Transition Pathway Initiative

Latest results: electricity utilities need to be more ambitious to meet 2°C target

The Transition Pathway Initiative, launched in January 2017, analyses how companies are preparing for the transition to a low-carbon future. The initiative supports asset owners in their investment decision-making, engagement with companies, and dialogues with fund managers and policy makers.

The latest analysis from the Initiative reveals that a majority of the world’s top 20 electricity utilities are currently aligned with emissions targets set out in the Paris Agreement. However, the analysis also shows that not enough utilities have set targets for their future emissions, and not enough of the targets that have been set are aligned with keeping global warming below 2°C.

New TPI results assess how well electricity utilities are cutting carbon emissions

There is a growing need amongst investors to better understand how the transition to a low-carbon economy could affect their portfolios. The Transition Pathway Initiative (TPI), established by the Church of England National Investing Bodies and the Environment Agency Pension Fund, assesses how companies are performing in relation to the transition to a low-carbon economy. It enables investors to scrutinise companies’ management of carbon emissions and track their performance in reducing emissions.

The first set of results from the TPI,  published in January this year, found that the world’s largest 20 companies in each of the oil and gas, and electricity utilities, sectors are building capacity to manage the low-carbon transition, but few have integrated carbon into operational decision-making, let alone assessing the issue strategically.

The second set of results, published this month, analyses how well the world’s top 20 electricity utilities are performing in cutting their carbon emissions and whether the targets they have in place match up to targets set out under the Paris Agreement.

Global carbon budgets set out the pathway towards Paris Agreement targets

The TPI assessment of carbon performance uses global carbon budgets as a starting point. These budgets are estimated by climate scientists and set out how much carbon can be emitted cumulatively over time while keeping global warming to a target level, e.g. 2°C. The TPI team has used modelling from the International Energy Agency to translate the global carbon budget into emissions pathways for different regions and different economic sectors, including electricity.

The TPI analyses the carbon emissions intensity of companies against two benchmarks: a “2°C scenario” consistent with the overall aim of the Paris Agreement; and a “Paris Pledges scenario” consistent with the emissions reductions pledged by signatories to the Paris Agreement in the form of “Nationally Determined Contributions”. The NDCs combined are currently insufficient to limit warming to 2°C, although the Paris Agreement is designed around them being ratcheted up over time.

The carbon emissions intensity of electricity utilities is calculated as their greenhouse gas emissions per unit of electricity generated. The TPI estimated it using public disclosures of current emissions and electricity generation, and companies’ stated future emissions targets. Two of the companies in the global top 20 made insufficient disclosures to be included in the analysis, leaving 18 in the sample.

Electricity utilities need to accelerate the pace of decarbonisation after 2020 to align with 2°C benchmark

Figure 1: Emissions intensity paths for companies with targets

Between 2013 and 2015, the emissions intensity of 12 out of the 18 utilities that the TPI looked at was low enough to be aligned with the benchmarks, including the pathway to keep global warming below 2°C. The average emissions intensity of all 18 utilities was also better than the benchmarks between 2013 and 2015.

The remaining 6 out of 18 companies are currently more carbon-intensive than either the 2°C benchmark or the Paris Pledges benchmark. They are: American Electric Power Co., CLP Holdings, DTE Energy, Eversource Energy, Fortis Inc. and XCEL Energy.

Five utilities are aligned with the 2°C target in 2020

Only half of the 18 companies have targets for 2020.  Of those 9, assuming that all companies meet their targets, 5 will be less carbon-intensive than the benchmarks in 2020, while the remaining 4 will be more carbon-intensive than either the 2°C benchmark or the Paris Pledges benchmark.

The average emissions intensity of the 9 companies with targets is below both benchmarks in 2020.

Only 2 utilities are aligned with the 2°C target in 2030

Just 6 of the 18 companies currently have targets for emissions reductions that extend to 2030.

Of those, 2 will be more carbon-intensive than both benchmarks and 2 will be on track to meet the Paris Pledges target.

Only 2 companies aim to cut their emissions in line with the pathway which will to limit global warming to 2°C. They are Enel and Iberdrola.

US utilities are decarbonising more slowly than European utilities, but European utilities face tougher regulation

The team also analysed how electricity utilities are performing based on their location, taking into account differences between countries’ NDCs to the Paris Agreement, as well as how efforts to limit global warming to 2°C might be distributed around the world.

Fourteen of the world’s top 20 electricity utilities are based in the US, 1 in Canada, 3 in Europe and 2 in Hong Kong.

The European utilities are significantly less carbon-intensive than the North American utilities on average; all 3 are aligned with the global 2°C benchmark now and in the future. Some North American utilities have very low carbon intensity, but they are outweighed by others whose carbon intensity is very high.

The European utilities do not perform as well against European benchmarks, however. These benchmarks are markedly tougher than the global benchmarks. Only one company, the Spanish utility Iberdrola, is aligned with the European 2°C benchmark and by 2030 even it is out of alignment.

The next steps – beyond the power sector

For now, most of the electricity utilities analysed in this latest set of results are aligned with low-carbon benchmarks, but many will need to step up their efforts in the future. More than half of the global top 20 still have not set targets that pin down their emissions in 2020 or 2030 and some will need to tighten the targets they do have.

The new results, in combination with earlier analysis of how well companies are strategically managing the transition to a low-carbon future, provide assets owners with objective information for investment decisions and engagement.

The next steps for the TPI will be to move beyond oil and gas, and power. Data releases are planned in the coming months for the global top 20 companies in each of the coal mining, cement and steel sectors.

Simon Dietz and Victoria Druce
Grantham Research Institute on Climate Change and the Environment
LSE