Power generation facilities will be increasingly at risk of weather-related disruptions related to climate change in the coming decades, according to a Moody's Investors Service report published on Thursday.
Extreme heat, water shortages, flooding and hurricanes will all pose risks to infrastructure, and will increasingly need to be calculated into long-term utility planning, according to the report. Rate design and regulatory support are key strategies for mitigating that risk.
Climate risks vary by region — Midwestern utilities are most vulnerable to increased extreme heat and flooding, while Western utilities face potential water shortages and Southeastern utilities are more exposed to hurricane risks.
Despite risks related to climate, utility credit ratings remain stable overall, according to the report.
"One thing that we are really reiterating in this research is that utilities will continue to invest in long-term infrastructure," Vice President and Senior Analyst at Moody's and one of the lead authors of the report, Jairo Chung, told Utility Dive.
"One caveat here though is that they will need to do this in the midst of the uncertainties around climate hazards. And that could potentially be a credit concern," she said. "But at least for now, our view is that for the near term, even for the medium term, that utilities will continue to have access to capital markets and have the regulatory support for them to recover the costs and on returns on these investments."
The larger question than whether a utility is prepared for this risk or not, is whether there are regulatory structures in place to absorb investment risks, such as potential stranded asset risks related to infrastructure damage, she said.
Elongated outages, as well as a change in power demand based on differing weather patterns, can threaten investor owned utility business models because traditional business models depend on consistent demand, and more volatile electric generation is one of the greater risks, according to Chung. Mitigating that risk can happen through rate strategies such as decoupling, which separates revenues generated by utilities from how much power their customers consume.
Which utilities are most at risk?
Heat stress can impact the grid in a number of ways — by lowering a plant's ability to cool down, decreasing transmission line efficiency or increasing power demand. Ameren territories across Illinois and Missouri are considered the most at-risk from rising temperatures, according to Moody's, which noted the region's coolest summer days were 24% hotter than average in 2019.
An Ameren spokesperson directed Utility Dive toward the utility's long-term climate risk strategy, which includes reducing emissions 80% below 2005 levels by 2050, as well as system hardening. The utility plans to harden its physical infrastructure by burying lines, insulating above-ground wires more heavily, surveying flood risks and upgrading flood mitigation infrastructure.
Conversely, water shortages are considered a risk to utilities in dry, arid regions of the West. Utilities require large amounts of water to cool down thermoelectric power plants, and during periods of drought or water scarcity plants have been forced to shut down or curtail their power because of high water temperatures or lack of availability.
Xcel Energy is considered one of the most at risk under that scenario, particularly in its territories across Colorado, New Mexico and Texas. The utility last week announced it would be retiring one of its coal-fired plants a decade early because of water scarcity concerns, but emphasized it did not expect water scarcity to impact other plant operations.
"We have operated in arid states for over a century, through times of water stress, and have developed strategies, partnerships and other mechanisms to ensure we are prepared," Xcel spokesperson Julie Borgen told Utility Dive in an email. "Based on the information and detailed analysis available today, we do not anticipate that water scarcity will hasten the retirement of any of our other plants."
The utility has strategic water plans across all of its states that include monitoring streams and snowpacks, as well as recycling the water it can. It also plans to cut all carbon emissions by 2050.
AES subsidiary Dayton Power and Light is considered the most at-risk for flooding, while NextEra Energy, Dominion Energy and Duke Energy were all considered top-risk for hurricane threats.
"Duke Energy understands that, due to the location of some areas of our service territory, there are climate-related risks the company must take steps to mitigate," utility spokesperson Phil Sgro told Utility Dive in an email. Strategies for the utility include physical pole reinforcements, line undergrounding, smart grids and equipment relocation, along with its goals to reach net-zero carbon emissions by 2050.
For coal ash in particular, Sgro said the waste has been excavated from its Sutton Power Plant and moved to a lined basin, while at other plants dams have been upgraded and flows into ash basins stopped.
Dayton Power and Light no longer has any power generation plants, an AES spokesperson told Utility Dive, and the parent company has several risk initiatives related to climate change.