power generation sector by 2035
(Climate Council, 2022).
Traditional power producers that fail to adapt to such targets could face decreased
demand, resulting in losses and forced closures. For example, in 2021, 16 of 31 prov-
inces in China implemented electricity rationing to meet their annual emissions target
(SCMP, 2021).
After meeting its target of 50% renewable energy a full eight years early, Sweden is on
track to rely 100% on renewable sources by 2040 (Climate Council, 2022). In 2020, the
Nordic country was able to shut down its last coal power plant, Värtaverket, two years
early. This was partly due to changes in tax rules that made coal use for heating less
profitable. The plant, owned by Stockholm Exergi, had been operating since 1989, when
Sweden was dependent on fossil fuels for energy. The plant will be replaced by a plant
for capturing CO2 emissions from burning biofuels (Smart City Sweden, 2020).

Climate Risks in the Power Generation Sector 15

Contents | Other public policy shifts
Table 2: Germany’s energy transition targets4 (French Institute for International
Relations, 2023)
Target stated by Stand in
the former Target set in 2021 Target set in 2022 January
coalition 2022

Share of RES in 65% by 2030 80% by 2030 80% by 2030 46.4%

the power mix

Around 100 GW by
Onshore wind 75 GW by 2030 115 GW by 2030 57 GW
2030

30 GW by 2030,
Offshore wind 20 GW by 2030 30 GW by 2030 40 GW by 2035, 8 GW
70 GW by 2045

Solar 100 GW by 2030 200 GW by 2030 215 GW by 2030 63 GW

Electrolyzers 5 GW 10 GW 10 GW -

The removal of fossil fuel subsidies for power generation is also becoming a threatening
reality for the sector. There are many ways in which fossil fuels are currently subsidised.
On the supply side, governments have various options at their disposal. One common
measure is to transfer funds directly to power companies via lower taxes. On the
demand side, consumer subsidies can lower the taxes on fuels or electricity or set lower
prices for consumers (IMF, 2019). Figure 7 illustrates various types of energy subsidies
as a percentage of global GDP.
0.8 7
0.7 6
Percent of global GDP

Percent of Global GDP

0.6
5
0.5
4
0.4
3
0.3
2
0.2
0.1 1

0 0
2013 2015 2017 2013 2015 2017

Pre-tax Post-tax

Coal Petroleum Natural gas Electricity

Figure 7: Types of energy subsidies as percentage of global GDP (IMF, 2019)

In 2021, 197 countries agreed to renew efforts to phase out fossil fuel subsidies at
COP26 (IMF, 2022). Some countries have already begun to take steps to remove explicit
subsidies, such as India, Morocco, Saudi Arabia, and Ukraine (IMF, 2022). In India, coal
subsidies have decreased from about USD 2.8 billion in 2014 to USD 1.6 billion in 2021

4 ‘Stand in January 2022’ refers to levels measured in 2022 for the targets set.

Climate Risks in the Power Generation Sector 16

Contents | Other public policy shifts
(Climate Scorecard, 2023). Removing subsidies can significantly impact consumers and
firms due to increased energy costs. The impact on costs for firms can be compared to
the impact of a carbon price, and therefore the removal of subsidies on fossil fuels can
be a huge incentive to switch to the use of cheaper renewable energy.
The Energy Community Treaty creates a common energy market between the EU and
nine Contracting Parties: namely, Albania, Bosnia and Herzegovina, Georgia, Kosovo,
North Macedonia, Moldova, Montenegro, Serbia, and Ukraine. Despite the EU’s goal
to decarbonise its energy sector by 2050, annual subsidies for coal within the Energy
Community amount to EUR 2.4 billion. Between 2015 and 2017, total direct subsidies
by the Contracting Parties added up to EUR 400 million annually, while hidden subsi-
dies reached an estimated EUR 1.9 billion (Figure 8). Without any subsidies on electric-
ity generated from coal, the price of electricity could increase from 15% in the case of
Montenegro and North Macedonia right up to 52% in the case of Serbia. Table 3 shows
the percentage increase that end-users, households, and industry could witness from
the removal subsidy assuming that domestic power generation was sold to domestic
consumers. In Bosnia and Herzegovina, for example, the removal of coal subsidies for
electricity production could result in a price increase of 37% for households and 29% for
industry (Energy Community Secretariat, 2019).
As the phase-out of fossil fuels progresses, policymakers will need to carefully address
the challenge of minimising the impact of this transition on electricity prices and afford-
ability, addressing the concerns related to a just transition.

Figure 8: Incentives for renewables compared to subsidies for coal-fired electricity in

2017 as end-user prices (Energy Community Secretariat, 2019)

Climate Risks in the Power Generation Sector 17

Contents | Other public policy shifts
Table 3: Estimated change in end-user prices without coal subsidies (Energy Community
Secretariat, 2019)
in EUR/MWh
Contracting Party End users prices for households End user prices for industry

Charged in Price adjusted Change in % Charged in Price adjusted Change in %

2018 for subsidies 2018 for subsidies

Bosnia and Herzegovina 74,40 102,20 37% 65,30 84,30 29%

Kosovo (under United 59,10 78,70 33% 73,30 70,00 -5%
Nations Security Council
Resolution 1244/99)

Montenegro 84,80 97,50 15% 80,50 90,40 12%

North Macedonia 66,70 80,50 21% 67,50 76,80 14%
Serbia 59,10 89,80 52% 71,90 80,40 12%
Ukraine 34,20 n/a 61,80 n/a

Case study 2: Public policy risk

Enel Integrated Annual Report 2022
An Italian multinational energy corporation
Policy implications on business
Enel group operates in regulated markets and changes in the operating rules of
the various systems, as well as the prescriptions and obligations characterizing
them, impact the operations and performance of the Parent.
Mitigation measures
Accordingly, Enel closely monitors legislative and regulatory developments, such as:
◾ periodic revisions of regulation in the distribution segment;
◾ the liberalization of electricity markets, with special attention being paid to the
acceleration provided for in Italy and expected developments in South America;
◾ developments in capacity payment mechanisms in the generation segment;
◾ regulatory measures to shield users from impact of price developments
◾ In order to manage the risks associated with these developments, Enel has
intensified its relationships with local governance and regulatory bodies, adopt-
ing a transparent, collaborative and proactive approach in addressing and elim-
inating sources of instability in the legislative and regulatory framework.

Climate Risks in the Power Generation Sector 18

Contents | Other public policy shifts
3. Rise in low-carbon technologies
and technological risks

Renewable energy
Advancements in renewable technologies have allowed for a rapid expansion in power
generation from renewable sources as these technologies become cost competitive.
This creates increasing competition for traditional companies in the sector with busi-
ness models reliant on power generation from fossil fuels. However, these technological
advancements can create business opportunities for those willing to diversify their oper-
ations and adapt their business models.
Technological innovations are improving storage capacity, such as through advance-
ments in battery technology, which are helping overcome the obstacle of intermittency.
Large-scale energy storage systems have improved grid stability and enabled greater
integration of renewable energy. According to McKinsey, more than USD 5 billion was
invested in Battery Energy Storage Systems (BESS) in 2022, three times the amount
invested in 2021. By 2030, it is estimated that between USD 130 and USD 150 billion
will be invested in the global BESS market (McKinsey, 2023). According to BNEF,
Bloomberg’s primary research service, energy storage capacity reached a record high
in 2022, with 35 gigawatt hours (GWh) of capacity being added to the grid, an increase
of 68% from 2021. Improvements in battery storage are expected to continue, with esti-
mates suggesting storage additions to reach 278GWh annually by 2030 (BNEF, 2023b).
The development of smart grid technologies has also improved the integration of renew-
able energy sources into the grid, enabling better control, demand response, and efficient
distribution (Department of Energy U.S, n.d). Advances in materials and manufacturing
processes of solar have improved the efficiency of solar power generation significantly,
while innovative turbine designs have increased wind energy generation. In both cases,
this has helped to reduce costs (Dada & Popoola, 2023). Such advancements in renew-
able technologies are being driven by a significant rise in investments, with financing for
renewables doubling in 2022 compared to 2010 levels (IEA, 2023b). According to IEA’s
World Energy Investment 2023 report, investment in solar power generation in 2023 was
predicted to be seven times higher than that for coal power and gas power generation
(see Figure 9 below) (IEA, 2023c).

Climate Risks in the Power Generation Sector 19

Contents | Rise in low-carbon technologies and technological risks
 400

350

300
Billion USD (2022)

250

200

150

100

50

Solar PV Wind Hydro Nuclear Coal Gas

power power
Technology

2020 2021 2022 2023e

Figure 9: Global annual investment in the power generation by selected technology,

2020–2023e (IEA, 2023c)

Over the last few decades, the costs of renewable technologies such as solar and wind
have significantly decreased, becoming increasingly more competitive with fossil fuels
(IRENA, 2023). The spike in fossil fuel prices caused by the Russian invasion of Ukraine
made power generation from renewable energy even more competitive. The falling costs
and increased availability of renewable technologies create increasing competition for
power producers in the sector that rely on fossil fuels. The coal power sub-sector is
especially vulnerable to decreasing costs of renewables. Indeed, in some cases, it is
now cheaper to build renewable energy plants than operating existing coal power plants
(Auger et al., 2021).
According to the International Renewable Energy Agency (IRENA), the global weighted
average cost of electricity from new utility-scale solar PV, onshore wind, geothermal,
bioenergy and concentrating solar power (CSP) all decreased in 2022. The global
weighted average levelized cost of energy (LCOE) for new onshore wind projects fell by
5% between 2021 and 2022. In 2010, the LCOE for onshore wind was 95% higher than
the lowest fossil fuel-fired cost. In 2022, meanwhile, the LCOE of new onshore wind
projects was 52% lower than the cheapest fossil fuel solution. Similarly, solar PV was
710% more expensive than the cheapest fossil fuel solution in 2010; by 2022, this cost
differential had reversed, with solar PV becoming 29% less expensive than the cheapest

Climate Risks in the Power Generation Sector 20

Contents | Rise in low-carbon technologies and technological risks
fossil fuel solution (Figure 10)5 (IRENA, 2023). Due to the falling prices of renewable
energy and the increased demand for cleaner energy sources, technology in the renew-
able energy market is being developed rapidly to accommodate and accelerate this shift.
The economic competitiveness of renewable technologies is also being further enabled
by rising carbon prices for fossil fuel power producers.6
Solar photovoltaic Concentrating solar power Offshore wind Onshore wind

900%

800%
greater than fossil fuel

710%
700%
95th percentile
RE LCOE

600% 591%

500%
5th percentile
400%

300% 258%

200%
less than fossil fuel

95%
100%
RE LCOE

0% 71% 17%

-100% -29% -52%

2010 2022 2010 2022 2010 2022 2010 2022

Note: The global weighted average LCOE data by technology and the fossil fuel LCOE data used to derive this chart is presented in
detail in Chapter 1; RE = renewable energy.

Figure 10: Change in LCOE of solar and wind in comparison to fossil fuels from 2010 to
2022 (IRENA, 2023)

5 Despite record low costs of renewable energy, price inequality among countries still remains as some countries
and investors face greater costs in deploying renewable technologies. Such inequalities can hinder the transition
(University of Oxford, 2023).
6 The transition from fossil fuels to renewable energy for power generation will be complex, with headwinds slow-
ing down new renewable projects. Headwinds such as policy uncertainties, volatile prices, interest rates, short-
ages of raw materials, and the need for grid integration can pause project bids, increase bid prices, restructure
long-term agreements, and increase project development timelines (Wood Mackenzie, 2022; Kearney, 2023).

