POWER January 2022 - 26

RISK MANAGEMENT
Power Sector Risks Loom Over
the Energy Transition
The fog of uncertainty that hangs over the global power industry is getting
larger and denser as generating companies and utilities navigate ever more
complex challenges.
Sonal Patel
H
igh-level scenarios often paint the
energy transition as a smooth
trajectory-a gradual evolution toward
a more modern, cleaner, more intelligent
system that addresses climate
change, as well as furnishes the world
with secure, affordable energy. In reality,
change often has sharp edges, and in the
vast and diverse power space, it can be
volatile and disjointed, characterized by
friction and imbalances among its many
participating entities.
As a critical infrastructure industry
whose primary mission is to provide
safe, reliable electricity, the power sector
has always faced some degree of
uncertainty and change, and many companies
have mature risk measures and
controls in place for their networks and
assets. But as overall system complexity
ramps up, POWER's analysis suggests
they are now facing a lengthy list
of looming exposures. Several industry
experts from insurance, financial consultancy,
and market rating firms pointed
out to POWER that many existing risks
are rooted in the industry's changing
business profile, specifically related to
potential impacts from decarbonization
and past reliance on natural resources.
Newer risks, however, can be pegged to
pandemic tumult that has had a broader
reach, they suggested.
While the level of risk can't be easily
quantified given the array or markets,
applications, and size of operation, the
following are some risks to which experts
called specific attention. While not
detailed here, stakeholders notably also
highlighted risks related to fuel uncertainty,
business model overhauls-including
through mergers and acquisitions-asset
divestment and decommissioning,
safety, and geopolitical concerns, such
as trade disputes and political volatility.
Natural Disasters. Climate change
is adding new stressors to power operations,
and that is raising a paramount
interest in resiliency against severe
26
weather events for power companies
and utilities. According to the Edison
Electric Institute (EEI), a trade group
representing all U.S. investor-owned utilities,
" risks are differing in different parts
of the country and evolving, " which is
why they require specific planning for
mitigation. Examples include risks of
hurricanes, floods, wildfires (Figure 1),
and extreme heat or cold events, as well
as decreasing water availability. Since
Superstorm Sandy in 2012, EEI said its
members have invested more than $340
billion to harden their investments.
Reliability and Environmental ComRequirements.
The extreme
pliance
cold weather event that forced three grid
operators, most prominently in Texas, to
implement rolling blackouts last February,
and the summer 2020 heat wave-
related brownouts in California, resulted
in billions of dollars in losses for market
participants and highlighted supply-demand
mismatches. Ensuing reliability
measures may require costly generator
upgrades. Environmental compliance
has meanwhile prompted a wider spate
of coal and gas plant closures in the U.S.
Government-announced phaseouts have
meanwhile prompted closures of coal
and nuclear plants across Europe, China,
and South Korea.
Regulatory Uncertainty. In the U.S.,
efforts to address climate change and
resiliency, customer preferences, and
technologies that promise to integrate
renewables, electric vehicles, and digitalization
are " crashing up against sluggish
century old regulatory paradigms, "
said Brien J. Sheahan, former chairman
and CEO of the Illinois Commerce Commission
and former chairman of the National
Association of Regulatory Utility
Commissioners' Presidential Task Force
on Innovation. Mandates related to data
privacy, cybersecurity, supply chains, and
other evolving areas are also an emerging
concern. Meanwhile, environmental,
social, and governance (ESG) concerns
" pressed upon utilities by both their
www.powermag.com
1. Pacific Gas & Electric (PG&E) in July announced
it would bury about 10% of its
transmission and distribution lines to prevent
wildfires in projects that could cost up to $30
billion. Courtesy: PG&E
boards and regulators are an immediate
risk to utilities, " Michael Pignataro,
regional head of Energy and Construction
North America for global corporate
insurance carrier Allianz Global Corporate
and Specialty, told POWER. These concerns
will require long-term planning and
execution in the form of investment and
divestment. " Conversely, they are subject
to the quarterly and election-cycle
mindset of shareholders and politicians, "
he said.
The ESG Boon and Burden. Heightened
pressure from investors that is
informed by ESG, a metric that gauges
corporate sustainability, is prompting
financial institutions-including banks,
insurers, and brokers to halt financial
support or coverage for the traditional
coal-fired power sector. But ESG considerations
may also have negative credit
implications for all utilities that own generation
owing to their high exposure to
extreme weather risk, Moody's Investors
POWER | January 2022
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POWER January 2022

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