Climate Action 100+ power utility profiles for mainstream investors to align with Paris and manage energy transition risk
Climate Action100+ (CA100+) represents a sea change in how investors perceive climate risks. The five-year initiative is led by more than 320 signatories managing over $33 trillion in assets under management – roughly a third of global market capitalization. Carbon Tracker is a research adviser to the CA100+.
This analyst note details our company profiles which aim to help CA100+ members engage with power utilities to ensure they align their generation activities with the temperature goal in the Paris Agreement and manage the risks associated with a transition to a low carbon economy.
The company profiles can be viewed here.
Mainstream investor tool: an asset-level least-cost approach which lets the market decide who gets the remaining carbon budget in a Paris-aligned world.
Our company profiles for power utilities differ from other offerings due to our least-cost asset-level methodology. This approach lets the market decide who gets the carbon budget in a Paris-aligned world by replicating a competitive power market where high-cost coal generators are forced to shut before low-cost generators. In doing so, our profiles provide a tool for most investors who cannot simply divest, so they can understand their risk, engage with companies and redirect capital in a manner that is both economically rational and consistent with the temperature goal in the Paris Agreement. The data and analytics from our profiles are drawn from in-house modelling which covers ~95% of global operating capacity and ~90% of capacity under-construction. This model was developed by the Power & Utilities team from 2016 to 2018 and provides current and forward-looking estimates of the short- and long-run marginal cost (SRMC and LRMC), gross profitability (EBITDA), relative competitiveness, phase-out year and stranded asset risk in a below 2°C scenario. More information on this data and analytics is available on company profiles webpage.
No companies with coal capacity are Paris-aligned based on our methodology and there is significant transition risk due to strong competition from renewables.
Our profiles allow investors to understand whether a company’s coal generation is aligned with the temperature goal in the Paris Agreement and the extent to which its coal capacity is at risk from becoming financially (i.e. EBITDA negative) or economically obsolete (i.e. uncompetitive based on a on levelised cost of energy (LCOE) and LRMC analysis). With regards to our below 2°C scenario analysis, to be Paris-aligned, companies need (i) a coal retirement schedule consistent with a credible climate scenario (such as the IEA’s Beyond 2°C Scenario); and (ii) a date assigned to each coal unit. No CA100+ power utility with coal capacity is Paris-aligned based on our methodology. Our transition risk analysis tracks two asset-level metrics which are aggregated to company-level: (i) the year when the LRMC of a coal unit is higher than the LCOE of utility-scale solar PV or onshore wind; and (ii) the EBITDA of coal units. Transition risk depends on the region, and thus the regulatory context, the power utility is operating in. However, whether a regulated or liberalized market, coal capacity will be – or already is – a high-cost option for power generation relative to wind and solar PV.
Why we modelled coal first: coal represents ~80% of emissions from power generation.
Coal is responsible for nearly 80% of all carbon emissions from power generation. Future analysis will also include gas capacity. The burning of coal and gas currently generates around 90% of carbon emissions from power generation.
Written by Matt Gray, Durand D’souza, Magali Joseph, Aurore Le Galiot, Rob Schuwerk & Henrik Jeppesen.
For investor engagement inquiries contact CA100@carbontracker.org