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COLUMN: Electric utilities must increase investment in renewable power generation

by Colin Isaacs
EcoLog, 9/11/2020 11:12:00 AM

Globally, the public does not have a positive perception of the petroleum industry, at least according to Amin H. Nasser, president and CEO of Saudi Aramco, one of the largest petroleum companies in the world by revenue. Now, a research-based article in the August 31, 2020 issue of the journal, Nature Energy, suggests that the electric utility industry may be heading in the same direction. The experience of the petroleum industry suggests that this will only make the utility industry’s life more difficult with both governments and investors.

The article, with the eye-catching title, “A global analysis of the progress and failure of electric utilities to adapt their portfolios of power-generation assets to the energy transition”, is the result of research at the Smith School of Enterprise and the Environment, School of Geography and the Environment at the University of Oxford. The methodology is interesting because it relies on an already existing dataset of 3,311 electricity companies identified as utilities, that is, regulated (including those owned by national or local governments), investor-owned and cooperative companies, existing at some point between 2001 and 2018, with gas- and/or coal-based generation assets in their portfolios.

Theoretically, a similar analysis could be undertaken on the environmental performance of any industry sector, provided an adequate dataset exists or can be compiled. The increasingly common publication of sustainability and corporate social responsibility reports by large investor-owned companies provides the opportunity to compile such datasets even for sectors where data is not collected by international agencies.

The study uses a clustering algorithm, an unsupervised machine-learning-based tool which can identify patterns in large, complex datasets. The results demonstrate, in the researcher’s words, “that utilities’ decarbonization remains slow”. While a considerable number of the utilities claimed to prioritize growth of renewable electricity capacity, the majority continued to simultaneously increase their fossil-fueled asset base, particularly gas, though often at a slower rate than renewable assets.

According to the study, over 75% of all electric utilities, representing nearly 50% of total production capacity, are not actively growing their capacity either in terms of renewables or fossil fuels. Only 10% of utilities, mostly in Europe and North America, are prioritizing expansion into renewables over fossil fuels. Despite their prioritization of growth in renewables, the share of renewables in this group of utilities was still less than 3% in 2018, and they continued to grow their fossil-fueled generating capacity.

The author of the study concludes that power utilities worldwide are lagging behind, and even hindering, the global transition to renewable electricity. Although only a minority continued to invest in coal-fired capacity ahead of other assets in the last two decades, natural gas was prioritized by a substantial share of the companies. While a considerable and increasing number of utilities claim to be prioritizing renewable electricity, their transition remains slow. The study could not find a distinct group of utilities that has been successfully reducing its fossil-fueled capacity even though the reduction of emissions from burning of fossil fuels has been one of the objectives of virtually all governments since 1992 under the United Nations Framework Convention on Climate Change.

While this one study may not have an immediate effect, the long-term impact of the electric utility sector being labelled as unhelpful to climate change objectives may lead to activist and public calls for increased regulation and, potentially, calls for institutional disinvestment from the electric utility sector by large institutional investors such as universities and public pension funds.

Two additional points are worth noting. First, the study notes that utilities seem to be out of step with non-utility electricity providers. This group, known collectively as independent power producers, owned three-quarters of the global non-hydro renewable electricity capacity in 2018, while utilities, despite their much larger size, owned only 19%. The study states that this situation, coupled with decentralized generation and smart technology solutions, could potentially undermine the value proposition of conventional power utilities.

Second, the electric utility sector’s hindering of progress towards society’s climate goals is not likely to serve either the electric utility industry or its customers very well over the medium- to long-term. More and more, corporate, institutional, and individual customers are preferring to purchase renewable electricity, and independent power producers are investing to meet that demand. Unless the utilities buck up their renewables investment they may, over time, lose a large percentage of their customer base and be left with nearly worthless fossil generating capacity.

Other materials consulted for this column:

Oil Industry’s Poor Reputation Throws A Dark Cloud Over Energy Security. Mark Venables. Forbes. February 28, 2019

2020 Renewable Energy Industry Outlook: A midyear update. Marlene Motyka. Deloitte Transactions and Business Analytics LLP

Revealed: how the gas industry is waging war against climate action. Emily Holden. The Guardian. 20 August 2020

Colin Isaacs is a scientist and analyst with CIAL Group who focuses on sustainable development for business. He was selected by Environment Canada to be the principal author of the waste management chapter in the report The State of Canada’s Environment 1991. Colin can be reached at (416) 410-0432 (phone), (416) 362-5231 (fax), and colin@cialgroup.com (e-mail).

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