The business model for the electric power sector has been gradually evolving in recent years, with a growing number of companies developing robust energy efficiency programs and deploying distributed generation to help their customers reduce energy purchases and environmental impacts. However, the overall sustainability picture for U.S. utilities is mixed. In many states, the traditional approach of generating and selling more electricity remains the dominant paradigm driving utility profits, and policies for decoupling energy sales from revenues are not yet in place.
Climate change is a significant issue for the electric utility sector, given that the power sector accounts for over one-third of total U.S. greenhouse gas (GHG) emissions. While companies in this sector do not currently face any significant legislative limits on GHGs, the EPA’s recently promulgated rules–such as the Cross State Air Pollution Rule, the Mercury and Air Toxics Standard, and the Carbon Pollution Standard for New Power Plants–will impact carbon intensive modes of generation. Renewable energy policies at the state level have been strong drivers for increased deployment of low carbon energy, though companies are largely focused on complying with, rather than exceeding state mandates. While these efforts have resulted in some progress in reducing GHGs, this has not been significant enough to put the utility sector on the path towards the expectation of achieving the 25 percent reduction in carbon emissions by 2020 set out in The Ceres Roadmap.
While a small number of the companies assessed have identified water risks as relevant to their business and are developing management plans to address the “water-energy nexus,” most still lack disclosure on efforts to improve water management and to address risks associated with water availability and quality in direct operations and in the supply chain.
This assessment includes 31 electric and multi-utilities companies. Companies in this sector that performed consistently well across each of the four chapters of The Ceres Roadmap for Sustainability include Consolidated Edison, PG&E and Xcel Energy.
The analysis that follows includes a summary of the sector’s progress within each of the four chapters of The Ceres Roadmap: Governance, Stakeholder Engagement, Disclosure and Performance. Within the Performance section—which covers operations, supply chain, transportation and logistics, products and services, and employees—those issues that are of greatest relevance to the sector have been highlighted.
GOVERNANCE FOR SUSTAINABILITY
Establishing management accountability and board oversight of sustainability issues is an indication that a company is committed to integrating sustainability into its core business practices and decision-making. Of the 31 electric utilities assessed, over half have assigned either direct board or executive oversight of sustainability issues. Roughly one-third (12 companies) have both levels of oversight in place.
Linking executive compensation to sustainability performance is one way for companies to create accountability for sustainability performance. One-third of the utilities (10 companies) have strong sustainability incentive programs for their executives and many of these are tied to regulations on safety and environmental emissions. Xcel Energy’s executive compensation package is based on a number of performance measures including safety and environmental performance targets, such as increasing the amount of renewable energy available for commercial operation, reducing emissions, improving energy efficiency and integrating new technologies. Xcel also discloses the weight assigned to each measure, along with actual performance and percentage payout. Duke Energy identifies specific executives responsible for achieving key aspects of their environmental and social performance.
The large majority of utilities (30 companies) disclose details about their environmental policies and management systems, including Consolidated Edison, Entergy, Exelon, PG&E and Xcel Energy. PG&E’s environmental policy addresses environmental justice, which commits the company to work with its potentially affected stakeholders, especially community groups, when siting new facilities.
Identifying and engaging with stakeholders is an important way for companies to gauge the effectiveness and projected impact of sustainability strategies and identify emerging risks. Yet, in the utilities sector, over 70 percent of companies (24 companies) have weak or no stakeholder engagement programs in place.
American Electric Power (AEP) has a robust and transparent stakeholder engagement process, discloses not only who its stakeholders are, but the issues on which it engages and the methods. AEP’s stakeholder engagement process brought together the company’s senior executives with environmental, social, community and investor organizations that have provided substantial input on a wide range of sustainability issues over multiple years. The company has implemented changes based on this process including improvements to its energy efficiency and contractor safety goals. However, changes related to its business model and the alignment of its policy positions with its sustainability objectives and are yet to be seen.
More than 60 percent of utilities (20 companies) in this study provide some degree of sustainability reporting and respond to the Carbon Disclosure Project survey. Roughly one-quarter of companies reported on their sustainability performance in 2011 in accordance with the Global Reporting Initiative (GRI) guidelines. However, none of the utilities have externally verified their disclosure according to a third-party standard.
More than 40 percent of the companies (15 companies) in this sector are disclosing sustainability risks and opportunities to shareholders in their financial filings. NRG and Constellation Energy disclose the regulatory, physical and competitive risks that climate change could have on their business, addressing strategies to increase the efficiency of their generation and the production of renewable energy as a business opportunity.