Climate Risks in the Power Generation Sector 21

Contents | Rise in low-carbon technologies and technological risks
 Case Study 3: Expansion of solar power energy in Egypt
As part of its Energy Strategy 2035, Egypt is increasing its reliance on renewable
energy. According to IRENA’s Renewable Energy Statistics 2022, Egypt’s total
renewable energy production stood at 15,325 GWh in 2012, surging to 24,064
GWh by 2021. Specifically, solar energy production increased to 4,453 GWh in
2020, up from 504 GWh in 2012 (IRENA, 2022).

5,000
4,500
4,000
3,500
Mw/GWh

3,000
2,500
2,000
1,500
1,000
500
0
2012 2020
Year
Capacity (MW) Production (GWh)

Figure 11: Solar Energy Capacity and Production in Egypt 2012–2020 (IRENA,
2022).

Egypt has set an aim to generate 42% of its energy from solar sources by 2035
and 55% by 2050. By 2035, the country is targeting for wind power to generate
14% and for solar PV to generate 21.3% of its total electricity. These targets
are currently being updated to achieve 48% and 55% of electricity generation
by renewables by 2025 and 2035, respectively. Renewable energy projects are
expected to be delivered by the private sector (International Trade Administration,
2022). For example, the Egyptian Electricity Holding Company disclosed in its
2020/2021 annual report that installed renewable generation capacity increased
from 887MWs to 3016MWs between 2016 and 2021 (Egyptian Electricity Holding
Company, 2022).

Climate Risks in the Power Generation Sector 22

Contents | Rise in low-carbon technologies and technological risks
 As a result, it has undertaken numerous solar energy projects (Egypt Today,
2021a). Egypt is one of the largest geographical locations receiving solar bright-
ness throughout the year, making the use of solar energy a desirable option
(Egypt Today, 2022). From 2019 to 2021, the country established over 126 power
stations, including Benban Solar Park, which is the largest solar energy project
in the world (Egypt Today, 2021a) with 32 solar projects spanning 36 km2 (MEI,
2020). Developed by the private sector with about USD 2 billion in investments,
the park can produce an additional 2000 megawatts of electricity for the national
grid (Egypt Independent, 2021). It is expected that Benban Solar Park will reduce
carbon emissions by two million tons annually (MEI, 2020). The solar plant aims
to ensure energy diversification and optimal use of renewable energy (Egypt Inde-
pendent, 2021).
To scale up renewable energy, Egypt is offering cost incentives. In 2021, the Egyp-
tian government decided to lower the price of renewable energy (kilowatt/hour) to
attract foreign and local investments. The cost of its solar energy (2 cents kilowatt/
hour) and its wind energy (3 cents kilowatt/hour) has consequently become one
of the lowest globally (Egypt Today, 2021b). The government has also announced
efforts to phase out electricity subsidies by 2025, as well as unveiling plans to
remove subsidies for diesel and gasoline. Furthermore, the Benban Solar Park was
awarded a feed-in-tariff higher than international standards. In 2021, solar PV in
the country emerged as a more cost-effective option for new bulk generation when
compared to other sources (Climatescope.org, 2022).

Carbon capture and storage

In a low-carbon economy, to remain operational, fossil fuel power producers will need to
rely on Carbon capture and storage (CCS) technology. For example, the IEA’s Net Zero
Emissions by 2050 scenario shows that unabated coal-fired generation needs to reduce
by about 55% by 2030 (compared to 2022) and needs to be completely phased out by
2040 to reach net zero CO2 emissions by 2050 globally (IEA, 2023d). To get on track with
this scenario, coal-fired power plants need to reduce emissions by 10% annually until
2030. To align with this scenario for gas, unabated gas-fired plant emissions need to
decrease by 2% annually between now and 2030 (IEA, 2023e). As a result, CCS technol-
ogy will need to be added to existing power plants to limit warming.
However, the development of CCS technology is still in its early stages and has not been
widely deployed. Currently, only around 40 commercial facilities apply carbon capture, util-
isation and storage (CCUS) technology across industrial processes, fuel transformation,
and power generation (IEA, 2020c). Since January 2022, plans for about 50 new projects
have been announced, with operating dates of 2030 or before. However, as of 2023, no new
power plants with CCS installed have been developed at a commercial scale. Two major
retrofit power projects have taken place in North America—Boundary Dam in Canada and
Petra Nova in the United States. However, Petra Nova has since suspended operation, and
both plants have performed below the target of a capture rate of 90% (IEEFA, 2023a).

Climate Risks in the Power Generation Sector 23

Contents | Rise in low-carbon technologies and technological risks
Currently, CCS technology is costly and uncertain. Implementation of CCS will increase
expenditures for firms given rising operating and fuel costs, as well as additional expen-
diture for the transportation and storage of CO2. The LCOE for thermal power gener-
ation with CCS is estimated to be at least 1.5–2 times higher than renewable energy
(Figure 12). Therefore, using CCS for power generation could significantly increase costs
for firms and cause electricity prices for end-users to rise (IEEFA, 2023a). Along with
higher costs, efficiency is also a significant barrier to deploying CCS technology (RFF,
2020). These barriers create substantial challenges for producers reliant on fossil fuels
as the power generation sector decarbonises due to the lack of cost competitiveness of
operating fossil fuel plants with CCS.
700

600

500
USD/MWh

400

300

200

100

0
*Solar Onshore Onshore Gas Solar Coal Coal Gas with Pumped
PV wind wind (*CCGT) + 4h with CCS CCS hydro
+ 4h storage
storage

Figure 12: Comparison of power generation with CCS with other alternatives based on
their LCOEs (IEEFA, 2023a)

Climate Risks in the Power Generation Sector 24

Contents | Rise in low-carbon technologies and technological risks
 Case Study 4: Risks linked to the rise in low-carbon technologies
EDF Universal Registration Document 2022
French electricity generation company
Risk factors
Group’s long-term strategic directions are in line with the transition to a low-car-
bon economy. The EDF group’s raison d’être, adopted in May 2020, centres on the
objective of “building a CO2-neutral energy future”. The majority of the Group’s
investments are directed towards this low-carbon climate strategy. In this seem-
ingly favourable and promising context, there are several significant transition
risks. For example, the Group may have to deal with the emergence of new tech-
nologies or disruptive solutions that are part of the efforts to meet the transition
objectives. Such situations could make it more difficult to carry out these trans-
formations and achieve the desired objectives. These situations could directly
or indirectly affect the Group’s business volumes, margins, asset value, financial
position, reputation and/or prospects.
Control Framework to address transition risks
◾ Carbon trajectory. In 2018, the Group made a commitment to significantly
reduce its carbon dioxide emissions, with a target of 30 million tonnes in 2030
instead of 51 million tonnes in 2017 (a 40% reduction). The EDF group also
confirmed this goal in 2020 by joining the “Business Ambition for 1.5 degrees”
initiative. The EDF group has made new commitments to contribute to achieve
carbon neutrality by 2050, both in direct and indirect emissions (scopes 1, 2
and 3), with milestones set for 2023 and 2030. The SBTi organisation certified
this approach in 2020 as going beyond the 2°C set out in the Paris Agreement.
Thus, for the first time, the EDF group has set reduction targets for its indirect
emissions, covering in particular the emissions associated with the sale of gas
to end customers. The EDF group undertook discussions with the SBTi organ-
isation in 2022 in order to obtain 1.5°C labelling for its trajectory.
◾ Deployment of low-carbon solutions. The Group has been particularly active
in the development of renewable energy in France, electric storage and low
carbon electric mobility, which will make it possible to develop and promote
the Group’s low-carbon energy solutions, particularly for the transport sector,
which still emits a very high level of carbon dioxide in France and Europe.
◾ As a final step in the process of contributing to achieving neutrality, the Group
favours so-called “negative emission” projects to offset its residual emissions
by 2050.
◾ Control actions for risk No. 1A concerning changes in public policies and the
regulatory framework consist of: monitoring the political, legislative and regu-
latory context; analysing the potential consequences of legislation in prepara-
tion; dialoguing with and lobbying the public authorities.

Climate Risks in the Power Generation Sector 25

Contents | Rise in low-carbon technologies and technological risks
4. Consumer and
societal pressure

As consumers’ awareness of the contribution of fossil fuels to climate change contin-

ues to increase, and as new alternatives continue to enter the market and their costs
decrease, fossil fuel-reliant firms in the sector will face challenges from changing
consumer preferences. In 2021, World Economic Forum-Ipsos Forum Climate Change
and Consumer Behavior survey of 23,055 consumers in 29 countries found that 56% of
respondents had changed their purchasing practices to reduce their carbon footprint
(World Economic Forum, 2021).
Historically, the market for power generation has been dominated by fossil fuels. As
renewables continue to become cheaper and thus more competitive, there will be a huge
shift in the global power generation mix. Between 2022 and 2025, renewable and nuclear
energy are likely to dominate the growth of global electricity supply, meeting an average
of over 90% of additional demand, as seen in Figure 13. Growth in natural gas and coal
power generation is expected to remain flat between 2022 and 2025 (IEA, 2023f).
31,500

31,000

30,500

30,000
TWh

29,500

29,000

28,500

28,000
2021 2022 Coal Oil Gas Nuclear Renewables 2025

Figure 13: Changes in global electricity generation by source between 2022 and 2025
(IEA, 2023f)

Globally, society has witnessed a clear shift in the support of fossil fuels to renewable
energy. For example, a study found that twice as many people in South Korea support
renewable energy as those who do not (Kim et al., 2018). Similarly, a recent survey by the
Pew Research Center in the United States showed that 67% of Americans would priori-

Climate Risks in the Power Generation Sector 26

Contents | Consumer and societal pressure
tise the development of renewables over new fossil fuels (Pew Research Center, 2023).
This supports a previous survey that showed 85% of Americans supporting a require-
ment for power generation companies to transition to renewable energy (Yale Climate
Communications, 2019). As consumer preferences rise for renewable energy over fossil
fuels, power generation firms that do not transition from fossil fuels will experience a
loss in demand.
Along with the growing awareness of climate change, rapidly decreasing costs for
renewable energy (Figure 14) can become a strong driver for a shift in consumer prefer-
ence from fossil fuel-fired power generation to renewable energy. For example, solar PV
now costs 29% less than the cheapest fossil fuel solution on average globally (IRENA,
2023). The impact of energy prices on energy preferences can be illustrated by the
impact that Russia’s invasion of Ukraine in early 2022 had on energy prices. Notably,
wholesale electricity prices in in many European countries, such France and Germany,
were three to four times more expensive in the first half of 2022 than in the same period
of 2016–2021 (IEA, 2022b). Amidst the energy crisis, with electricity bills increasing
on average by 59%, solar power installations by homeowners in the United Kingdom
doubled in 2022 compared to the previous year (Department for Business, Energy &
Industrial Strategy, 2023; Euronews, 2023).

