The Electric Utilities Report was based on responses from 112 of 265 global power companies surveyed by the Carbon Disclosure Project (CDP), a venture by 225 institutional investors with $31.5 trillion under management.
The survey asked electric utility companies about commercial risks and opportunities posed by climate change, the impacts of greenhouse gas regulation, physical risks associated with climate change, relevant technologies and innovations, and related management responsibilities.
Companies also were asked about energy costs, and emissions in terms of total annual generation, emissions from products and services, reduction programs and targets, and emissions trading arrangements.
The survey analysis performed by Trucost, an environmental research organization, found that only six of the 25 companies analyzed added value to the economy. For perhaps the first time, the analysis gives investors the net contribution of an industry on a company-by-company basis by factoring in their environmental damage.
Trucost based its assessment on an “economic value added” (EVA) analysis popularized by the Stern Stewart consulting firm and an overlay of external environmental costs, an approach pioneered by Trucost and Yale Professor Dr. Robert Repetto. Combining Trucost’s environmental emissions data, environmental external costs and Stern Stewart’s EVA produces “a measure of true value added, TRUEVA, that subtracts from the firm’s operating surplus not only its costs of capital but also the environmental damage it imposes elsewhere in the economy,” the report said.
“This study shows investors that the true value of utilities is considerably less once the utilities’ environmental costs have been incorporated into the analysis,” said Russell Read, CalPERS Chief Investment Officer. “As this analysis demonstrates, it is imperative for utilities to disclose the environmental data required by investors so they can more accurately assess a firm’s true value and associated risk.”
The report said electric utilities lead all sectors in accounting for about 25 percent of total greenhouse gases, which help retain heat beneficially in Earth’s atmosphere -- or lead to runaway global warming if allowed to increase unchecked.
“While these results may be challenged by some, they cannot be ignored,” said Christopher J. Ailman, CalSTRS Chief Investment Officer. “These utilities pay to dispose of solid waste and waste water and at some point, they will be required to pay for the disposal of gaseous waste. Those costs need to be factored into their valuation.”
The report showed that companies were most likely to report emissions data in countries where there is strong pressure from regulators and investors to assess climate risk. While all 11 companies in Japan responded to the CDP survey, none of the 32 companies in China did so.
“The lack of disclosure from utilities in a country that is responsible for a large and growing proportion of global carbon emissions is of particular concern,” the report said. China’s CO2 emissions are predicted to exceed those of the U.S. by 2015.
Of the 25 companies that reported quantifiable emissions, Pacific Gas & Electric Co. of Northern California scored highest with a TRUEVA measure of $395 million after the damages it produced were subtracted from surpluses generated. American Electric Power, a large coal-based power generator, had the lowest TRUEVA measure of a negative $3.3 billion based on a cost of $21 per ton for carbon emissions – the price set under the European Union Emission Trading Scheme.
While many EU companies responded to the survey, only half of all respondents provided data emissions, and statistics were not comparable in many cases, the report said.
An analysis of the impact on U.S. utilities of legislation specifying mandatory reductions of carbon emissions, such as the Global Warming Solutions Act recently introduced in California, was conducted for the 23 U.S. utilities that provided emissions data. The Act specifies a 25 percent reduction of carbon emissions by 2020 for the electric utilities sector. The analysis indicates that there is a large variation in the costs of emissions reductions using market mechanisms. At a price of $22.6 per ton of carbon as of this year, companies would face costs equivalent to less than 0.01 percent of revenue to nearly 8 percent of revenue.
Generally, utility companies expressed concerns about rising fossil fuel prices, the security of energy supplies, the rising global demands for energy, and the need for nationwide mandatory, market-based policies to control carbon emissions. Companies also mentioned uncertainties about how emissions regulations might increase costs of compliance and environmental protection, lead to new taxes or caps, and affect alternative energy ventures – for example, wind, water and biomass.
Several respondents provided examples of emissions reduction-related efforts:
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American Electric Power reported a $1 billion plan to build the world’s first nearly emission-free plant to produce electricity and hydrogen from coal.
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Entergy cited a $14.8 million commitment to complete 61 internal emission reduction projects to reduce carbon dioxide emissions by 6.2 million tons by 2010.
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PG&E is investing $1 billion between 2006 and 2008 in energy-efficient programs and initiatives to help customers save money, avoid the release of greenhouse gases to the atmosphere, and promote the development and deployment of new energy-efficient technologies and processes.
The analysis complements a broader CDP4 report in September that was based on responses from global companies in the Financial Times 500 that were asked about greenhouse gas emissions. The great majority of companies surveyed for the CalPERS/CalSTRS Electric Utilities Report were not represented in the earlier CDP4 assessment.
The pension funds’ report was financed by the World-Wide Fund for Nature (WWF), an independent conservation organization that works in more than 90 countries.
The California Public Employees’ Retirement System is the nation’s largest public pension fund with assets of more than $225 billion. The System provides retirement and health benefits to approximately 1.5 million State and local public employees and their families.
With a $157.8 billion investment portfolio, the California State Teachers’ Retirement System is the second-largest public pension fund in the United States. It provides retirement, disability and survivor benefits to California’s nearly 800,000 public school educators from kindergarten through community college.
A copy of the CalPERS/CalSTRS report can be viewed at www.calpers.ca.gov and www.calstrs.com.
