Climate Finance

Abstract:

We review the literature studying interactions between climate change and financial markets. We first discuss various approaches to incorporating climate risk in macro-finance models. We then review the empirical literature that explores the pricing of climate risks across a large number of asset classes including real estate, equities, and fixed income securities. In this context, we also discuss how investors can use these assets to construct portfolios that hedge against climate risk. We conclude by proposing several promising directions for future research in climate finance.

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Our review of the current literature is organized into two parts. In the first section, we discuss efforts to incorporate climate risk into macro-finance models. The pioneering work of Nordhaus (1977) paved the way for thinking about the interaction of the physical process of climate change with the real economy. Early papers in this literature — such as Nordhaus (1977, 1991, 1992) — focused on optimal climate change mitigation, and worked in deterministic settings. As such, these papers did not directly speak to the ways in which climate change affects asset prices and risk premia. Subsequent work extends these models to incorporate different aspects of risk and uncertainty about climate change and its link to the economy. These attributes include the stochastic nature of physical and economic processes as well as uncertainty about models of these processes (see, for example, the work by Kolstad, 1992, Manne et al., 1992, Nordhaus, 1994, Kelly & Kolstad, 1999, Nordhaus & Popp, 1997, Weitzman, 2001, 2009, Lemoine & Traeger, 2012, Golosov et al., 2014). Much of this literature has focused on the way risks and uncertainties affect optimal mitigation policies and the “social cost of carbon.” More recently, the financial economics literature has explored the implications of these models for the prices and returns of financial assets.

In the second part of this review article, we discuss the empirical literature that explores the pricing of climate risk across a large number of asset classes. This literature considers the price effects of at least two broad categories of climate related risk factors: physical climate risk and transition risk. Physical climate risk includes risks of the direct impairment of productive assets resulting from climate change; transition risk includes risks to cash flows arising from a possible transition to a lowcarbon economy. A central element of the research designs in these papers is that assets are differentially exposed to these climate risk factors: for example, houses located near the sea are more exposed to physical climate risks, while coal companies are more exposed to transition risks. Many papers then combine the differential exposure of assets within an asset class with time-varying attention paid to climate risk in order to understand how this type of risk is priced in asset markets. We review research that documents climate-related asset price effects in equity markets, bond markets, housing markets, and mortgage markets. We also discuss recent work that shows how one can use financial assets to construct portfolios that hedge climate change risks.

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To sum up, the debate around the term structure of discount rates for valuing investments to mitigate climate change (and its effects on the social cost of carbon) can in large part be traced to different assumptions about the nature of the shocks that mitigation investments are hedging, and about the dynamics of the economy and the climate in response to those shocks. While this two-dimensional distinction does not fully span the variety of models that have been written in the literature, it helps to understand what has lead the literature to reach different (sometimes opposite) conclusions.

https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2019/

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Lemoine (2020) argues that accounting for model uncertainty leads to higher estimates of the social cost of carbon than would otherwise prevail. ... Uncertainty thus introduces a new channel that impacts asset prices in the form of covariance between model parameters and agents’ consumption. This induces precautionary savings and risk premia effects in addition to those resulting from stochastic shocks in standard unambiguous models. Viewing damage uncertainty as a compound lottery, when the

agent “draws” an especially adverse damage parameter, carbon mitigation becomes especially valuable and raises the social cost of carbon (as long as relative risk aversion is greater than one, as commonly assumed in calibrations of macro and finance models).

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Barnett et al. (2020) analyze the additional incremental effects of ambiguity aversion on the social cost of carbon. Holding fixed the extent of model uncertainty, they compare model calibrations with ambiguity averse investors versus a model with ambiguity neutrality.  Ambiguity aversion magnifies the cost of carbon by roughly 60% to 70% in current value terms relative to the baseline scenario with model uncertainty but ambiguity neutrality.

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Krueger et al. (2020) conduct a survey of active investment managers to explore their approaches to managing climate risk. They find that investors believe that climate change has significant financial implications for portfolio firms, and that considerations of climate risk are important in the investment process. For example, 39% of investors in the survey reported to be working to reduce the carbon footprints in their portfolios. These survey responses are also consistent with findings from Alok et al. (2020), who show that fund managers adjust their portfolios in response to climatic disasters. Pedersen et al. (forthcoming) provide an ESG CAPM framework and outline how investor beliefs and preferences regarding climate change risks (and ESG considerations more broadly) fit in with the factor model paradigm that dominates empirical asset pricing research.

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Given the attention that investors dedicate to climate change, a growing literature explores the pricing of various dimensions of climate risk in equity markets (e.g., Hong et al., 2019). Much of this literature has focused on the effects of regulatory climate risk, where different measures of carbon intensity or environmental friendliness are often used as proxies for regulatory climate risk. For example, Bolton & Kacperczyk (2020) analyze U.S. equity markets, and demonstrate that firms with higher carbon emissions are valued at a discount. Quantitatively, the authors estimate that a one standard deviation increase in emissions across firms is associated with a rise in expected returns of roughly 2% per annum. The authors trace this effect at least in part to exclusionary screening performed by institutional investors to limit the carbon risk in their portfolios. In related work, Hsu et al. (2020) show a similar spread in average returns between high- and low-pollution firms, and link it to uncertainty about environmental policy. Engle et al. (2020) document that stocks of firms with high E-Scores — which the authors argue capture lower exposure to regulatory climate risk — have higher returns during periods with negative news about the future path of climate change. Similarly, Choi et al. (2020) explore global stock market data and find that stocks of carbon-intensive firms underperform during times with abnormally warm weather, a period when investors’ attention to climate risks are likely to be particularly high. Barnett (2020) uses an event study analysis to explore financial market impacts of regulatory risk. He finds that increases in the likelihood of future climate policy action lead to decreased equity prices for firms with high exposure to climate policy risk. Similar evidence of the pricing of climate risk can be found in equity options markets. Ilhan et al. (2019) show that the cost of option protection against extreme downside risks is larger for firms with more carbon-intense business models, and particularly so at times when there is an increased public attention to climate risk.