Figure 14: Decreasing power generation costs (2010–2023) (WEF, 2020)

Power generation firms will also be affected by the change in consumer preferences
resulting from changes in temperatures, shifts in weather patterns and water availabil-
ity, and a greater frequency of extreme weather events. Climate change is expected to
influence global electricity demand, potentially leading to decreased demand for heat-
ing during cold seasons and increased demand for cooling during extreme heat events
(Romitti and Wing, 2022; EPA, 2017). The unpredictability of future weather events is

Climate Risks in the Power Generation Sector 27

Contents | Consumer and societal pressure
predicted to lead to significant performance gaps for power generation companies due
to climate variations that affect both electricity demand and the reliability of the power
grid during extreme weather. For example, office buildings in the Canadian cities of
Quebec City, Toronto, and Vancouver could witness a decrease in annual energy demand
by 8.7%, 9.1%, and 9.9% between 2056 and 2075 (Jafarpur and Berardi, 2021). Similarly,
Sweden is set to experience an estimated 30% decrease in heating demand by the end
of the century, relative to 1991–2010 demand levels. Peak demand for heating and cool-
ing is projected to increase between 50% and 400% during extreme conditions (Perera
et al., 2020).
One extreme example of the impact a massive change in electricity demand could have
on firms in the sector was seen during the global pandemic. At the height of COVID-19,
electricity demand dropped by almost 30% in some major economies (IEA, 2020d; IEA,
2021b). Low demand led to a significant drop in energy prices, which, together, led to
financial losses for power generation firms as well as the delay or cancellation of new
power generation plants (Congressional Research Services, 2020; IEA, 2021c). Analy-
sis by Hartree Solutions, an energy equipment and services firm, found that between
March and August 2020 the UK power sector lost USD 1.3 billion (GBP 1.1 billion) in
income (Hartree Solutions, 2020). Similarly, in Bangladesh, power generation decreased
by almost 17% in the two years up to May 2020 (Hasan et al., 2022). Between March
and December of 2020, meanwhile, the Ministry of Power Energy and Mineral Resources
predicted that the country’s power generation sector would see revenues fall by USD 0.5
billion (The Business Standard, 2020). The massive changes in electricity demand that
result from climate change can create similar uncertainties for power generation firms
around the profitability of their current and planned projects.

Climate Risks in the Power Generation Sector 28

Contents | Consumer and societal pressure
5. Shifting investor preferences

Investors are growing increasingly climate-conscious and are driving financing away
from fossil fuel sources to less carbon-intensive alternatives. Coal-fired plants are espe-
cially exposed to climate action by investors. Over 200 global financial institutions have
announced divestment policies to restrict investment in coal-fired power projects and/
or in coal mining. These financial institutions include asset managers and owners with
more than USD 50 billion in assets under management (AUM), as well as banks, insurers
and reinsurers, credit agencies, and multilateral development banks with more than USD
10 billion in assets (IEEFA, 2023b). Figure 15 illustrates the rapid rise of disinvestment
policies at banks in recent years.

Paris accords adopted

80
60
Number of Banks

40
20
0

2012 2013 2014 2015 2016 2017 2018 2019 2020

Year
Figure 15: Number of banks with active coal policies (Green and Vallee, 2023)

For example, the EU’s biggest Pension fund, ABP of the Netherlands, joined a growing
number of investment managers in dumping fossil fuels in 2021. The company, under
pressure from activists, customers, and the physical risks of climate change, announced
it would divest EUR 15 billion by early 2023, which it has done (Bloomberg, 2023). In
2021, the European Investment Bank stopped its funding for fossil fuel projects, while

Climate Risks in the Power Generation Sector 29

Contents | Shifting investor preferences
Chinese institutions did the same for overseas coal plants (BBC, 2019; The Guardian,
2021). The Bank of the Philippine Islands, the oldest bank in Southeast Asia, has also
committed to stop new greenfield investments (on undeveloped land) and has pledged
to completely divest from coal by 2030 (BusinessMirror, 2023).
A study has shown that companies focused on coal-fired power generation facing
strong disinvestment policies from their lenders have reduced their borrowing by 25%,
in comparison to coal companies that do not face the same policies. The reduction in
capital could force divested companies to shut down their facilities (Green and Vallee,
2023). Outside of China, for every USD 1 lent to coal projects that were approved and
funded in 2022, an additional USD 14 earmarked for other coal projects was cancelled
or halted. The coal sub-sector lost an estimated USD 7.7 billion in financing for projects
outside of China. The decrease in corporate lending has been due to divestment policies,
as well as country commitments and other financial uncertainties. Figure 16 shows the
number of coal-power projects cancelled as a result of lost financing between 2011 and
2023 (Carbon Brief, 2023). In 2022, for instance, the Japanese government withdrew
financing for two coal-fired power plants in Indonesia and Bangladesh (Mongabay, 2022).
Both projects were permanently shelved as a result. This follows Japan’s decision the
previous year to stop financing coal projects that do not have credible measures in place
to reduce emissions.

12,590
12,000

10,000
Capacity (MW)

8,000

6,000
3,970
4,000
2,090
2,000
752

Cancelled/Shelved Pre-Construction Construction Operating

Status of coal-fired power plant

Source: Global Energy Monitor

Figure 16: Status of coal-fired power plant projects as a result of lost financing from
2011 to 2023 (Carbon Brief, 2023)

Besides increasing disinvestment in coal-fired power plants, global energy transi-

tion investment has reached unprecedented levels. Investments reached USD 1.1 tril-
lion in 2022, bringing them in line with annual investments in fossil fuels for the first
time (Bloomberg NEF, 2023c). Investment in renewable power and fuel rose for the
fifth consecutive year in 2022, reaching a record USD 495 billion. This achievement is
complemented by a 2.4% increase in global electricity generation, partially led by solar

Climate Risks in the Power Generation Sector 30

Contents | Shifting investor preferences
PV production and wind power (IEA, 2023). Moreover, renewable power installations,
which account for 74% of the total amount of new power capacity investments, attracted
more financing than fossil fuel or nuclear generation plants (Ren21, 2023).
1,200
1 110 1 110

1,000
930 922
896
849
561
800
745
USD billions

626 382
600
522
482 222
169
400 163

550
467
200 404
318 353

0
ETI FF ETI FF ETI FF ETI FF ETI FF
2018 2019 2020 2021 2022

Year

Energy demand Energy supply Fossil fuels

ETI s for Energy FF s for Fossil f 2018 1

FF alues om orld Energy 2022 2022 fossil fuel i ar
and ude ed fossil gener

Figure 17: Global clean energy investments compared to fossil fuel investments from
2018 to 2022 (Bloomberg NEF, 2023c).

Climate Risks in the Power Generation Sector 31

Contents | Shifting investor preferences
6. Market risk and asset stranding

As the urgency to limit warming to 1.5°C grows, the need to phase out unabated coal is
growing increasingly crucial with the need to retire newly developed plants, as well as
existing ones. This puts owners of coal-fired power plants at high risk of contraction in
market value and opens them up to the risk of stranded assets. To meet climate goals,
coal-fired power plants will need to be retired 10–30 years earlier than before the end
of their useful lives (London School of Economics, 2022). The value of global stranded
assets of coal power generation between now and 2050 is estimated at between
USD 1.3–2.3 trillion (MIT, 2022).
To limit warming to 1.5°C with a 50% probability, 90% of coal and 60% of oil and gas
will need to remain unextracted by 2050. As a result, countries will need to reach peak
production soon (Welsby et al., 2021). This has significant implications for fossil fuel
power plants. An estimated 107 countries are five years or more past their peak electric-
ity generation from fossil fuels (Ember, 2023b). A study by Edwards et al. assessed the
changes in global stranded asset risk from coal-fired power plants over time in various
regions (Edwards et al., 2022). The analysis considered a scenario in which a 1.5°C
policy was in place and all coal-fired plants currently under development continued to
be built. The stranded assets that would be created in such a scenario were calculated
to be worth a total of USD 1.4 trillion. For a 2°C policy scenario, the figure is closer
to USD 1 trillion. If all proposed projects were cancelled, on the other hand, stranded
assets would decrease to USD 880 billion under a 1.5°C policy scenario and USD 573
billion under a 2°C policy scenarios. Coal plants currently in the pipeline represent 55%
of stranded assets under a 1.5°C climate goal. No new financing for coal could lead to a
50% reduction in the stranding of international investments (Edwards et al., 2022).
Countries with a larger portion of newer coal-fired power plants, such as emerging
economies in Asia, are much more likely to face higher stranded risks. China, India, and
Southeast Asia are exposed to greater asset standing than the United States and the
European Union. However, based on the location of the headquarters of companies,
stranded asset risk is higher in China, the United States, Europe, South Korea and Japan
(Edwards et al., 2022).

Climate Risks in the Power Generation Sector 32

Contents | Market risk and asset stranding
 100
a IUSA b
IEU and UK 2500 ··All New Coal to 1.5° C
�
s:
(.'.) Other Europe ··All New Coal to 2° C
; 75
Japan - No New Coal to 1.5°C
� s:!.,2000 - No New Coal to 2 °c
s:!..1500 "'
·u South Korea
China c
c
·u
a.
r3 50 India ·c:; All New Coal
I Southeast Asia � 1500 I No New Coal
IROW co
� 1000 u
25
� 1000
0
0. 0.
<ii O 1950 1960 1970 1980 1990 2000 2010 2020
<ii
0 0 500
0 Vintage year 0

0
2020 2030 2040 2050 2060 2070 2080
Year

C
.gco No New Coal to 2 °c IUSA
C IEU and UK
J.l No New Coal to 1.5 °C
Q) I Other Europe
Japan
C South Korea
.Q China
coCl All New Coal to 2 °c
India
:;::, ISoutheast Asia
� All New Coal to 1.5 °C IROW
1400

Figure 18: Pathways for global coal capacity and stranded assets: (a) coal capacity by development stage; (b) coal capacity pathways
under 1.5°C and 2°C goals (lines) or if plants outlive their historical average lifetimes (shaded regions); and (c) asset stranding under
1.5°C and 2°C scenarios (Edwards et al., 2022)

Climate Risks in the Power Generation Sector 33

Contents | Market risk and asset stranding
7. Reputational risk

Power generation companies and governments face increased reputational scrutiny

from non-governmental organisations, activists, and communities as they continue to
rely on fossil fuels for power generation. For example, in Switzerland, demonstrations
against fossil fuel power plants were held across eight cities in 2023. The most intense
demonstrations were directed towards an emergency power plant that runs on oil and
gas and a planned liquefied natural gas terminal (Swiss info, 2023). In Edinburgh, mean-
while, it was reported that a group of climate campaigners planned to march through
Edinburgh in early September 2023 to protest against an oil field and against plans for a
gas-fired power plant (Aberdeen Live, 2023). In the same year, protests were held close
to the last active coal power plant in New England, in the United States. A large number
of the protestors, who were advocating for the plant to be turned into a renewable energy
plant, were arrested (WBUR, 2023). Similarly, in 2023, students chained themselves to
the University of Washington’s campus power plant, demanding that the university to
shift from fossil fuel use to renewables (Seattle Times, 2023). Firms in the sector are
also being held accountable for further exacerbating extreme climate events. In Mirditë,
Albania, for instance, residents have protested new hydropower plants due to the poten-
tial for flooding or loss of power during droughts (Euractiv, 2023). Hydropower projects
in Brazil have also led to flooding and displacement of families during wet years, leading
to criticism (Mongabay, 2023).
Firms in the sector are also vulnerable to reputational damage caused by insufficient
preparedness for extreme weather events. For example, protests broke out in 2022 in
Puerto Rico after LUMA Energy, the island’s main power grid operator, failed to ensure
consistent access to electricity. The fact that LUMA Energy had a 15-year contract with
the government increased the protestors’ frustration (Reuters, 2022). In the same year, a
power outage caused by Hurricane Ian in Cuba led to protests in the island nation, with
hundreds of people demanding the restoration of electricity in the capital city, Havana
(NPR, 2022). In 2021, meanwhile, citizens took to the streets across different cities in
Iran to express their anger over electricity blackouts, which the government blamed were
as a result of severe droughts in times of high demand (BBC, 2021).