Through the combustion of fuels for power generation, utility operations release varying degrees of air emissions associated with climate change, acid rain and smog, posing impacts to local communities, employees and the environment. As such, they are becoming subject to increasingly stringent regulations, such as the 2011 Mercury and Air Toxics Standards aimed at limiting mercury, acid gases and other toxic pollution from some generating units. Most companies (25) have initiated some level of activity to reduce air emissions, but most of this is compliance-driven.
Industry leaders are positioning themselves to improve their results, but still only one-third of those assessed (12 companies) disclose clear emissions reduction targets and timelines. Noteworthy examples include Exelon’s 2020 Low Carbon Roadmap that includes a commitment to reduce its carbon footprint by more than 15 million metric tons of greenhouse gas emissions per year by 2020 (from a 2008 baseline); and Duke Energy’s steps to cut its carbon dioxide emissions by 17 percent between 2005 and 2020 (although the company has recently disclosed that it will face challenges meeting this target).
In the video below, Bill Brady, director of Environmental Strategies at Exelon talks about how the energy company is embedding sustainability practices throughout their operations.
Sixty-one percent of companies (19 companies) fail to disclose any long-term targets to reduce emissions. However, state-level renewable portfolio standards are accelerating the production of low carbon energy. Today, more than 30 states have established renewable portfolio standards, requiring electricity supply companies to produce a specific percentage of their generation from renewable sources.
The U.S. electric power industry is highly water-intensive, requiring an estimated 136 billion gallons of water per day for generating and cooling the steam that drives electric turbines. It is therefore critical that companies efficiently manage their water withdrawals to better insulate themselves from risks related to scarcity and rising costs. Each of the companies assessed provides some level of disclosure on water risk, usually starting with the identification of sector specific risks such as scarcity, quality or regulations. Roughly one-third of the companies state that they have conducted a water-related risk assessment and have, at a minimum, identified direct operations located in areas of water scarcity. Yet as a whole, the sector lacks strong water management programs that include long-term targets to reduce the amount of water required for generation, namely the cooling process. Only one-quarter of the 31 companies assessed (eight companies) disclose details on water management systems.
Pinnacle West has a robust process in place to address water availability and risks. In 2010, the company announced a 40-year water agreement with five Arizona municipalities to provide the company with treated wastewater to meet the cooling water needs for power production at its Palo Verde Nuclear Generating Station. By reusing municipal wastewater, the company estimates that it is recycling approximately 20 billion gallons of wastewater each year.
Of the 31 companies, just half disclose a general statement or a code of conduct defining their expectations for contractor or supplier working conditions. These statements are largely focused on supplier safety and grievance mechanisms. American Electric Power, Duke and PG&E stand out for having a supply chain code of conduct or policy that addresses key criteria including workplace quality, conflicts of interest, diversity, forced and child labor, working hours and wages. PG&E’s Contractor, Consultant and Supplier Code of Conduct goes beyond social policies to address adherence to the company’s relevant environmental programs.
Currently, half of the companies assessed (16 companies) disclose green procurement policies. However, this sector has the opportunity to engage with their suppliers ESG impacts associated with both non-fuel and fuel procurement. For example, Duke Energy now requests that its suppliers not source Central Appalachian coal that has been mined using mountain-top removal techniques. The company reports that it has started buying mountaintop-mine free coal where possible and that it continues to develop this approach.
PRODUCTS & SERVICES
Innovative products and services, with a lower environmental footprint, are transforming the utilities sector. Most of the companies in this report (28 companies) offer some kind of sustainability-related products or services, including energy efficiency programs, and wind or solar power.
As discussed, given the growth of state renewable portfolio standards, and as an effort to capture a growing portion of the energy market, companies are offering renewable energy as part of their portfolios. NextEra Energy is one of the leading generators of renewable energy in North America, with the capacity to produce more than 8,500 megawatts of wind energy and 300 megawatts of solar generation. As part of its strategy, NextEra founded the EarthEra program as a way to continually grow national renewable energy use. The program works when companies, cities, schools and households purchase renewable energy and offsets from the company. In turn, 100 percent of the funds from these purchases are invested in the EarthEra Renewable Energy Trust to support new NextEra renewable projects across the U.S. To date, over $35 million has been committed to the Trust, although the overall scope of the project remains relatively small.
The shift towards sustainable energy infrastructure requires the training of existing staff and recruiting new talent. In the U.S., the utilities sector is challenged by an increasingly insufficient supply of skilled workers, gender imbalances and an aging workforce. In addition to hiring workers to make up the projected shortfall, electric utilities need to proactively train their workforce on methods and means to identify risks and embrace opportunities relating to the sector’s priority environmental and social issues. Of the 31 companies, three-quarters (24 companies) have no formal training on key sustainability issues in place. Given the sector’s vulnerability to a transitioning workforce, the lack of employee training and engagement on sustainability issues represents a missed opportunity.