ESG (Environmental, Social and Governance) factors measure the sustainability and ethical impact of an investment. ESG includes the energy sector, and the amounts spent show it’s no longer just an ethical choice, says The Rocky Mountain Institute’s Todd Zeranski. It doesn’t just save the planet, it saves our pensions. Why? From regulatory penalties to the cost of climate clean-up, fossil fuel investments are getting too risky and expensive. Those ESG investments around the globe are actually chasing better returns. The author runs through examples of the major innovations that are making it possible: cheaper renewables, energy storage, energy efficiency, demand response, distributed energy, new utility-customer business models and the new financial instrument of coal-closure securitisation.
If we needed another proof point of the growing role sustainable business practice is playing in guiding investment decisions, the recent announcement that an institutional investors group representing $1.8 trillion in global assets has asked the country’s 20 largest publicly traded energy generators to commit to achieving net-zero carbon emissions should serve as a mic drop.
Environmental, social, and governance (ESG) considerations are an ascendant force in financial markets, emerging to play a key role in financial decision-making with some estimates finding ESG-focused investments totaling $20 trillion in assets under management around the globe—about one-quarter of all professionally managed investments. That’s approximately equal to the total US economic output for a full year.
Want our pension trillions? Guarantee net-zero by 2050
New York City Comptroller Scott Stringer, a lead signatory for the initiative, noted in a press release, “The climate crisis is an imminent threat not only to our planet, but to pensions systems, and ultimately, our beneficiaries. Delaying climate action is like denying climate change—it’s not an option for these companies or for anyone else.” The coalition—which includes among others the largest US pension system, California Public Employees Retirement System—is asking energy producers to make the commitment within the next six months to achieve net-zero emissions from power generation by 2050 at the latest.
By acknowledging that the historic mandate to provide affordable, reliable, and safe electric service is necessary but no longer sufficient, a growing number of forward-leaning utilities have discovered that clean energy represents not only a long-term risk mitigant but also a compelling economic opportunity. And in highlighting to customers the cost savings from transitioning to a clean energy system, these large power providers are making clear that the demands of institutional investors for more climate-friendly policies do not involve a trade-off between climate and system costs.
Integrating renewables and distributed energy resources saves money
Many utilities, for example, are rushing to integrate increasingly low-cost clean energy technologies like renewables and distributed energy resources (DERs) into their portfolio mixes. As RMI’s The Economics of Clean Energy Portfolios report demonstrates, advances in renewable energy and DERs offer lower rates and emissions-free energy while delivering all the grid reliability services that new fossil fuel-fired power plants can. Look no further than Xcel Energy, which operates across eight states, becoming the first large investor-owned utility to commit to 100 percent carbon-free energy by 2050. That pivot was made after Xcel forecast last year that its customers would save $200 million by the utility retiring two coal plants earlier than scheduled and replacing that generation with renewables and battery storage technology.
Transitioning to a decarbonised grid can also be supported by utilities deploying not only renewable energy but also other so-called non-wires solutions (NWS) – like energy storage, energy efficiency, and demand response – to cost-effectively meet growing grid needs. In addition to providing customer savings while safeguarding reliable service, NWS can support the integration of smart, customer-centered technologies that promote a cleaner, more flexible, and resilient grid, as described in The Non-Wires Solutions Implementation Playbook: A Practical Guide for Regulators, Utilities, and Developers. One example of successfully implementing NWS is ConEdison’s innovative Brooklyn-Queens Demand Management Demand Response Program, which compensates customers for reducing their energy usage during times of high demand, allowing the utility to optimise the use of its most efficient generation assets to meet those obligations.
Securitisation: retiring profitable coal assets
Another intervention to speed decarbonisation is supporting the orderly transition of uneconomic assets from the grid. RMI estimates that nearly 102 gigawatts of coal generation operated by regulated investor-owned utilities costs more money to keep running than buying power via power purchase agreements for renewable energy in those regions. Yet while the economic decision to retire coal plants that are close to the end of their operating lives has a relatively minor impact on utilities’ balance sheets, cycling off coal generation where utilities have invested capital recently and are authorised to earn a steady economic return would cause rates to spike for customers.
An emerging approach to overcome this obstacle is coal securitisation – closing coal plants before their scheduled retirement date and allowing utilities to recoup the remaining depreciation by creating a bond-like instrument. An approach like securitisation avoids ratepayer shock by funding utility capital recovery using long-term, dedicated ratepayer charges. And if utilities are then allowed to recycle this recovered capital into investments in clean energy, they can capture earnings growth while decarbonising their operating portfolios. This mechanism is growing in uptake: New Mexico’s recently approved 100 percent clean energy bill includes a securitisation provision that is being discussed in other state jurisdictions.
Reforming utility-customer business models
In addition to resource and grid planning there are structural changes utilities could undertake to support their decarbonisation efforts, starting with business model reform. In the face of increased policy pressure and heightened consumer calls for choice – alongside flat energy usage in much of the country – meeting the demands of an increasingly decarbonised and distributed grid requires updating legacy business and regulatory models, which were built for different infrastructure investments and operating structures. As we discuss in our report, Reimagining the Utility: Evolving the Functions and Business Model of Utilities to Achieve a Low-Carbon Grid, delaying these reforms will inhibit the growth of DERs and the corresponding economic, environmental, and grid benefits these technologies can provide.
The energy system is in a state of profound transition, buffeted by rapidly declining costs of renewable and DER technologies, new technical capabilities, rising customer calls for choice, increasing policy pressures prioritising sustainability, and the need for strengthened grid resilience. While the challenges inherent in this shift to a more decarbonised and distributed grid should not be understated, a number of innovative solutions are available to utilities to support their efforts in response. As we see, doing so makes a lot of business sense.
Todd Zeranski is a Marketing and Communications Manager at the Rocky Mountain Institute.
This article is published with permission.