Climate Risks in the Power Generation Sector 34

Contents | Reputational risk
8. Emerging legal risks

As of December 2022, there were more than 2,180 climate-related lawsuits in place
in over 68 jurisdictions (UNEP, 2023). The power generation sector faces increasing
climate-related legal risks as environmental activists, governments, and citizens grow
more predisposed to pursue legal action in order to hold firms accountable for climate
change. The cost of fines, climate-related damage, and legal fees arising from such
litigation can be high for firms. In extreme cases, it can even lead to bankruptcy. Addi-
tional losses from reduced demand associated with reputational damage can also
occur (EPA, n.d.).
In 2018, for example, families in Kobe, Japan, sought an injunction to prevent the
construction and operation of a nearby coal-fired plant (Climatecasechart, 2023c).
The plaintiffs claimed a violation of personal rights on the grounds that the project’s
construction would make climate change worse and consequently impinge on these
rights (Columbia Law School, 2023). The court initially rejected these claims and also
a preliminary request or injunction, but the families have since appealed the decision
(Climatecasechart, 2023c). Similarly, ClientEarth, a UK-based advocacy organisation,
bought shares in the Polish power company, Enea, and then sued the company over a
planned coal power plant outside Warsaw. ClientEarth argued that the EUR 1.2bn coal
power plant would become a stranded asset due to new climate-related regulations and
market trends, including carbon pricing, the phasing out of fossil fuel subsidies, and
increased competition from renewable energy. A final judgement in favour of ClientEarth
was made in 2020 (The Economist, 2022; Climate Case Chart, 2023b). In the same year,
a District Court in Poland ordered the owners of the Belchatow plant, Europe’s biggest
coal-fired power plant, to negotiate with ClientEarth in order to accelerate the closure of
the plant (ClientEarth, 2020).
As part of an ongoing case, Saúl Luciano Lliuya, a Peruvian farmer, sued RWE, a German
utilities company, in the District Court of Essen, Germany, for its contribution to climate
change (Climate Case Chart, 2023a). The plaintiff claimed that his home is at risk from
climate-induced flooding from a rapidly growing glacial lake (Germanwatch, 2022). He is
arguing that RWE should pay 0.47% of the EUR 3.5 million adaptation costs to increased
flooding as the firm has contributed to 0.47% of global emissions (The Guardian, 2017).
A ruling is expected to take place later this year.
In South Africa, meanwhile, the Centre for Environmental Rights launched a high-pro-
file “Cancel Coal” case in 2021 with the goal of halting government plans to expand the
capacity of coal-fired power generation by 1500 MW (Earthjustice, 2021). The lawsuit
argues that new coal plants are incompatible with South Africa’s climate goals. Not
only do they pose health and environmental threats, it is argued, they also violate the
constitutional rights of children and future generations. The case is supported by young

Climate Risks in the Power Generation Sector 35

Contents | Emerging legal risks
climate activists and community members affected by coal. In 2023, the applicants filed
a supplementary founding affidavit emphasising that new coal-fired power is not the
cheapest fuel option and that it poses health and economic risks to the population of
South Africa (Ground work Environmental Justice Action, 2023). The applicants are now
awaiting the government’s response.
Along with firms’ contribution to GHG emissions, insufficient preparation for extreme
events is also leading to significant legal damage, especially to the equipment of power
firms contributing to wildfires. PacifiCorp, an American power company, provides a
notable illustration. In 2023, the firm was found liable for billions of dollars in damages
because the electrical equipment that it kept overground was judged to have contrib-
uted to a series of major wildfires in Oregon in 2020. PacifiCorp was also found to
have refused to cut power to 600,000 customers despite warnings about fires from
officials during a windstorm (AP News, 2023). Beyond the outcome of litigation, the
fires killed nine people and destroyed over 5,000 homes and other buildings, causing
enormous reputational damage for the company. Similarly, Pacific Gas and Electric
Company (PG&E), the largest utility in California, faced several lawsuits for the contri-
bution of equipment to the deadliest wildfires in the state’s history. The fires led the firm
to temporarily declare bankruptcy after having to compensate victims USD 13.5 billion
(ABC News, 2023). PG&E is now subject to another class action lawsuit over the health
costs of another fire that its equipment started in 2022 (CBS Sacramento, 2023).

Climate Risks in the Power Generation Sector 36

Contents | Emerging legal risks
9. Transition risk guidance

This section offers guidance on how financial institutions can address transition risks
within the sector and support their clients in the process.

Key transition risk questions for financial

institutions to consider
1. Gathering information
◾ Are there any new governmental standards (on energy efficiency, on fossil fuel
use, on pollution/waste) that impact assets within our portfolio’s footprint?
◾ How rapidly is the low-carbon transition progressing across our portfolio foot-
print? What do energy costs, demand, and efficiency look like across our portfolio
footprint?
◾ What have our clients disclosed in their financial, sustainability, and climate
reports regarding their transition risks?
◾ Are any of our clients facing legal action related to industrial activities, pollution,
or other environmental issues?
◾ How many of our clients have transition plans? Do they consider plans for phas-
ing down or restructuring? Do they incorporate just transition considerations into
these plans?
◾ Do we have emissions data for our clients?

2. Assessing the risks

◾ Have we looked at transition scenarios to see how those risks will evolve over
time across the portfolio? Have we considered short-term, medium-term, and
long-term risks?
◾ What does our exposure to higher-risk clients look like? What are the terms of our
financial relationship (e.g. debt/equity, tenor)?
◾ How does the emissions intensity of our clients compare to industry and regional
averages?
◾ What is the cost of production for our clients? How does that compare to industry
and regional averages?
◾ How much are clients investing in low-carbon operations and research and devel-
opment?
◾ Which power generation types will be the most and least impacted in the low-car-
bon transition?

Climate Risks in the Power Generation Sector 37

Contents | Transition risk guidance
 ◾ How much are clients investing in low-carbon power generation? How much of
their revenue is derived from low-carbon sources?
◾ Have we considered the potential environmental and social risks that might
emerge from shifts in the value chain or changes in demand resulting from tran-
sition risks?
3. Engaging with clients and updating strategy
◾ Do our senior leaders understand the transition risks of our clients?
◾ How are we helping our clients to transition to a low-carbon future? How are we
supporting their efforts to advance a just transition?
◾ How will the transition risks identified and assessed influence our strategy in the
power generation sector?
◾ What specific updates to risk management practices or business activities will be
needed to appropriately consider these transition risks in our operations?

Recommendations for risk management

1. Determine potential stranded assets
The power generation sector, at present, is highly dependent on reserves of coal, oil,
and gas. The majority of these reserves need to remain unused so as to limit warming
to 1.5°C. Fossil fuel power plants are therefore at risk of being discontinued before the
end of their lifetime because of government regulation on fossil fuel use, an increase
in competitiveness from renewable sources, and a growth in litigation. These plants
thus face the very real possibility of becoming stranded assets. As such, financial
institutions with exposure to power generation clients reliant on fossil fuels must
carefully assess the major assets of these clients in order to identify which assets
are most likely to become stranded. Financial institutions should explore the propor-
tion of assets likely to be stranded under different transition scenarios. They should
then consider risk drivers such as costs, the emissions intensity of energy generated,
and the environmental impact so as to identify assets and clients that are particularly
vulnerable.
2. Evaluate transition progress
Firms in the power generation sector using fossil fuel sources will face significant
challenges in the coming decades unless their current business models are updated.
Firms looking ahead and recognising the potential risks to their business are develop-
ing (or have developed) transition plans. Many firms’ transition will require significant
investment to diversify their energy sources for power generation, shifting from fossil
fuel-based production to low-carbon energy sources. However, firms that are slow to
act may be able to stay competitive in the sector due to new government policies and
technological advancements. Financial institutions should carefully assess whether
their clients have developed, or are developing, transition plans. Where this is the case,
they should compare these plans to others in the sector. A number of frameworks are
publicly available for financial institutions to use in their assessment. Examples include
the Assessing Carbon Transitions framework of CDP, as well as the guidance issued by

Climate Risks in the Power Generation Sector 38

Contents | Transition risk guidance
the TCFD on effective transition plans. By evaluating a client’s transition plan, financial
institutions will be evaluating the future prospects of both the client in question and
the sector overall. As a result, a financial institution’s industry analysts should play an
active role in working with their climate risk colleagues to assess the viability of client
transition plans.

Adaptive and mitigating actions of clients

1. Diversification and transition
Firms in the power generation sector that produce energy from fossil fuel sources are
highly carbon-intensive. However, some firms recognise the importance of transition-
ing to less carbon-intensive business practices. To do so, firms need to diversify their
energy sources and expand their business portfolios, focusing on renewable power
generation, especially from wind and solar energy sources. The diversification in busi-
ness operations will require a large amount of investments towards new capital assets
and research and development to reduce the firm’s emissions intensity. To support the
transition, firms should develop a transition plan to outline the shift to power genera-
tion from low-carbon energy sources and detail the various changes needed across the
business to transition.
2. Environmental and social stewardship
Strong environmental and social practices are essential across all economic sectors.
However, given the historical (and ongoing) environmental and social issues associ-
ated with the power generation sector, from fossil fuel power plants causing toxic air
and water pollution to hydropower plants causing habitat destruction and worsen-
ing water quality, environmental and social stewardship needs to be a top priority for
power generation firms. Firms in the sector should promote stricter emissions control
and consider practices with mutual benefits for the surrounding communities and the
environment. Environmental and social impacts should be considered early prior to
constructing a new plant. Firms should support clients in the process of closing plants
to ensure a just transition to protect jobs and incomes of those affected. Firms should
also consider involving local communities in the planning face to identify and address
any potential social and environmental issues. Power generation companies should
work to ensure accessibility to power in all communities by investing in infrastructure
development, focusing on extending power grids to underserved areas, and promot-
ing renewable energy solutions. Simultaneously, addressing affordability involves opti-
mizing operational efficiency, embracing cost-effective technologies, and collaborating
with governments and communities to implement inclusive pricing models. The follow-
ing box offers examples of social factors that financial institutions and their clients
should take into account during the transition to clean energy.