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Climate risks may also affect financial assets beyond equities. Municipal bond markets are a particularly interesting setting for analyzing the financial market implications of climate risk. In particular, when considering the physical risks of climate change, firms may be at risk depending on the location of their production facilities. However, even the most exposed firms usually have the option of relocating their modes of production to other geographies. Municipalities have no such luxury. As a result, one would expect that municipal debt backed by tax revenues from localities more exposed to physical climate risks such as rising sea levels or wildfires would trade at a substantial discount. In evidence along these lines, Painter (2020) shows that at-issuance municipal bond yields are higher for counties with large expected losses due to sea level rise (SLR). Consistent with the hypothesis that such price differences reflect the pricing of climate risk, he finds that this effect is concentrated in long-dated bonds and essentially absent at short maturities over which the likelihood of SLR remains low. In related work, Goldsmith-Pinkham et al. (2019) show via a structural model that this effect of SLR on municipal bond yields is tantamount to a 3–8% reduction in the present value of local government long-run cash flows.

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To implement this dynamic hedging strategy, it is necessary to determine which firms increase or decrease in value when there is news around climate change.  Engle et al. (2020) solve this problem by proxying for firms’ climate risk exposures using “E-Scores” that capture various aspects of how environmentally friendly a firm is. The hedge portfolio would then overweight high-E-Score firms, and underweight lowE-Score firms, with the relative weights updated dynamically as more data on the relationship between E-Scores, climate news, and asset prices is obtained. While it is straightforward to construct such a hedge with the benefit of hindsight, the true test of a hedge portfolio is its ability to profit in adverse conditions on an out-of-sample basis. Indeed, Engle et al. (2020) find an out-of-sample correlation of 20% to 30% between the return of the hedge portfolio and innovations in the WSJ climate change news index. In summary, the paper provides a rigorous methodology for constructing portfolios to hedge against climate risks that are otherwise difficult to insure.

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Zillow economist Krishna Rao (2017) calculates that a six feet sea level rise would put 1.9 million homes worth about $882 billion at risk of flooding, with about half the losses coming from Florida alone. 

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Using these data, Giglio et al. (2020) show that while properties in a flood zone generally trade at a premium compared to otherwise similar properties (likely because of positive amenities such as beach access), this premium compresses in periods with elevated attention paid to climate risk. Quantitatively, a doubling in the Climate Attention Index (i.e., a doubling in the share of listings that mention climate risk-related words) is associated with a relative 2.4% decline in the transaction prices of properties in the flood zone.

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A number of other papers exploit related research designs to explore the pricing of climate risk in real estate markets. Bernstein et al. (2019) also explore the relationship between house prices and sea level rise (SLR). They find that houses that are exposed to sea level rise sell for a discount compared with observably equivalent unexposed properties. The authors are able to control for the distance from the beach, which allows them to alleviate some concerns around differential amenity values of these properties. Quantitatively, properties that will be inundated after one foot of global average SLR sell at a 14.7% discount, properties inundated with two to three feet of SLR sell at a 13.8% discount, and properties inundated with six feet of SLR sell at a discount of 4.4%. Baldauf et al. (2020) present related evidence suggesting that the extent to which physical climate risk is priced in housing markets depends on whether the local population believes in climate change. Bakkensen & Barrage (2017) explore a similar point, highlighting that when individuals who do not believe in climate change disproportionately sort to purchase more exposed properties, this will reduce the extent to which climate change risk is priced in housing markets.

Utilities Exploit Market Loopholes, Costing Midwest Consumers $350 Million in 2018 - Study Finds Nearly One Fifth of Coal Generation the Midwest Operated Uneconomically

Regulated monopoly utilities overcharged millions of U.S. ratepayers in the Midwest at least $350 million in 2018 by selling them power from coal plants instead of from lower-cost, cleaner sources, according to a study released today by the Union of Concerned Scientists (UCS).

Consumers paid an average of $5 a month and as much as $184 a year in increased electricity costs that pay for monopoly utility practices that clog up the grid with dirty, expensive coal power and deprive less polluting resources grid access and revenues.

“Our analysis shows millions of customers are forced to subsidize utilities’ coal-fired power plants without even realizing it,” said Joe Daniel, senior energy analyst at UCS and co-author of the report “Used, But How Useful? How Electric Utilities Exploit Loopholes, Forcing Customers to Bail Out Uneconomic Coal-Fired Power Plants.” “Utilities have been hoodwinking regulators and ripping off their customers to prop up their uneconomic coal plants when lower-cost resources are readily available,” added Daniel.

Power markets are set up so that the lowest-cost resources should operate when they are available. But monopoly utilities, which build and operate power plants that directly serve retail customers, are able to exploit loopholes in the market rules at the expense of consumers. One example is “self-committing,” which allows the company to sell power from its own, uncompetitive coal plants at a loss instead of from cheaper, cleaner energy sources.

If the energy resources in the Midcontinent Independent System Operator (MISO) market were dispatched economically, consumers would have saved approximately $350 million dollars in annual electricity bill costs in 2018. Furthermore, the coal fleet across MISO would run 19 percent less and allow cheaper, cleaner generation access to the market. These consumer savings stem from a reduction in regulated utilities’ fuel and operations costs.

“Power from coal plants is expensive because the fuel isn’t cheap and the plants cost a lot to operate compared to other resources available in the market,” said Daniel. “But some utilities will sell power from coal plants at a loss, banking on being able to recoup those losses on the backs of captive customers.”

Utilities and regulators are supposed to check to make sure they are truly putting the least expensive power on the grid, but in MISO, they often don’t spot the problem. The report notes that public utility commissions, which regulate monopoly utilities and determine what costs they are allowed to recover from ratepayers, also are usually unaware that they are greenlighting a utility bailout.

“Allowing uneconomic self-commitment of coal-fired power plants in those markets diverts precious consumer dollars away from improving market efficiency and wastes dollars that could otherwise reduce greenhouse gas emissions,” said Jon Wellinghoff, former chair of the Federal Energy Regulatory Commission and CEO of GridPolicy, Inc. “If we are going to move rapidly to the low-carbon future necessary to avert climate disaster we need to be as efficient as possible in the operation of wholesale electric markets.”

Daniel and his co-authors analyzed the MISO market, which provides power to 15 states. The report explored a most efficient way to use existing energy resources in the area, using the same modeling tool that MISO operators and many utility companies use when making their own market forecasts.

