Water shortages are already impacting global energy production, as utility companies rely on water for system cooling in the production of electricity. In India, 14 of the country’s 20 largest thermal utilities were forced to shut down for at least one day between July 2013 and December 2016 due to drought, turning the lights out on millions of customers and causing a total of USD 1.4 billion loss in revenue.
With climate change likely to increase water scarcity in many regions in India, and global energy demand set to increase, the risks posed to electricity output and utilities’ financial performance are real.
A new study by the World Resource Institute looks at the impact of water shortages on the bottom lines of various power utilities in India between 2014 and 2017. The authors find that droughts caused significant financial losses for many utilities, with loss of earnings of up to 17 per cent for one utility in just one quarter alone. Yet not all companies are equally affected. Those using renewable energy to generate electricity are much less reliant on water than thermal power plants, and those using seawater (as opposed to fresh water) are less at risk. The type of technology in use also affects risk level, and thermal plants with "once-through" cooling technologies are affected at a higher rate than those with "recirculating" or "dry cooling" technologies.
Recommendations for Investors, Regulators and Companies
The authors make recommendations for various stakeholders to manage the financial risks from drought:
- Investors should incorporate drought indices into their future scenario analysis to stress test energy portfolios. Investors should also ask companies about the water withdrawal intensity of the cooling technologies in use in their plants.
- Thermal power companies should disclose water risk information, including any historical impacts of droughts, their choice of cooling technologies and previous water shortage-induced generation outages
- Power-industry and financial regulators should require the disclosure of climate-related risks so that all companies must report on outages and their causes.
- The Task Force on Climate-related Financial Disclosures should provide detailed disclosure guidance for the energy sector to assist companies in reporting water risks.
- Data and ESG ratings providers should integrate drought indices into their suite of research ratings and data offerings.