Climate Risks in the Power Generation Sector 39

Contents | Transition risk guidance
 Examples of sector-specific social considerations (UNEP FI, 2023)
Employment impacts: since investments in renewable energy generally gener-
ate more jobs than investments in fossil fuels, the low-carbon transition has the
potential to generate green jobs. Workers in the sector value chains can also be
vulnerable to abuses including forced labour.
Skills development is a crucial consideration in the sector since fast deployment
of renewable energy has led to skill shortages in technical occupations, such as
solar installers and electrical engineers. Gender equitable skills development is
required to restore gender balance in the industry.
Gendered impacts: women and men tend not to have equal access to skills devel-
opment and green jobs in the sector; gender gaps persist in employment, senior
management, and women entrepreneurship.
Land and Indigenous peoples’ rights: land is a crucial resource for the energy
transition. The amount of land required to scale up wind and solar production is
significant. Pressure on land and resources can have potential side-effects on the
livelihoods and rights of local communities and Indigenous peoples.
Social dialogue and stakeholder engagement: consultations with the affected
stakeholders and communities are required in the framework of renewable proj-
ect development to address the potential impacts on rights and livelihoods and
improve economic linkages with local economies.
Human rights risks and protection of rights defenders: Human rights abuses
linked to the construction of renewable energy projects, especially large hydro-
electric dams, are well documented. Additional attention needs to be given for
human and environmental defenders, grievance mechanisms and access to
remedy should be put in place, as well as ensuring that human rights are inte-
grated in in security contracts consistent with the Voluntary Principles on Security
and Human Rights.
Accessibility and affordability of clean energy technologies for low-income
groups are important as 770 million people still live without access to electricity
worldwide. Renewable energy sources can be an opportunity to enhance acces-
sibility and affordability of energy.

Climate Risks in the Power Generation Sector 40

Contents | Transition risk guidance
Aligning to net zero
Financial institutions looking to manage their transition risks in the power generation
sector should engage directly with clients and support client transitions. However, while
necessary, this client-level approach must complement a more strategic approach to
reducing the firm’s financed emissions. Over the past few years, hundreds of major
financial institutions have committed to net zero by 2050 across their portfolios. Most
of these institutions have joined one of the industry-specific decarbonisation alliances
(e.g., Net-Zero Banking Alliance, Net-Zero Asset Owner Alliance) to support them in fulfill-
ing their climate goals. Beyond the financial sector, net-zero alignment has also gone
mainstream in government policies worldwide, with nearly 90% of global emissions now
covered by a net-zero commitment. Amid growing pressures on high-carbon sectors and
the decarbonisation ambitions of financial and government actors, financial institutions
can consider a credible and actionable net-zero commitment a way to mitigate both
the systemic and idiosyncratic risks of the transition. The process of operationalising a
net-zero commitment begins by assessing baseline financed emissions.
Then, institutions set targets for their portfolios and specific sectors, such as the power
generation sector using science-based scenarios. After the targets are set, financial insti-
tutions develop holistic strategies to reduce their financed emissions. These processes
can be explained to stakeholders in a transparent transition plan that demonstrates not
only the net-zero commitment but how the firm is mitigating its transition risks.

Additional guidance
◾ The Equator Principle’s guidance note on Climate Change Risk Assessment provides
detailed information on transition risk assessment.
◾ The Transition Plan Taskforce’s draft Power Generation Sector guidance includes
detailed guidance on transition planning for the sector.
◾ The European Central Bank has published good practices for climate-related and envi-
ronmental risk management for financial institutions.
◾ UNEP FI and the International Labour Organization’s report on Just transition Finance
includes guidance for banks and insurers on adopting a just transition lens in their
banking and underwriting activities.
◾ UNEP FI and the Cambridge Institute for Sustainability Leadership’s report on Lead-
ership Strategies for Client Engagement: Advancing climate-related assessments
provides guidance on advancing climate-related assessments and assessing client
transitions for effective use in client engagement.

Climate Risks in the Power Generation Sector 41

Contents | Transition risk guidance
 SECTION B:
Physical risks
The power generation sector is vulnerable
to a range of physical hazards. The sector
is exposed to multiple chronic physi-
cal risks, including rising temperatures,
sea-level rise, and droughts. In addition, it
faces acute physical risks such as more
frequent and severe storms and wildfires.
Environmental risk assessment specialist,
S&P Trucost, for example, analysed the
susceptibility of 11 different sectors to
physical hazards, such as wildfires and
water stress. Of the sectors surveyed, the
2021 study identified the utilities sector
(which includes power generation) as the
most exposed (S&P Global, 2021). One
main reason is the vulnerability of physical
operations of companies in the sector to
physical risks (Figure 19). S&P Trucost
highlighted water stress as a particularly
high-risk issue for these companies (S&P
Global, 2021).

Climate Risks in the Power Generation Sector 42

Contents | Section B:
Figure 19: Exposure of various sectors to physical risks (S&P Global, 2021)

Climate Risks in the Power Generation Sector 43

Contents | Physical risks
1. Rising temperatures
and heat stress

Even though power plants are designed to operate in various climate conditions, an
increase in global temperatures can create many challenges for firms in the sector.
For example, rising global temperatures can significantly impact the power genera-
tion sector by reducing operational capacity while increasing the demand for energy. A
global temperature rise of 2°C could result in a decrease of 4.5% in power plant capacity
(Carbon Brief, 2021).
It has been estimated that the electricity generation capacity of power plants is maxi-
mised at a temperature of 27°C (Coffel et al., 2021). On hotter days, air and water needed
to cool power plants can become too warm, which can decrease the capacity of power
plants by up to 10%. For example, thermal power plants rely on water to cool steam in
generators, which convert water vapor back to a liquid form. Typically, thermal power
plants only store 30 to 50% of the energy in gas, coal, or other fuels to generate elec-
tricity. In contrast, the remainder of the energy (50–70%) is dissipated as heat. Such
plants are therefore typically located along rivers and lakes as a means of cooling down
operations. As a result, higher temperatures could decrease the efficiency of this cooling
process, thereby impacting the efficiency of a plant’s power generation operations as a
whole (Carbon Brief, 2021). For each additional degree Celsius of global temperature rise,
it is estimated that 40–60 new thermal power plants would be required to counterbal-
ance the resulting power loss (Coffel et al., 2021).
Consider the example of French and German nuclear power plants that were severely
impacted by a heatwave in 2019. As scorching temperatures raged across Europe,
nuclear power plants in both countries reported substantial losses in electricity output
due to high water temperatures.7 EDF, a major power provider in France, had to follow
French regulations mandating power generation to be cut when water temperatures
rise above 28°C due to safety concerns (RFI, 2019). In the same year, Preussen Elektra,
a German nuclear unit of the utility firm E.ON, blamed high temperatures in the Weser
river as the reason for its Grohnde reactor to go offline (Reuters, 2019). As a result, two
nuclear plants in France and one in Germany went offline due to high temperatures in
surrounding waters (RFI, 2019). It was reported that French electricity output decreased
by around 8% (5.2 gigawatts)7 (Reuters, 2019). Similar impacts were observed during
a heatwave in 2022. German power plant productivity decreased during the heatwave
as the cooling effects were largely inefficient. Waterways such as German rivers used
to transport coal also dried up, threatening coal deliveries to power plants (Bloomberg,

7 Decrease in power generation was also attributed to drought and low water levels. More information can be
found in the sub-section, ‘Droughts and Water Stress’.

Climate Risks in the Power Generation Sector 44

Contents | Rising temperatures and heat stress
2022). Half of France’s nuclear power plants went offline due to maintenance. The
heatwave added further pressure on energy prices that were already rising due to a
decreased supply in gas from Russia. This contributed to energy prices in Germany and
France reaching an all-time high, with electricity in France costing six times more than
the year before (Figure 20). This could be attributed to supply and demand dislocation
as the heatwave caused demand for electricity to rise but disrupted supply from power
plants (Times, 2022). As global temperatures rise, events such as these that lead to
disruptions in power generation are expected to become more frequent.

2021 2022

Figure 20: Electricity price hike in France after heatwave (Bloomberg, 2022)

Heatwaves are also associated with a significant decrease in the usual and expected
wind levels of an area (referred to as a “wind droughts”), which can be detrimental for
wind power (OECD, 2021). In 2021, many European countries witnessed wind speeds
decreasing by 15% below the yearly average. In the UK, wind farms only produced 2% of
the United Kingdom’s total power. In comparison, in 2020, wind farms produced 18% of
the total power. The country had to restart two coal plants to fill in the gap (Yale Univer-
sity, 2022). In order to reach net zero by 2050, the total amount of power produced from
wind power will need to rise substantially. For example, to be in line with the IEA’s Net
Zero 2050 scenario, electricity generation will need to increase by 17% annually during
this decade (IEA, 2023h). However, the potential impact of more frequent heatwaves on
wind speed could threaten the scale-up. Wind droughts could also lead to price volatility.
For example, low winds in 2021, coupled with the Russian invasion of Ukraine, led to gas
prices rising by 450% in Europe (Yale University, 2022).
The sector will also be impacted by the changing energy needs of consumers due to
higher temperatures. Demand for electricity, especially air conditioning and other cooling
services, is expected to increase as the global temperature rises. A temperature increase
of 3.5°C to 5°C, for instance, could increase the need for electricity by 10–20% by 2050.
Meeting such an increase will require billions of dollars of investment to increase
power generation capacity (EPA, n.d.). However, rising temperatures would also result
in warmer winters, which can decrease the overall demand for energy for heating. In
the United States, the Environment Protection Agency estimates that for every 1°C rise
in temperature, 5–20% more energy would be used for cooling and only 3–15% less

Climate Risks in the Power Generation Sector 45

Contents | Rising temperatures and heat stress
energy would be needed for heating (Penn State, n.d.). Under a high emissions scenario,
it is estimated that the number of extreme heat days (i.e. above 35°C) experienced in
the United States by 2040 will increase from 14 days to 25–40 days a year. Such an
increase in the number of extreme heat days could result in demand for residential and
commercial electricity increasing by 3–9% from historical levels. Expenditure on resi-
dential and commercial electricity will consequently rise by an estimated 6–18%, with a
one-in-20 risk that costs will increase by 23% (Rhodium Group, 2023). Similarly, a study
by Gurriaran et al. assessed the change in energy demand in Qatar as a result of global
warming (Gurriaran et al., 2023). It determined that electricity demand would increase
by 4.2%, on average, per degree of warming, and electricity demand could increase by
5–35% by 2100.
As such, the power generation sector will be confronted with the dual challenge of surg-
ing energy demand as temperatures rise, while simultaneously grappling with reduced
operational capacity in power plants due to higher temperatures. Power generation
companies will therefore need to make expensive investments in new energy generation
and distribution to account for higher peak demand.