According to the analysis, the following utilities sold the most coal-powered electricity when less expensive electricity was available from market sources in 2018:

Cleco Power LLC, which provides power to more than 240,000 families in Louisiana, uneconomically generated electricity from its Dolet Hills and Brame Energy Center coal plants, at a $123.3 million loss in 2018. If utilities in MISO ran their power plants more efficiently, the average family in Louisiana could have saved $15 a month in electricity bills, or a total of $184 that year.

DTE Electric Company, which also provides power to nearly 2 million families in Michigan, uneconomically generated power from its five coal plants—Belle River, Monroe, River Rouge, St. Clair and Trenton Channel—at a $94.7 million loss in 2018. If utilities in MISO ran their power plants more efficiently, the average family in Michigan could have saved $5 a month in electricity bills, or a total of $61 that year.

Rebuilding Cities to Generate 117 Million Jobs and $3 Trillion in Business Opportunity with Nature-Positive Strategy

COVID-19 recovery packages that include infrastructure development will influence the relationship between cities, humans and nature for the next 30 to 50 years. With the built environment home to half the world’s population and making up 40% of global GDP, cities are an engine of global growth and crucial to the economic recovery.

Research shows that nature-positive solutions can help cities rebuild in a healthier and more resilient way while creating opportunities for social and economic development. The World Economic Forum’s new Future of Nature and Business Report found that following a nature-positive pathway in the urban environment can create $3 trillion in business opportunity and 117 million jobs.

“Business as usual is no longer sustainable,” said Akanksha Khatri, Head of the Nature Action Agenda at the World Economic Forum. “Biodiversity loss and the broader challenges arising from rapid urban population growth, financing gaps and climate change are signalling that how we build back can be better. The good news is, there are many examples of nature-based solutions that can benefit people and planet.”

Cities are responsible for 75% of global GHG emissions and are a leading cause of land, water and air pollution, which affect human health. Many cities are also poorly planned, lowering national GDP by as much as 5% due to negative impacts such as time loss, wasted fuel and air pollution. However, practical solutions exist that can make living spaces better for economic, human and planetary health.

The study, in collaboration with AlphaBeta, highlighted examples of projects deploying nature-positive solutions and the business opportunities they create.

Cape Town: Cape Town was just 90 days away from turning off its water taps. Natural infrastructure solutions (i.e. restoring the city’s watersheds) were found to generate annual water gains of 50 billion litres a year, equivalent to 18% of the city’s supply needs at 10% of the cost of alternative supply options, including desalination, groundwater exploration and water reuse. 

 

Singapore: Singapore’s water leakage rate of 5% is significantly lower than that of many other major cities thanks to sensors installed in potable water supply lines. Globally, reducing municipal water leakage could save $115 billion by 2030. Returns on investment in water efficiency can be above 20%.

 

Suzhou: Suzhou Industrial Park’s green development in China has seen its GDP increase 260-fold, partially through green development. The park accommodates 25,000 companies, of which 92 are Fortune 500 companies, and is home to 800,000 people. The park has 122 green-development policies, including stipulations on optimizing and intensifying land use, improvement of water and ecological protection, and the construction of green buildings. As a result, 94% of industrial water is reused, 100% of new construction is green, energy is dominantly renewable and green spaces cover 45% of the city.

 

San Francisco: San Francisco requires new buildings to have green roofs. The “green” roof market is expected to be worth $9 billion in 2020 and could grow at around 12% annually through 2030, creating an incremental annual opportunity of $15 billion.

 

Philippines: The loss of coastal habitats, particularly biodiverse and carbon-rich mangrove forests, has significantly increased the risk from floods and hurricanes for 300 million people living within coastal flood zones. A pilot project in the Philippines, one of the countries most vulnerable to climate change, is monetizing the value of mangroves through the creation of the Restoration Insurance Service Company (RISCO). RISCO selects sites where mangroves provide high flood reduction benefits and models that value. Insurance companies will pay an annual fee for these services, while organizations seeking to meet voluntary or regulatory climate mitigation targets will pay for blue carbon credits. 

Overall, restoring and protecting mangrove forests in human settlements can reduce annual flood damage to global coastal assets by over $82 billion while significantly contributing to fighting climate change.

The report identifies five complementary transitions to create nature-positive built environments and outlines the business opportunities and potential cost savings for programmes targeting urban utilities for water, electricity and waste, land planning and management, sustainable transport infrastructure and the design of buildings.

Office space the size of Switzerland

Global examples call out areas to be improved. For example, an estimated 40 billion square metres of floor space is not used at full occupancy during office hours – an area roughly equivalent to the size of Switzerland. The COVID-19 upheaval has prompted a surge in flexible and remote working models in many countries – greater application of such models could help reduce the need for private office space in the future.

Governments’ role to raise and steer finance

The report calls for both government officials and businesses to play their part in raising and steering finance for sustainable urban infrastructure. “Regulations in areas including urban master planning, zoning and mandatory building codes will be critical to unlocking the potential of net-zero, nature-positive cities and infrastructure,” said Khatri. “We are at a critical juncture for the future of humanity. Now is the time to treat the ecological emergency as just that. A net-zero, nature-positive path is the only option for our economic and planetary survival and how we choose to use COVID-19 recovery packages might be one of our last chances to get this right.”

The Report is available free of charge at:

https://www.weforum.org/reports/new-nature-economy-report-ii-the-future-of-nature-and-business

The Future of Nature and Business sets out how 15 transitions across the three systems can form the blueprint of action for nature-positive transitions which could generate up to US$10.1 trillion in annual business value and create 395 million jobs by 2030.

COVID-19 has brought the Great Acceleration to a screeching halt. Hundreds of thousands of people have died and entire sectors of the economy have stopped operating. All because a novel zoonotic disease, possibly triggered by human disturbance of nature, became a pandemic. As of June 2020, governments and international organizations have invested close to $9 trillion to try to prevent the most immediate human and economic impacts. But despite these efforts, the global economy is expected to contract by 3% in 2020, affecting the jobs and livelihoods of millions of people. page 4

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A pragmatic framework for the industry to lead the transition towards a nature-positive economy.... can unlock an estimated $10 trillion of business opportunities by transforming the three economic systems that are responsible for almost 80% of nature loss.

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The first report of the World Economic Forum’s New Nature Economy Report (NNER) series, Nature Risk Rising, highlighted that $44 trillion of economic value generation – over half the world’s total GDP – is potentially at risk as a result of the dependence of business on nature and its services.