Climate Risks in the Power Generation Sector 46

Contents | Rising temperatures and heat stress
2. Droughts and water stress

As climate change causes precipitation patterns to change, the power generation sector
is becoming highly exposed to the impacts of drought and water stress. Changes in
water availability can decrease river flows and, therefore, the amount of power produced
through hydroelectric sources. Reduced water availability can also disrupt oil and gas
drilling, which are key energy sources, as well as operations at thermoelectric plants that
need water for cooling (NCA, 2018). Furthermore, droughts and water stress can nega-
tively affect power generation through biofuels. Biofuel feedstocks can be significantly
reduced through reduced water availability and decreased soil moisture during droughts
(National Integrated Drought Information System, n.d).
Water is crucial for a wide variety of power generation methods. Power generation
constitutes 10% of water withdrawal worldwide (World Resources Institute, 2017).
According to the World Resources Institute (WRI), 47% of the world’s thermal power
plants and 11% of hydroelectric power are located in highly water-stressed areas. This
presents huge risks to the power generation sector as a lack of sufficient water supplies
can cause power outages and increased competition for water between sectors. For
example, India suffered water shortages from 2013 to 2016 that caused 14 of the 20
biggest thermal utilities in the country to close down power plants. The shutdown cost
companies USD 1.4 billion and caused a loss in thermal power generation equivalent to
the total annual electricity demand of Sri Lanka (WRI, 2018).
India is far from exceptional. In the United States (excluding the states of Alaska and
Hawaii), for instance, projections show that 68.6% of natural gas, 73.3% of oil, 61%
of nuclear, and 44.6% of coal-fired power plants are located in areas that could face
medium to extremely high water stress by 2030 (S&P Global, 2020). Two-thirds (65%) of
all the country’s electricity comes from generators that require water for cooling Union
of Concerned Scientists, 2017). Figure 21 below illustrates the amount of power plants
in the United States that were exposed to droughts in 2022. Total water usage by the
electric power sector in the country amounted to around 47.5 trillion gallons in 2020; the
water withdrawn per unit of electricity generated was roughly 12,000 gallons/MWh (EIA,
2021b). By the 2030s, 27% of thermoelectric power plants could be significantly exposed
to water stress (Ganguli et al., 2017). Compared to other thermoelectric power plants,
nuclear power plants could face greater vulnerability to droughts due to their larger cool-
ing needs. Water stress can lead to lower efficiency of nuclear power plants, as well as
planned and unplanned shutdowns (OECD, 2021).

Climate Risks in the Power Generation Sector 47

Contents | Droughts and water stress
Figure 21: Map of US power plants located in drought areas (National Integrated Drought
Information System, 2023)

China, the world’s largest electricity producer, is another country facing major exposure
to water stress. China generates 70% of its electricity from coal. A study assessing the
impact of climate-related water risk on its coal-fired power plants found that 10% face
water shortages between July and October, with this proportion doubling during the
remaining months. The North Grid is particularly vulnerable, with 35 to 60% of its coal-
fired power capacity at risk from December to June. The situation in China’s northern
region is expected to worsen with climate change. The country’s eastern and southern
grids are not without water shortage problems either. When coupled with higher demand
for electricity, this could further burden coal power generation capacity in these regions
(Liao et al., 2021). Similarly, fossil fuel power plants in the southern and eastern Mediter-
ranean countries, such as Egypt, Jordan, Lebanon, Morocco and Tunisia, face vulnerabil-
ity due to decreasing rainfall. Almost all (91%) of electricity generation in these countries
rely on freshwater for cooling. Under all three warming levels—below 2°C, around 3°C,
and above 4°C—nine in every 10 (90%) fossil fuel-fired power plants are estimated to
become exposed to lower levels of water. About 32% of coal power plants, 15% of gas
power plants, and 9% of oil power plants could be exposed to drier environments by
2100, higher than the global average (IEA, 2023i).

Climate Risks in the Power Generation Sector 48

Contents | Droughts and water stress
Figure 22: Changes in precipitation in the Middle East and North Africa from 2081 to
2100 under SSP2–4.5 scenario (IEA, 2023i)

Hydroelectric power generation will be especially vulnerable to rising water stress as

it relies on water stored in dams. The majority of climate models project a significant
decrease in hydropower generation in southern South America, for example, especially
for Chile and Argentina. This is due to a decrease in rainfall in central Andes and Patago-
nia. In 2019, the share of hydropower for power generation was 27% and 20% for Chile
and Argentina, respectively. In a below-2°C scenario, hydropower capacity in the area
could decrease by 10% between 2020 and 2100. In a 4°C scenario, meanwhile, capac-
ity could decrease by 15% between 2020 and 2060. Without any climate action, Chile’s
hydropower capacity could decrease by 34% by the end of the century (IEA, 2021d). Simi-
lar trends are visible in Vietnam. High temperatures in 2022 led to high energy demand in
the country, while water levels in its hydropower dams remained low. The use of public
lighting had to be reduced as a result, along with other energy conservation measures
(Guardian, 2023).
At present, about 26% of existing hydropower dams and 23% of projected dams are
located in areas of medium to very high risk of water scarcity, according to a study by
Opperman et al. (2022). Under a 3.5°C warming scenario, these figures are expected to
rise by 2050 to 32% and 20%, respectively. Countries with existing hydropower dams
that are expected to be vulnerable to rising water stress include China, Jordan, Iraq,
Morocco, and Syria (Figure 23a). China and Morocco are also among those countries
with projected projects that are susceptible to water stress, together with Iran, Kyrgyz-
stan, and Uzbekistan, among others. Pakistan, India, and Turkey are also expected to
be exposed to rising water scarcity by 2050 (Figure 23b). In Malawi, meanwhile, rising

Climate Risks in the Power Generation Sector 49

Contents | Droughts and water stress
water stress has is already significantly impacting the power generation sector, which
relies on hydroelectric power for 98% of its electricity (Grantham Institute, 2018). In 2017,
the African country was only able to produce 150MW of power instead of the 300MW
typically produced from hydroelectricity. As a consequence, 18 million people were left
without electricity. To deal with the problem, the country imposed rolling power outages.
However, these resulted in local businesses incurring substantial economic losses. They
also led to an increase in mortality in hospitals as critical machinery became unavail-
able. Such events are expected to become more common in Sub-Saharan Africa as the
region’s experience of severe droughts increases in the coming decades due to climate
change (Grantham Institute, 2018).

Climate Risks in the Power Generation Sector 50

Contents | Droughts and water stress
Figure 23a: Projected change in water scarcity across regions with existing dams in 2050 under a 3.5°C warming scenario (Opperman et
al., 2022).

Climate Risks in the Power Generation Sector 51

Contents | Droughts and water stress
Figure 23b: Projected change in water scarcity across regions with projected dams in 2050 under a 3.5°C warming scenario (Opperman
et al., 2022)

Climate Risks in the Power Generation Sector 52

Contents | Droughts and water stress
Given the high reliance of the power generation sector on water availability, an increase
in the frequency and severity of droughts promises to have a significant impact on firms
in the sector by reducing the efficiency and generation capacity of power plants. A recent
study on Britain’s power supplies indicates that almost half (7GW) of freshwater thermal
capacity becomes unavailable on extremely hot days. The consequent annual cumula-
tive costs on electricity prices run from GBP 29 million to as much as GBP 66 million
(Byers, 2021). A similar study by North Carolina State University studied the impact of
drought conditions in California between 2012 to 2016. The research found that the
state’s reliance on hydropower fell from 13% to 6% during this period, incurring costs of
GBP 1.9 billion for the state’s three main investor-owned hydropower firms—costs that
were then passed on to consumers (Science Daily, 2020).
Similarly, drought conditions in Europe in 2022 had a significant impact on France’s
power generation sector, of which nuclear power makes up 63% and hydropower 11%
(The Local France, 2023). The French utility firm, EDF, witnessed a 30% decrease in
hydropower generation in the first half of 2022 compared to the same period in 2021.
Along with outages at its nuclear power plants, this resulted in a loss of USD 1.4 billion
for EDF (SP Global, 2022). In Kenya, meanwhile, a national disaster was declared in
response to a major drought in 2017. The country’s reserve energy margin, which it used
to prevent blackouts and meet high energy demand, dropped to 4.4% (World Resources
Institute, 2017). The previous year, a similarly severe drought in India caused the coun-
try’s coal power sector to suffer profit losses of USD 350 million due to its dependency
on water for cooling (World Resources Institute, 2017). Hydropower generation in the
country dropped by 20% from the previous year (Power, 2016). The same story played
out in Ghana after droughts in 2016 caused the country’s largest energy supply, the
Akosombo Dam, to operate at minimum capacity (World Resources Institute, 2017).
One of the repercussions of water stress is that countries reliant on hydropower may be
forced to shift power production to other sources. Due to low levels of rain in China since
mid-2022, for example, the country’s hydro production has decreased by 82 billion kWh.
As a result, it has had to increase power production from coal-fired power plants, which
has jumped by 149 billion kWh. The provinces of Sichuan and Yunnan, which produce
about half of China’s hydroelectric power, have been particularly hard hit. Rainfall in the
two provinces was 56% below the seasonal average in 2022. Drought conditions contin-
ued into the first half of 2023, during which time China registered its lowest level of hydro
generation since 2015. As a result, coal became vital to meet electricity demand in the
short term. Coal miners expanded production and coal-fired generators were encour-
aged to accumulate fuel by the government (Reuters, 2023). It should be said that China
has also turned to wind and solar sources for additional power generation. Even so, the
example demonstrates how the increasing occurrence and severity of droughts due to
climate change may worsen reliance on fossil fuels, thus intensifying transition risks.

Climate Risks in the Power Generation Sector 53

Contents | Droughts and water stress
 Case Study 5: Impact of severe droughts in Brazil
Hydroelectric power is Brazil’s top electricity source, comprising 61% of its total
electricity generated. Droughts in 2021 reduced water flows into the country’s
hydroelectric dams to a 91-year low (UNDRR, 2021). Particularly affected was
South America’s second largest river, the Paraná River, which flows southwest
from its source in eastern Brazil to some of the country’s most populous areas.
Brazil has more than 50 large dams and reservoirs throughout the Paraná River
Basin, making it critical for the country’s energy security. As a result of the water
shortages, Brazil’s national electricity supply fell by 17% (ECPAmericas, 2021).
To cope with the decreasing energy supply, relative prices increased by an aver-
age of 6.78%. Brazil had to import electricity from its neighbours and generate
more power at fossil fuel plants (which are more financially and environmentally
costly) (Al Jazeera, 2021). Given the restricted energy supply, the Brazilian federal
government sought to cut public service electricity use by 10 to 20%. Residential
use of energy was also affected. Many medium-sized towns started rationing,
for instance. In September 2021, the then Brazilian president, Jair Bolsonaro,
requested Brazilians to stop using elevators if possible and to take cold showers
in order to budget electricity. Residents in the São Paulo state only had access to
tap water at home every other day (ECPA, 2021).
The drought also caused fluctuations in the nation’s energy spot market, reflect-
ing unusual precipitation patterns. The lack of rain throughout most of the year
encouraged Brazil to increase its use of thermal power, which, at around USD 59/
MWh, costs around double to produce than hydroelectricity (Argus, 2021a). The
volatility posed significant difficulties for the market to accurately and consis-
tently determine the price of different energy sources. This, in turn, deterred
energy suppliers from offering long-term contracts. By June 2021, the drought
conditions had driven prices up by 40% (Reuters, 2021b). For large industrial
customers that desired to purchase energy from the power suppliers, this compli-
cated the planning processes and posed further difficulties in raising capital
(ECPA, 2021).