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Key Findings at a Glance

There is no future for business as usual – we are reaching irreversible tipping points for nature and climate, and over half of the global GDP, $44 trillion, is potentially threatened by nature loss.

Fighting climate change is essential but not enough to address the nature crisis – a fundamental transformation is needed across three socio-economic systems: food, land and ocean use; infrastructure and the built environment; and energy and extractives.

80% of threatened and near-threatened species are endangered by the three systems, which are responsible for the most significant business-related pressures to biodiversity; these are also the systems with the largest opportunity to lead in co-creating nature-positive pathways.

15 systemic transitions with annual business opportunities worth $10 trillion that could create 395 million jobs by 2030 have been identified that together can pave the way towards a people- and nature-positive development that will be resilient to future shocks.

Economic And Clean Energy Benefits Of Establishing A Southeast U.S. Competitive Wholesale Electricity Market

Executive Summary

Seven Independent System Operators (ISOs) or Regional Transmission Operators (RTOs) serve close to 70 percent of all United States electricity consumers. One region of the country, the Southeast, is particularly devoid of this type of market competition. This report details the impacts of enhancing competition for wholesale electricity transactions through a theoretical organized market in the Southeast region. We use a combined production-cost and capacity expansion model of the electric power system in seven Southeastern states (Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, and Tennessee) out to 2040. ...

We find that a competitive Southeastern RTO creates cumulative economic savings of approximately $384 billion by 2040 compared to the business-as-usual (BAU) case. In 2040, this amounts to average savings of approximately 2.5¢ per kilowatt-hour (kWh), or 29 percent in retail costs compared to BAU. 2040 retail costs in the RTO scenario are 23 percent below today’s costs. In the RTO Scenario, carbon emissions fall approximately 37 percent relative to 2018 levels, and 46 percent compared to the IRP Scenario, in which emissions increase. Other major criteria pollutants impacting human health, such as NOX, SO2, and PM2.5, drop dramatically, largely as a result of eliminated coal generation. Emissions gains are driven by a vast deployment of renewable energy resources replacing coal.

Employment benefits begin accruing immediately after the RTO comes into operation, as lost jobs in coal and natural gas generation are replaced by construction jobs related to wind, solar, and battery deployment. By 2040, the RTO scenario creates 285,000 more jobs relative to the business-as-usual scenario, owing to the construction of 62 gigawatts (GW) of solar, 41 GW of onshore wind, and 46 GW of battery storage.

Our BAU case relies on the Integrated Resource Plans of the major investor-owned utilities in these states, in which utilities prescribe a coordinated set of new generating and transmission capacity necessary to meet future load projections. Vibrant Clean Energy’s WIS:dom®-P model then optimizes operations for these projected resource additions and retirements based upon historical dispatch estimates, assuming no further public policy intervention. In this case, the model assumes that each utility must meet its specified load projections and planning reserve margins independently, assuming limited import/export capacity from neighboring utilities and limited transmission expansion.

We compare this scenario to a fully competitive wholesale electric market, in which an RTO administered open market determines the most cost-effective capacity mix and resource dispatch, regardless of where that generation is located or who owns it. The RTO scenario assumes an integrated transmission planning scheme in which all seven Southeastern states share resources and expand transmission in order to meet one regional planning reserve margin at least cost. The competitive RTO Scenario modeled here grants planners and operators in the region the opportunity to co-optimize generation, distribution, and transmission benefits while planning to meet capacity in the most economically efficient way. 

A companion policy report additionally details key policies to help achieve competition’s benefits in the Southeast region. We focus on incremental policies that introduce competition into regional dispatch and utility resource planning and procurement. We cover principles for market design to help ensure a regional market is compatible with a cost-effective variable resource mix.

We outline policies that enable regional utilities with net-zero carbon goals to meet those goals effectively while respecting and supporting the fossil-dependent communities that supported economic development in the region.

Despite the fact that new renewable energy and battery storage resources are the least-cost forms of generating electricity, the Southeast region is largely beholden to monopoly utilities that rely on existing coal fleets and new gas-fired power plants to meet consumer electricity needs. This report finds that these utilities continue to inefficiently plan the power grid at great expense to consumers. Wasted excess capacity leads to wasted consumer dollars while stifling clean energy deployment, employment gains, and public health benefits.

Policymakers considering a regional market or state-level competitive procurement should be encouraged by this analysis to keep pressing in legislative and regulatory forums. State stakeholders where utilities block competitive reforms now have new quantitative findings to challenge the assumption that the way utilities have traditionally done business is in the public’s best interest. 

By Eric Gimon and Mike O'Boyle, Taylor McNair, Christopher T M Clack, Aditya Choukulkar, Brianna Cote and Sarah McKee

https://energyinnovation.org/publication/economic-and-clean-energy-benefits-of-establishing-a-southeast-u-s-competitive-wholesale-electricity-market/

Energy Innovation https://energyinnovation.org/  August, 2020

"To Rid The Grid Of Coal, The Southeast U.S. Needs A Competitive Wholesale Electricity Market" by Sarah Spengeman in Forbes on August 23, 2020 https://tinyurl.com/y67co45m notes that:

The Southeastern United States, one of the country’s only regions without a competitive wholesale electricity market, is dominated by monopoly utilities, which have favored expensive and polluting fossil fuel generation over cheap clean energy. Nearly all Southeast coal plants cost more to run than replacing them with new wind and solar, so continuing to run these uneconomic resources forces customers to foot the bill and inhale dirty air. ...

Competitive wholesale electricity markets, or Regional Transmission Operators (RTOs) and Independent System Operators (ISOs), are public-benefit corporations serving 70% of U.S. electricity customers that arose from electricity restructuring during the late 1990s-early 2000s to cut costs and encourage innovation.

Competition in these markets has reduced wholesale energy costs while creating an entry point for low-cost renewable energy to provide power to the grid. They have also been critical to integrating variable renewable energy – wind and solar – and capitalizing on resource diversity over larger geographical areas. ...

Despite ambitious long-term climate announcements, Southeast utilities are still heavily reliant on expensive-to-run coal plants and are doubling down on risky new gas infrastructure investments, instead of clean technologies of the future. ...