Climate Risks in the Power Generation Sector 54

Contents | Droughts and water stress
 Figure 24: Drought along the Paraná River Basin (ECPA, 2021)

Climate Risks in the Power Generation Sector 55

Contents | Droughts and water stress
 Case study 6: Water stress-related risk
Capital Power Climate Change Disclosure 2022
Canadian power producer
Key assumptions
◾ Water resources are increasingly affected by climate change (impacts vary
by jurisdiction); water conservation and use are increasingly scrutinised and
subject to more stringent regulation.
◾ Long-term changes in weather patterns will affect the design and operation of
new and existing renewable assets.
Risks
◾ Short
◽ Water use and conservation efforts are increasingly scrutinized, and require-
ments are strengthened to mitigate the chronic impacts of climate change
on water resources.
◾ Mitigation
◽ Capital Power has approved and is executing a Water Management Strat-
egy that will mitigate risks associated with increasing scarcity of water
resources.
◽ Actions to be off-coal will reduce Capital Power’s overall water consumption.
◽ Capital Power monitors developments in policy and regulatory frameworks
that address management of water resources.
◽ Risks relating to the regulation and management of water are identified and
mitigated in due diligence processes.

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Contents | Droughts and water stress
3. Wildfires

If the impacts of climate change worsen, the frequency and severity of wildfires are
expected to rise, which is a significant concern for utility companies. Wildfires create
several pain points for power-producing companies, such as power outages and infra-
structure damage. These carry with them massive expenses. During wildfires, for exam-
ple, burnt trees and debris can collapse onto power infrastructures such as transmission
lines and substations. The consequent physical damage can be very costly and time-con-
suming to rectify. Over the past 50 years, for example, damages from wildfires have cost
power companies in the United States an average of USD 1 billion per year (adjusting
for inflation). Globally, the scenario is similar. Between 2017 and 2021, wildfires are esti-
mated to have caused a total of USD 81.6 billion in damages, a nine-fold increase on the
period 2012–2016 (National Oceanic and Atmospheric Association, 2023).
Power generation and utilities firms can sometimes be held accountable for causing
wildfires when power lines come into contact with dry vegetation and cause it to ignite.
Hawaiian Electric Industries is facing exactly this charge in the wake of the deadly Maui
fires on Hawaii in 2023. Although the cause of the fire remains under investigation, local
residents point the finger at the company’s power lines. If proved correct, Hawaiian Elec-
tric Industries could be held liable for billions of dollars’ worth of damage, resulting in its
potential bankruptcy. Either way, many investors have already chosen to play safe; the
firm’s stock plummeted by 70% in the month immediately after the fire (Time Magazine,
2023). In California, meanwhile, 10% of wildfires from 2016 to 2020 were caused by elec-
trical power (The Conversation, 2023). Since 2017, for example, equipment owned and
managed by PG&E, the largest utility company in the United States, has been blamed
for over 30 wildfires in California. Previously, the company had reached a settlement of
more than USD 25.5 billion with wildfire victims (PBS, 2022). It subsequently filed for
bankruptcy in 2019 (UtilityDive, 2020). As the frequency and severity of wildfires rise due
to climate change, firms in the sector face a dilemma as to whether to shut off power
on days with a high chance of a wildfire or to continue providing reliable electricity to
households and risk wildfires (Wall Street Journal, 2023).

Climate Risks in the Power Generation Sector 57

Contents | Wildfires
Figure 25: The ‘Dixie Fire’ spreading through Genesee, California, in 2021 ABCnews.
com, n.d.

Wildfires can also decrease the efficiency of solar energy generation. Wildfires produce
excess clouds and aerosols, which can decrease the amount of solar beam that reaches
the earth’s surface. This impacts the amount of energy that solar panels can capture
from the sun, decreasing solar energy production. It is estimated that aerosols can
reduce solar PV production by 30 to 50%. A study on solar power production in India
revealed that aerosols and clouds caused an estimated 82% reduction in total solar
energy production. The financial loss from one day of high levels of aerosols and clouds
was estimated at USD 98,000 and USD 171,500, respectively, for Indian total solar plant’s
capacity potential of 40 GW (Dumka et al., 2022). The impact of wildfires on solar power
was also witnessed during the 2019 Australian bushfires, which released almost one
million tons of smoke into the stratosphere. The Australian Energy Market Operator
(AEMO) and energy analytics company Amperon surveyed four solar farms. The study
found a mean decrease of 4.1% in output per plant between December 2019 and Janu-
ary 2020 due to the bushfires (Amperon, 2020).
Furthermore, wildfire-induced runoffs can cause sediments from wildfires to end up in
reservoirs used for hydroelectric power generation. For example, in 2018, the Thomas
Fire in California increased the influx of fine sediment in nearby rivers by 200 times
(Jumps et al., 2022). Currently, around 0.5 to 1% of the total volume of 6800 km3 of
water stored in reservoirs globally is lost annually due to sedimentation. Sedimentation
can reduce the storage availability of a reservoir, negatively impacting the generation of
hydroelectricity (Schellenberg et al., 2017).

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Contents | Wildfires
4. Intensifying storms and floods

Floods cause significant damage to power infrastructure, including power grid assets.
These damages are commonly associated with power outages (Karagiannis et al., 2017).
In 2023, devastating flooding in the Emilia-Romagna region in Italy left around 50,000
people without electricity (NBC news, 2023a). The floods killed nine people and caused
billions of dollars’ worth of damage, with at least 10,000 people forced to leave their
homes and more than 5,000 farms left underwater (NBC news, 2023b). As climate
change causes an increase extreme storms and flooding events, firms in the sector
are likely to face a growing risk of damage to infrastructure and unscheduled halts in
operations. Firms in the sector are expected to face higher costs related to infrastruc-
tural damages and higher prices of raw materials due to extreme storms. For example,
in 2017, a significant storm struck Ireland. The extensive damage that followed led the
Electricity Supply Board to allocate approximately USD 16.7 million to restore power to
residences and businesses throughout the nation (The Irish Times, 2018).
A study by Opperman et al. (2022) estimates that about 75% of existing hydropower
dams and 83% of projected dams are located in areas of medium to very high risk of
flooding. The proportion of existing hydropower dams exposed to very high or extreme
risk of flooding is projected to increase five-fold under a 3.5°C warming scenario (Figure
26). For projected dams, the risk in some areas is expected to increase by up to 20 times
by 2050 due to climate change. Myanmar, Cameroon, Laos, Thailand, Uganda, Bangla-
desh, Colombia, China, Ethiopia, India, Kenya, and Vietnam are just some of the coun-
tries with operational hydropower dams that are expected to become more vulnerable
to flooding as global temperatures rise (Figure 27a). Countries with projected projects
that will face rising flood risk under a 3.5°C warming scenario include Myanmar, Kenya,
Uganda, Ecuador, and Cameroon (Figure 27b).

Figure 26: Proportion of existing hydropower dams at risk of flooding under three
scenarios—optimistic (1.5°C warming), current trend (2°C warming), and pessimistic
(3.5°C warming) (Opperman et al., 2022)

Climate Risks in the Power Generation Sector 59

Contents | Intensifying storms and floods
Figure 27a: Projected change in flooding across regions with existing dams in 2050 under a 3.5°C warming scenario (Opperman et al.,
2022)

Climate Risks in the Power Generation Sector 60

Contents | Intensifying storms and floods
Figure 27b: Projected change in flooding across regions with projected hydropower dams in 2050 under a 3.5°C warming scenario
(Opperman et al., 2022)

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Contents | Intensifying storms and floods
Other energy assets can also be exposed to the increased frequency and severity of
floods. For example, in 2021, heavy rain and flooding in the state of Victoria in Austra-
lia forced the closure of the Yallourn power station. The power plant was the largest
plant in the state and produced 25% of Victoria’s power (9news, 2021). Nuclear power
plants located in close proximity to water bodies are also vulnerable to flooding. In the
summer of 2020, extreme floods in Bangladesh caused half of the country’s districts to
flood, impacting over 4.7 million people. Among the affected sites was the Pabna district,
where two nuclear power reactors were under construction at the Rooppur Nuclear
Power Plant site (Center for Climate and Security, 2020). Similarly, analysis by Moody’s
Investors Service has showed that 37 gigawatts of the United States’ nuclear capacity
is vulnerable to flooding, including nuclear plants located along the East and Gulf Coasts
that are growing susceptible to hurricanes. Flooding in nuclear plants can cause damage
to infrastructure, such as transmission lines, resulting in plants being unable to generate
and deliver power (Scientific American, 2020).
In 2021, Germany faced the worst flooding it had seen in decades, resulting in many
companies having to cut power supply. Particularly hard hit were the states of Rhine-
land-Palatinate and North Rhine-Westphalia. The floods cost 185 lives and caused
damage valued at USD 32 billion (EUR 30 billion). RWE, one of Germany’s major energy
generators, reported that the floods endangered many of its power stations. Nearly all of
the run-of-river power plants on the Mosel, Saar, and Ruhr rivers in the Eifel region were
shut down during the event (Power, 2021). E.ON SE, a German utility giant, cut power
to 165,000 people following heavy flooding that impacted the energy infrastructure of
the country. The company also stated that fallen trees damaged power lines, triggering
supply outages. RWE reduced its operations at a coal mine after it flooded, reducing
supplies and causing it to function at a limited capacity. Due to the flooding, German
power for same-day delivery doubled to USD 236/MWh (Bloomberg, 2021).

Figure 28: Flooding in Germany in 2021 (CNN, 2021)

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Contents | Intensifying storms and floods
The year 2021 also saw Hurricane Ida hit the United States, resulting in power outages
for 1.2 million customers across eight states, including Louisiana, Alabama, New York
and New Jersey (EIA, 2021c). The impacts mirror those of Hurricane Sandy in 2021,
which left the majority of the lower Manhattan district of New York without power (Chon-
drogiannis et al., 2017). Transmission lines are especially susceptible to damage from
strong winds and flood water pressure, with repair costs commonly passed down to
customers. In the US state of Louisiana, for example, legislators voted to allow Entergy,
an energy company, to pass on the repair costs from damage caused by five storms in
2020 and 2021 to its customers. It is expected to take 15 years for customers to pay the
USD 3.2 billion repair bill (Louisiana Illuminator, 2022). Should climate change continue,
customers will likely face higher energy bills due to the cost of repairing damage to
energy infrastructure and assets caused by the growing severity of storms and flooding.
Extreme flooding and storms can also increase the costs of raw materials for power
generation due to the constraints on supply that they create. Many of these costs are
reflected in increased prices for customers. Thermal coal, which is a primary source to
generate steam for the production of electricity, has seen its price significantly increase
during extreme climate events (EIA, n.d.). For instance, floods caused by heavy rainfalls
in parts of Indonesia’s main Kalimantan coal-producing region in 2021 caused the price
of thermal coal to reach USD 75.22 per ton, its highest level since 2008. Indonesia is
the biggest thermal coal exporter in the world. As such, these disruptions to its coal
logistics and supply constraints had knock-on effects for the global thermal coal market,
with power plants running low on coal. Many international buyers had to find alternative
sources of supply as a consequence. India looked to increase domestic coal availability,
for instance, while China turned to other markets such as Bangladesh, Vietnam, Thai-
land, and the Philippines (Argus Media, 2021b). In the same year, flooding in Shanxi in
China caused disruption to coal supply. The floods, which caused 100,000 people to be
displaced, caused Chinese coal futures to increase by 11.6% and reach an all-time high
(FT, 2021). Global energy prices also witnessed considerable volatility as leading coun-
tries sought power supplies at increasingly high costs. With most of China’s domestic
coal coming from the region, the flooding event combined with other local factors to
cause power rationing for industry and residential users.
As the risk of intense storms and flooding increases, firms may have to take costly
precautions against flood damage.