Comparing a competitive regional Southeast market through 2040 to a business-as-usual scenario based on existing monopoly utility Integrated Resource Plans reveals remarkable findings. Introducing a Southeast regional competitive market that optimizes regional transmission and shares resources (key features of other RTOs) would save $384 billion dollars with approximately $17.4 billion average yearly savings through 2040 - 23% lower electricity costs compared to today.

These enormous savings come from cheaper wind, solar, and storage displacing more expensive-to-run coal, along with an RTO-led regional transmission planning scheme where all seven states share power resources and expand transmission to most efficiently meet regional electricity demand. VCE’s WIS:dom model also incorporates electricity distribution infrastructure savings from deploying distributed storage and solar resources.

The Bar graph above shows cost reductions reach nearly 32% by 2040 in the competitive scenario compared to just 10% compared to business-as-usual. 

In contrast, the current utility-led planning regime is an inefficient patchwork system. Monopoly utilities plan their electric grids independently from their neighbors and impose fees called “wheeling charges” to ship power across successive utility transmission systems. This incentivizes monopolies to over-build power plants, thereby increasing profits for their shareholders. Together, this significant duplication and overbuild of infrastructure costs customers billions....

An online data explorer https://energyinnovation.org/2020/08/25/southeast-wholesale-electricity-market-rto-online-data-explorer/ allows users to compare scenarios and understand state-level impacts:

Investors Are Learning That Clean Tech Pays: The stock performance of green companies shows that climate change is also a business opportunity.

FOR FULL STORY GO TO:

https://www.bloomberg.com/opinion/articles/2020-01-13/tech-companies-fighting-climate-change-outperform-stock-market

The American companies most reliant on embracing green technology are outperforming every broad measure of the stock market, delivering a greater return last year than all but two (Russia and Greece) of the world’s 94 leading equity indexes.

These are the 92 publicly traded firms with at least 10% of their revenues derived from clean energy, energy efficiency or clean technology, according to data compiled by Bloomberg New Energy Finance. ...

The S&P 500 Index and Russell 3000 gained 31%. ... This exceptional result didn’t come close to the performance of the clean companies, with their combined total return (income plus appreciation) of 40%. Together they were worth $946 billion last year, more than triple their market capitalization at the end of 2010. Whether the investment period is 2, 5 or 10 years, the return is superior by margins of 12%, 37% and 112% for clean companies.

Total Return (Income plus appreciation)

    Clean-tech companies*

Russell 3000

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The three biggest companies in this group by market capitalization all derived more than half their revenue from the clean-energy business. They are Nextera Energy Inc., ... operator of commercial nuclear power units and provider of electricity through wind, solar and natural gas; Tesla Inc. ..., manufacturer of battery-powered, electric vehicles; and Universal Display Corp., ... maker of organic light-emitting diode technology, according to data compiled by Bloomberg.

... The 19 energy firms in the group produced a 106% total return, 15 times the 7% gain by the overall energy-stock benchmark, the Russell 3000 energy sector. The nine technology companies among the 92 returned 70% when the Russell 3000 technology sector appreciated 46%, and the 16 BNEF-designated utilities earned 34% when the comparable Russell group advanced 26%, according to data compiled by Bloomberg.

Even U.S.-imposed tariffs on products from China, which manufactures a ... [great deal] of clean-energy equipment, haven’t ... [hurt] the performance of the U.S. companies. Enphase Energy Inc., for example, moved its production to Mexico from China and the Petaluma, California-based maker of renewable energy equipment rallied 452% last year on revenue growth of 96%. Analyst estimates compiled by Bloomberg predict that Enphase sales will increase 26% and 27% annually through 2021.

By contrast, revenues for the 28 companies in the S&P Energy Index, a mostly fossil-fuel crowd, declined 5% in 2019 and are forecast to grow 4% in each of the next two years.

One investor who is bullish on clean companies ... manage[s] the most successful mutual fund in the U.S. last year, the Columbia Seligman Communication and Information Fund. The manager, Paul H. Wick, counted three of the cleaner companies among his winners: Advanced Energy Industries, Bloom Energy Corp. and Rambus Inc.

Wick said that Bloom Energy, for example, reduced the cost of its products “on a continuous basis over the last four or five years” and “as a result will be cheaper than grid power in quite a few jurisdictions, states in the U.S. and overseas.” His fund returned 54% (income plus appreciation) in 2019 and Bloom Energy rallied 144% in the final two months of the year after Wick acquired its shares.

Among the BNEF technology firms, Universal Display Corp., the ... provider of power-saving lighting products, appreciated 121% as sales climbed 64% last year amid forecasts for 23% and 25% growth in 2020 and 2021. That's a superior outlook compared to the 70 tech companies in the S&P 500 Information Technology Index, which saw sales increase 10% in 2019 with 10% projected for 2020 and 8% for 2021, according to analysts’ estimates.

Renewable-energy utilities are similarly positioned for growth. Pattern Energy Group rallied 54% last year after the Canada Pension Plan Board agreed to acquire the San Francisco-based renewable power generation firm for $2.6 billion. Revenues increased 10% last year and are expected to rise 11% in 2020 and 3% in 2021, according to analyst estimates compiled by Bloomberg. The 28 companies in the S&P 500 Utility Index reported inferior sales growth of 6% last year and are likely to see only 3% in 2020 and 2% in 2021, according to the estimates.

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FOR FULL STORY GO TO:

https://www.bloomberg.com/opinion/articles/2020-01-13/tech-companies-fighting-climate-change-outperform-stock-market

SWEPCO Announces Major Project To Secure Low-Cost, Renewable Energy for Customers

Southwestern Electric Power Co. (SWEPCO) today announced plans for a major clean energy project that will provide 6 million megawatt-hours (mWh) of new wind energy annually to SWEPCO customers. SWEPCO will file applications July 31 with utility regulators in Arkansas, Louisiana and Texas to request approval for the project.

As proposed, SWEPCO will own 1,400 megawatts (MW) of a 2,000-MW wind farm under construction in Oklahoma. SWEPCO also will help build an approximately 350-mile, dedicated 765-kilovolt (kV) power line from the Oklahoma Panhandle to Tulsa to deliver the wind energy to customers.

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The proposed Wind Catcher Energy Connection Project is expected to save SWEPCO customers more than $5 billion, net of cost, over the 25-year life of the wind farm, compared to projected market costs for procuring power over the same period.

Cost savings include no fuel cost for wind, which lowers SWEPCO’s overall fuel and purchased power costs; full value of the federal Production Tax Credit, which is available for construction of new wind farm projects; and the cost-efficient delivery of the wind generation to customers through the new, dedicated power line.

Customers will see savings primarily through a reduction in the fuel portion of their bills, beginning in 2021.

Public Service Company of Oklahoma (PSO), also a subsidiary of American Electric Power (NYSE: AEP), will own 600 MW of the same wind power plant and co-own the proposed power line, pending regulatory approval.

SWEPCO’s 70 percent share of the $4.5 billion Wind Catcher project is $3.2 billion.

The Swiss company hoping to capture 1% of global CO2 emissions by 2025 | Carbon Brief

On the roof of a waste incinerator outside Zurich, the Swiss firm Climeworks has built the world’s first commercial plant to suck CO2 directly from the air.

Climeworks says that its direct air capture (DAC) process – a form of negative emissions often considered too expensive to be taken seriously – costs $600 per tonne of CO2 today. This is partly covered by selling the CO2 to a nearby fruit and vegetable grower for use in its greenhouse.

Climeworks hopes to get this down to $100/tCO2 by 2025 or 2030. It aims to be capturing 1% of global CO2 emissions each year by 2025.

...

Negative emissions might be necessary to meet the goals of Paris, where an overspend against the carbon budget is paid back by pulling CO2 from the air.

Some estimates suggest as much as five billion tonnes of CO2 (GtCO2) would have to be removed from the atmosphere, and then locked away underground, each year by 2050. (Last year, Carbon Brief produced a series of articles on the need for negative emissions, the options available and whether they are feasible – or merely a distraction that encourages complacency).

Direct air capture (DAC) is one of those options, with DAC machines often described as “sucking CO2 from the air” or “artificial trees”. It has a number of attractive features, including a limited land footprint, the ability to site units near to CO2 storage sites and a clarity around how much CO2 it sequesters, in contrast to negative emissions that use biomass.

....

Academic estimates for the cost of CO2 capture, transport and storage, along with regeneration of chemicals used in the process, range from $400 to $1,000 per tonne of CO2.

...

According to a 2016 Nature paper, DAC would require a theoretical minimum of 0.5 gigajoules (GJ) of energy to remove and store each tonne of CO2. Or, perhaps, as much as 12GJ/tCO2 once inefficiencies and other stages of the process are taken into account.

On this basis, the paper says that capturing 12 billion tonnes of CO2 equivalent (GtCO2e) per year (around a third of annual global emissions) would require 156 exajoules (EJ) of energy. This is more than a quarter of total annual global energy demand for all uses, of around 550EJ.

The paper says the costs and energy requirements would be “prohibitive” and that research and development is required to bring them down.

...

In the past two years, Climeworks has grown rapidly, reaching 45 employees today. Its $20m in financing includes $5m in Swiss government grants and $15m from private equity.

...

The market price in Switzerland, for small amounts of CO2, is $200-250/t...

Driving the Climeworks process uses 2.5 megawatt hours (MWh) of heat, at around 100C, for each tonne of CO2, along with 0.5MWh of power. This energy requirement is roughly equivalent to the 12GJ/tCO2 estimates set out above, though the firm hopes to shave 40% off this figure, bringing it down to around 7GJ/tCO2. Gebald says an increase in energy resources – he points to wind and solar – would be needed to scale up direct capture.

...

FOR FULL STORY GO TO:

https://www.carbonbrief.org/swiss-company-hoping-capture-1-global-co2-emissions-2025

by SIMON EVANS

Carbon Brief www.CarbonBrief.org

June 22, 2017
http://www.climeworks.com/wp-content/uploads/2017/05/01_PR-Climeworks-DAC-Plant-Opening.pdf

Arizona utility signs game-changing deal cutting solar power prices in half - Tucson Electric Power to buy new solar power at under 3 cents per kWh, a “historically low price.”

Remarkable drops in the cost of solar and wind power have effectively turned the global power market upside down in recent years.

We’ve seen prices for new solar farms below 3 cents per kilowatt hour (kwh) in other countries for over a year now, but before this week, not in the U.S. That changed on Monday when Tucson Electric Power (TEP), an Arizona utility company, announced that it had reached an agreement to buy solar power at the same game-changing price.

TEP says that this is a “historically low price” for a 100-megawatt system capable of powering 21,000 homes — and that the sub-3-cents price is “less than half as much as it agreed to pay under similar contracts in recent years.”

For context, the average U.S. residential price for electricity is nearly 13 cents per kwh, and the average commercial price is 10.5 cents.

NextEra Energy Resources will build and operate the system, which also includes “a long duration battery storage system” (whose price is not included in the 3 cents/kwh). Also worth noting: The sub-3-cents contracts that have been signed in other countries such as Chile, Dubai, and Mexico are unsubsidized, whereas U.S. prices include the 30 percent Investment Tax Credit.

https://www.tep.com/avalon-solar-ii/ Arizona solar array. CREDIT: Tucson Electric Power

PV Magazine reports “this is the lowest price” they’ve seen for solar yet in this country. And Bloomberg New Energy Finance chair Michael Liebreich explained last month that thanks to recent price drops, “unsubsidized wind and solar can provide the lowest cost new electrical power in an increasing number of countries, even in the developing world — sometimes by a factor of two.”

...

https://thinkprogress.org/arizona-utility-game-changing-solar-deal-8e7c0bcb093a

by Dr. Joe Romm, Founding Editor of Climate Progress, “the indispensable blog,” as NY Times columnist Tom Friedman describes it.

Think Progress https://thinkprogress.org

May 23, 2017

Tesla Solar Roof Costs Released

Solar Roof complements a home’s architecture while turning sunlight into electricity. With an integrated Powerwall, energy collected during the day is stored and made available any time, effectively turning a home into a personal utility. Solar energy can be generated, stored and used day and night, providing uninterrupted power even if the grid goes down.

Tesla recognized the need for a roof that is simultaneously affordable, durable, beautiful and integrated with battery storage.