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 Case study 7: Intensifying flood risks
EVNGENCO3 Annual Report 2022
Vietnamese power generation company
Risks
Vietnam has witnessed extreme weather phenomena in recent years, such as
rainfall and sea level rise. Therefore, input factors of EVNGENCO3’s hydropower
plants are also hit by flood season flow, erosion, reservoir sedimentation, etc.
These abnormal changes have caused direct impacts on power production
(energy safety), construction safety, flood, etc.
Risk management plans
◾ Build a plan on natural disaster prevention & control, search and rescue with a
“4 on the spot” motto: command manpower-materials and logistics to improve
capacity and specialised responsibilities.
◾ To timely provide information of production operations and reservoir regulation
to communities downstream, the Corporation has established 24 flood warn-
ing stations downstream (Buon Tua Srah: 14 stations; Buon Kuop Reservoirs:
10 stations) and along the river downstream to get local people alerted. At the
same time, the Corporation has installed Zalo groups at 3 reservoirs with local
authorities to announce, exchange and provide information in a timely and
quick manner to related parties to improve efficiency of flood & rain response.

Climate Risks in the Power Generation Sector 64

Contents | Intensifying storms and floods
5. Rising sea levels

If climate change worsens, rising sea levels threaten power plants located along coasts.
Flooding caused by rising sea levels can damage power plant infrastructure, including elec-
trical and cooling systems. Damage to nuclear power plants can even result in the release
of radioactive materials (Vidal, 2018). Flooding caused by rising sea levels can also damage
urban infrastructure that can, in turn, result in power outages. Equipment in substations
used to distribute electricity can become disrupted, for instance. Powerlines can also
become damaged or they can collapse and collide with other objects (Burillo, 2018).
By 2050, the heightened risk of flooding due to sea-level rise will affect 270 power plants,
directly impacting 800 million people. Globally, an estimated 6,700 power plants are situ-
ated in the low-elevation coastal zone, resulting in rising exposure of firms in the sector to
higher sea levels. Power producers operating in Asia, Europe, and the east coast of North
America will be exposed to an above-average level of sea-level rise (c40 cities, 2018). A
sea-level rise of one metre could double the number of vulnerable power plants in the US
coastal states of Florida and Delaware (Power, 2018). A recent study assessed the propor-
tion of power plants in the United States that could become exposed to a 100-year sea-level
rise by 2100. It found that, without any adaptation actions, the exposed power capacities
in relation to current average generation capacities for Delaware, New Jersey and Florida
would be 80%, 63% and 43%, respectively (Bierkandt et al., 2015).

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Contents | Rising sea levels
Figure 29: Additional exposure of US power plant sites to extreme sea-level rise without
additional mitigation action (Bierkandt et al., 2015)

Due to higher costs and increasing obstacles to the construction of new nuclear power
plants, companies are considering extending the lifespan of operational plants for
decades longer than expected. However, exposure to rising sea levels could threaten
such plans. For example, in 2019, officials in the United States approved a 20-year exten-
sion of Florida’s nuclear plant, Turkey Point, pushing its lifespan forward into the 2050s.
Three years later, however, the decision was reversed after a review of the plant’s poten-
tial environmental risks, which includ flooding from a rise in sea level due to climate
change. Climate models project that frequent flooding in the area of the plant would be
highly likely by the 2040s (AP News, 2022; Miami Waterkeeper, 2023).

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Contents | Rising sea levels
Figure 30: Exposure to sea-level rise of nuclear power plants in Florida (National
Geographic, 2015)

Climate Risks in the Power Generation Sector 67

Contents | Rising sea levels
The risk of land loss are disproportionately higher for the power generation sector of
small island nations because of their vulnerability to sea-level rise. On the island of
Hulhumalé in the Maldives, for example, 50,000 residents generate about 1.5 MW of
power through solar panels for the local grid (World Bank, 2022). At the current rate of
rising sea level, nearly 80% of the archipelago is projected to be uninhabitable by 2050.
This places coastal power generation like that of Hulhumalé in jeopardy, as it does for
the country’s overall energy supply (ABC News, 2021).

Urban populations at risk 2050s

10,000,000+
5,000,001–10,000,000
1,000,001–5,000,000
500,001–1,000,000
100,000–500,000

Figure 31: Cities with power plants vulnerable to coastal flooding due to a sea-level rise
of 0.5 metres in the 2050s (c40 cities, 2018)

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Contents | Rising sea levels
6. Physical risk guidance

This section offers guidance on how financial institutions can address physical risks
within the sector and support their clients in the process.

Key physical risk questions for financial

institutions to consider
1. Gathering information
◾ What are the most prevalent physical risks across our portfolio footprint?
◾ What have our clients disclosed in their financial, sustainability, and climate reports
regarding their physical risks?
◾ How many of our clients have business resiliency plans or a climate change risk
assessment in place?
◾ Do we have locational data on the major assets of our clients?
2. Assessing the risks
◾ How much of our portfolio operates in areas of high physical risk?
◾ What does our exposure to higher-risk clients look like? What are the terms of our
financial relationship (e.g. debt/equity, tenor)?
◾ Have we looked at physical risk scenarios to see how these risks will evolve over
time across the portfolio? Have we considered short-term, medium-term, and long-
term risks?
◾ How would physical hazards disrupt our clients’ production and distribution activities?
◾ How long might disruption last for the client? What might be the potential loss in
revenue?
◾ What indirect damages8 might result from physical hazards (e.g. business disruption,
changes in value of assets) for individual clients?
◾ How might insurance markets (and insurability) change in the face of worsening
physical risks?
◾ What proportion of our clients are covered? Which hazards are covered? Is uninsur-
ability a risk in areas of more frequent physical hazards?
◾ Are water availability issues a concern for the client’s operations? If they are, do the
client’s plans consider the water needs of the local populations?
◾ Have we explored if local adaptation measures are being taken individual clients and,
if so, how they will increase the resilience of assets to climate change?

8 Indirect damages can result from tangible damages caused by a physical risk. An example of this is business
disruption caused by the physical damage to a business’s property or facilities.

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◾ How much are clients investing in adaptation and resiliency measures?
◾ Have we considered the potential environmental and social risks that might emerge
from changes in the value chain as a result of physical hazards?
3. Engaging with clients and updating strategy
◾ Do our senior leaders understand the physical risks of our clients?
◾ How are we helping our clients to transition to more resilient infrastructure, equip-
ment, and other assets?
◾ How will the physical risks that we have identified and assessed influence our strat-
egy in the power generation sector?
◾ What specific updates to risk management practices or business activities will be
needed to appropriately consider these physical risks in our operations?

Recommendations for risk management

1. Conduct geolocated, asset-level analysis
Power plants are extremely vulnerable to physical hazards, such as flooding and water
stress. Temporary disruptions in operations as a result of an extreme event can signifi-
cantly increase the operating costs of power plants. These costs are commonly passed
on to consumers, thereby increasing electricity prices. Financial institutions need to
have an in-depth understanding of the major capital assets of their clients and the loca-
tion of their assets. Financial institutions should assess the exposure of their assets to
physical hazards based on the type of energy source (such as coal-fired, hydropower,
or solar) and its location, as well as existing insurance coverage and any mitigating or
exacerbating risk factors. Financial institutions or their clients should conduct periodic
analysis of their assets to be aware of the magnitude of the risks that they face and
how these change over time.
2. Review clients’ resiliency plans
Many firms in the power generation sector have identified the negative financial
impact posed by physical risks such as to heat stress and wildfires. These can be
seen through the disclosure examples above. Some firms have started to develop and
disclose business continuity plans and actions to improve resiliency against physical
hazards. For financial institutions, information about the resiliency and adaptive capac-
ity of their clients is important. As a first step, financial institutions should review their
clients’ annual reports and climate-related financial disclosures to gain information
on resiliency. Clients should also be requested to provide further information on adap-
tation measures being undertaken for major assets. For assessing the credibility of
these plans, they should be compared to national adaptation plans (NAPs) issued by
governments as well as to other suggested resiliency measures (e.g., those within the
IPCC AR 6 WG 2 report).

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Adaptation and mitigation actions clients can take
1. Resiliency planning
If the impacts of climate change worsen, infrastructure of power stations face increas-
ing risk of damage from physical hazards. Firms can develop resiliency and adaptation
plans for these sites. To develop these plans, firms can conduct an assessment of their
current climate risks and asset vulnerabilities. As part of the assessment, firms can
explore different climate scenarios to understand how climate risks may evolve in the
coming decades as the frequency and intensity of physical hazards increase. As part of
their resiliency planning, clients should create procedures for different business units
to respond to potential disruptions in the upstream supply of raw materials for power
generation. Clients of the power generation sector should consider the development of
green infrastructure and the strengthening of synergies for adaptation measures and
other environmental issues, such as flooding, water availability, air quality, resource
efficiency, and biodiversity conservation.
2. Climate-ready infrastructure
Given the capital-intensity of the power generation sector, firms in the sector should
invest in climate-ready infrastructure to ensure that their power stations, grids, and
equipment are resilient to worsening climate hazards. For new infrastructure, this will
need to take place during the planning process by enacting standards that are appro-
priate for today’s conditions and potential future tail-risk events. Furthermore, firms
may need to consider relocation or building plants in newer locations, for example,
considering cooler locations for power generation impacted by higher temperatures.
Retrofits and climate defences can be considered for existing infrastructure, for exam-
ple, efficient cooling, flood protection, implementing safety measures for fuel storage
and improving drainage systems and structural levels. The most effective of these
investments may be those that offer environmental and social co-benefits. Examples
of projects that build resiliency and support nature include the restoration of mangrove
forests and wetlands and that also consider affected communities.

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Additional guidance
◾ The Equator Principle’s guidance note on Climate Change Risk Assessment provides
detailed information on physical risk assessment.
◾ The note by the Network for Greening the Financial System, titled ‘Physical Climate
Risk Assessment: Practical Lessons for the Development of Climate Scenarios with
Extreme Weather Events from Emerging Markets and Developing Economies’, offers
a framework to complement existing climate risk assessment practices.
◾ The European Central Bank has published good practices for climate-related and envi-
ronmental risk management for financial institutions
◾ UNEP FI and the Cambridge Institute for Sustainability Leadership’s report on Lead-
ership Strategies for Client Engagement: Advancing climate-related assessments
includes guidance on advancing climate-related assessments for effective use in
client engagement.

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UNEP Finance Initiative brings together a large network of banks,
insurers and investors that collectively catalyses action across the
financial system to deliver more sustainable global economies.
For more than 30 years the initiative has been connecting the
UN with financial institutions from around the world to shape the
sustainable finance agenda. It has established the world’s foremost
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Convened by a Geneva, Switzerland-based secretariat, more than
500 banks and insurers with assets exceeding US$100 trillion work
together to facilitate the implementation of UNEP FI’s Principles
for Responsible Banking and Principles for Sustainable Insurance.
Financial institutions work with UNEP FI on a voluntary basis and
the initiative helps them to apply the industry frameworks and
develop practical guidance and tools to position their businesses
for the transition to a sustainable and inclusive economy.

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