Affordability

Solar Roof is more affordable than conventional roofs because in most cases, it ultimately pays for itself by reducing or eliminating a home’s electricity bill. Consumer Reports estimates that a Solar Roof for an average size U.S. home would need to cost less than $24.50 per square foot to be cost competitive with a regular roof. The cost of Solar Roof is less. The typical homeowner can expect to pay $21.85 per square foot for Solar Roof,1 and benefit from a beautiful new roof that also increases the value of their home.

Solar Roof uses two types of tiles—solar and non-solar. Looking at the roof from street level, the tiles look the same. Customers can select how many solar tiles they need based on their home’s electricity consumption. For example, households that charge an electric vehicle every day may want more solar tiles on their roof.

In doing [their] research on the roofing industry, it became clear that roofing costs vary widely, and that "buying a roof is often a worse experience than buying a car through a dealership". Initial contracts tend to be overly optimistic, and later customers face hidden costs that were never mentioned up front.

At Tesla, [they] believe in transparency and putting the customer in control. That’s why [they] created a Solar Roof calculator that lets homeowners estimate the upfront price of Solar Roof, as well as the value of the energy it can generate for their home. The calculator is based on factors like roof size, the average local price of electricity, and how much sunlight a neighborhood receives throughout the year.

As shown in the graph below, the cost of [their] non-solar tiles is comparable to regular roofing tiles.2 Although the cost of our solar tiles is more expensive up front, it can be more than offset by the value of energy the tiles produce.3 In many cases, the reduction in a home’s electricity bill over time will be greater than the cost of the roof.

Design & Durability

Solar Roof will be available in a variety of designs, including Smooth and Textured (available this year) and Tuscan and Slate (available early 2018). Made with tempered glass, Solar Roof tiles are more than three times stronger than standard roofing tiles, yet half the weight. They do not degrade over time like asphalt or concrete. Solar Roof is the most durable roof available and the glass itself will come with a warranty for the lifetime of your house, or infinity, whichever comes first.

Availability

Customers may place an order for Solar Roof today on the Tesla website. Installations of Solar Roof will begin in the U.S. this summer and we expect installations outside the U.S. to begin in 2018.

...

Speaking on a briefing call with reporters, Musk said a solar roof covering 40 percent of the average-sized American home would generate 10 percent to 20 percent more electricity than a standard solar system. "It's a better product at a slightly better price," said Musk, comparing the product to conventional roofs.  "It's the most affordable roof you can buy," said Peter Rive, SolarCity's chief technology officer, on the call.

...

If you price out your home, Tesla will encourage you to add a Powerwall. That'll add another $7,000 to the system.

...

Tesla plans to make the entire system in Buffalo, New York, with cells made from Panasonic. Peter Rive, the CTO of SolarCity, said the efficiency of the solar roof tile was equivalent to a standard solar PV module.

...

This week’s "Energy Gang" podcast at https://www.greentechmedia.com/podcast/the-energy-gang, sifts through all the new details about Musk’s latest solar project.

https://www.tesla.com/blog/solar-roof

Tesla www.tesla.com

Blog Post dated May 10, 2017

Also see:

https://www.greentechmedia.com/articles/read/is-teslas-solar-roof-a-good-deal-for-homeowners

1. $21.85 per square foot is the price of a Solar Roof derived using similar methodology, roof size, and energy costs described in Consumer Reports’ research. This price does not reflect any solar incentives. The price was calculated for a roof where 35 percent of the tiles are solar (solar tiles cost more per square foot than non-solar tiles), in order to generate $53,500 worth of electricity, which according to Consumer Reports would make a solar roof more affordable than an asphalt shingle roof.

2. Average roofing costs were derived from data available on Home Advisor and Homewyse. In each case, there is a wide range of roofing costs and we report the midpoint in each case. Ranges for roof tile types from Home Advisor were derived using information from roofing contractors that included all equivalent components of a Solar Roof (such as installation labor, materials, existing roof tear-off, and underlayment). Range of fully installed costs per square foot from Home Advisor were: Slate, $13.00 - $21.00; Metal, $9.60 - $21.40; Tile, $7.80 - $16.00; Asphalt, $4.40 - $8.70. Costs from Homewyse were derived using their online cost calculator, averaged across 3 representative zip codes (Albany, NY 12220; Fort Worth, TX 76122; Bakersfield, CA 93314) and resulted in the following cost ranges per square foot: Slate, $12.03 - $17.57; Metal, $11.22 - $16.24; Tile, $11.85 - $17.34; and Asphalt, $3.28 - $5.45.

3. In the bar chart, the “Solar Roof with Value of Energy” is calculated based on a roof where 50 percent of the tiles are solar; 30 years of electricity production; and a grid electricity price of 13.7 cents per kilowatt-hour in year one (the average electricity price in Q1 2017 across California, Texas, and North Carolina — the states referenced by Consumer Reports), escalating at 2 percent annually. The calculation also reflects the inclusion of one Powerwall 2 battery. The ability to realize the full value depends on a household’s electricity usage, the amount of energy storage available, and local utility regulations.

Major European utilities put €14 billion of earnings at risk by missing climate goals, report finds

New CDP report reveals European utilities such as RWE and Endesa at risk

• 14 major European utilities set to exceed carbon targets by 1.3 billion tonnes of CO2, equivalent to Japan’s entire annual CO2 emissions.
• €14 billion of earnings at risk across the 14 major European utilities from carbon price of €30;
• Industry heavily depends on fossil fuels for power generation, despite EU renewables target. The global utilities sector as a whole is responsible for a quarter of emissions;
• Verbund, Iberdrola, Fortum and Enel are best performing companies on carbon-related metrics relative to peers; RWE, CEZ, Endesa and EnBW rank lowest of companies assessed.

A new report ‘Charged or static’ analyzing a €256 billion market cap grouping of Europe’s major publicly-listed utilities companies reveals many are locked into high emissions from long-lived fossil fuel power plants until 2050 and EUR€14 billion of earnings are at risk unless they rapidly respond to climate goals laid out in the Paris Agreement.

The report from CDP – voted no. 1 climate change research provider by institutional investors – reveals major utilities companies remain heavily dependent on fossil fuels, which is responsible for 43% of their electricity generation. Almost half are producing more than 20% of electricity from coal and on aggregate the 14 companies are set to exceed the ‘carbon budget’ required to keep temperature rises below 2°C by 14% or 1.3 billion tonnes of greenhouse gases. This comes despite the EU’s target to provide 45% of electricity from renewables by 2030.

The electric utilities industry is responsible for a quarter of global emissions and must reduce greenhouse gas emissions by over two thirds (67%) by 2030 to meet the goals of the Paris Agreement. Capacity for short-term turnarounds are restricted due to the long term capital investment in fossil fuel power plants. There are positive signs that the sector is already in transition, highlighted by the UK’s decision to close all coal fired power plants by 2025 and decisions taken by E.ON and RWE to split their renewable and fossil fuel assets into separate companies. Utilities generating larger amounts of power from renewables are outpacing their peers in reducing emissions compared to those reliant on fossil fuels, with emissions ten times more intensive than those using renewables.

https://www.eea.europa.eu/highlights/renewables-assuming-greater-role-in

Paul Simpson, CEO of CDP, said: “EU utilities are at a crossroads and must make some rapid decisions. The last year has seen a step change in support for, and engagement with, low carbon policies but the industry remains heavily reliant on fossil fuels to meet electricity needs. Market prices are showing that renewable energy sources like wind and solar power are more cost competitive than ever and utilities should look to capitalize on the strong growth that is forecast for these technologies. The recommendations of Mark Carney’s Taskforce on Climate-related Financial Disclosure (TCFD) is another marker of increasing investor pressure for companies to not only disclose but manage their transition risk. CDP’s mission is more important now than ever and we continue to drive global environmental disclosure and track corporate progress towards achieving a well below 2-degree world." 

[The] report benchmarks major European utilities’ performance on climate issues and finds that Verbund, Iberdrola, Fortum and Enel are the best performing companies on carbon-related metrics relative to peers, with RWE, CEZ, Endesa and EnBW ranking lowest among those who disclose to CDP.

CDP’s summary League Table for European utilities is below:

https://www.cdp.net/en//articles/media/major-european-utilities-put-14-billion-of-earnings-at-risk-by-missing-climate-goals-new-report-finds

Drew Fryer, Senior Analyst, Investor Research at CDP said: “In Europe, major utilities must transform their business models to achieve the climate goals laid out in the Paris Agreement. Verbund is leading the way in planning for the future, targeting a 100% renewable energy generation portfolio by 2020 and is decommissioning remaining fossil fuel assets. But many other utilities remain reliant on coal for a significant share of power generated, and will break their carbon budgets in years to come based on existing fossil fuel assets. Rapid deployment of renewables is critical for the sector as it transitions to a low carbon future.”

Other findings from the report include:

• Renewables: Companies have increased their renewable portfolios, and 20% of electricity generated in 2016 was from renewables. However, fast progress is needed to meet the EU's 2030 target of 45% from renewables.
• Innovation: Carbon Capture & Storage (CCS) technology could be a key means to limit global warming to below 2°C if existing fossil fuel assets are to continue operating, yet progress on this technology is slow which risks it becoming commercially available too late to contribute to effective mitigation.
• Water: Exposure to water stress is considerable. By 2030, half of utilities’ thermal generation capacity will be in areas of high or extremely high water stress.

Hedging an Uncertain Future: Internal Carbon Prices in the Electric Power Sector

Summary

This report examines how internal carbon prices are used by companies and electricity regulators to manage regulatory risk, and identifies ways policymakers can offer guidance for companies to manage such risk in uncertain political climates.

Key Findings

• Electric power companies have been at the forefront of using internal carbon prices to anticipate future policies, manage regulatory risks, prepare for new markets and services, and respond to customer interests.
• In particular, electric utilities have used carbon prices in integrated resource plans (IRPs) to evaluate future resource portfolios and to examine business decisions such as the retirement of fossil fuel units.
• A review of recent IRPs shows a diversity of carbon prices used based on a number of factors, including the potential for future constraints on carbon that go beyond current state and federal policies.
• In a new political environment less supportive of climate policy, the estimation of internal carbon prices for planning and hedging regulatory risk has become more difficult but no less important.
• State policymakers and electric power companies should consider renewed efforts to provide transparent assumptions about carbon prices in IRPs. In addition, there should be continued efforts to improve modeling and methodologies for carbon pricing.

...

Companies and analysts cite several benefits of using internal carbon prices (WBCSD 2015):

• anticipating future policies that may put a mandatory price on carbon or that require deployment of low- or zero-carbon technologies;

• managing regulatory risk associated with stranded assets or inefficiently allocated capital associated with fossil fuel facilities that could be costly to ratepayers and shareholders (CERES 2010; Morris 2015);

• preparing for new markets and customer services that will evolve as the electricity sector decarbonizes; and

• responding to customers’ or investors’ interests in reducing emissions (UN Global Compact 2015).

US companies in the electric power sector employ a wide variety of carbon prices in Integrated Resources Plans (IRPs)  Table 1 displays carbon price information from a sample of recent integrated resource plans (IRPs) from US investor-owned electric utilities. These IRPs are all dated after the announcement of the final Clean Power Plan regulations in August 2015 but before the November 8, 2016 presidential election.

http://www.wri.org/blog/2015/11/4-corporate-carbon-pricing-do%E2%80%99s-and-don%E2%80%99ts

https://www.flickr.com/photos/haglundc/3946685535

Several differences in the carbon pricing used by electric power companies are worth noting. First, companies differ on whether they include a carbon price in their base case assumptions, in sensitivity analyses, or in both.  Barbose et al. (2009, 16) argue for including in the base case an estimated carbon price that reflects “the most likely carbon regulations over the planning period.” In addition, some IRPs present a range of carbon prices that reflect different future natural gas price assumptions, rather than alternative stringencies for future carbon policies.

Prices range from $0 to $122 per ton.

The full report is available free of charge at http://www.rff.org/files/document/file/RFF-Rpt-Kruger-Internal%20Carbon%20Pricing.pdf

Also see http://www.rff.org/research/publications/managing-uncertainty-us-electric-power-sector-can-shadow-carbon-prices-light which notes that A 2016 international survey of companies across all economic sectors found that carbon prices ranged from less than $8 to greater than $800 per metric ton CO2.

http://www.rff.org/research/publications/hedging-uncertain-future-internal-carbon-prices-electric-power-sector

by Joseph A. Kruger
Resources For the Future (RFF) www.RFF.org
April 25, 2017