This amorphous term ESG encompasses a wide spectrum of information and considerations but is so often assumed to mean something it does not. To paint a better picture of what the term ESG actually means, each month we will be outlining examples of what ESG integration looks like in practice across a variety of sectors, through the lenses of risk, opportunity, and impact.
Industry: Electric Utilities
ESG Issue: Climate Risk Management
Wildfires, which can be catastrophically destructive, pose one of the greatest financial risks to utility companies, especially in the western US. In California, because of extreme drought, the risk of transmission lines igniting wildfires is particularly high. In the last five years, the state suffered 10 of the most destructive wildfires in its history, with utilities found to be the cause for most.1 As a result, utilities are expected to create and adhere to wildfire prevention plans.
Pacific Gas & Electric (PG&E), which serves over 5.5 million customers and operates 106,681 circuit miles of electric distribution line and 42,141 miles of natural gas distribution pipelines across California, has been the largest electric utility in the country for nearly four decades.2 Since 2018, the utility has paid out over $5 billion in settlements to wildfire victims, with an additional $8 billion in proposed settlements, and has paid hundreds of millions in fines. The company was found liable in court for the notorious Camp Fire which caused record-setting death and destruction, including 85 lives lost. PG&E executives pleaded guilty to manslaughter in this tragic event. Ultimately in 2019, they filed for bankruptcy and remain at risk for a state takeover.3
In 2020, S&P lowered its rating outlook for California utilities from stable to negative as a direct result of their handling of that year’s wildfire season. Moody’s joined them shortly thereafter, lowering PG&E’s rating to “junk.”5
A 2022 report by the state legislature found that utility companies have not made enough investment in wildfire prevention, and credit rating agencies have agreed as both S&P and Moody’s have downgraded utility ratings in California as a direct result of wildfire risk.6,7 Utilities that refuse to invest in vegetation management which reduces the risk of sparks igniting, forecasting equipment to better monitor conditions, and infrastructure improvements like updating aging equipment and undergrounding power lines will continue to face greater wildfire risk as extreme weather conditions increase.
Opportunity: Interconnection grid backlog
According to the Lawrence Berkeley National Laboratory, the leading barrier to the renewable energy transition in the US is the interconnection queue length, or the time it takes energy generation projects to get connected to the country’s power grid.8 On average, projects that were connected to the grid last year spent 5 years waiting in the queue, up from the pre-pandemic average of 2 to 3 years.9
The increased wait-time is thanks, in part, to the Inflation Reduction Act’s (IRA) investment in renewable energy generation which has flooded the market, directing nearly $400 billion to clean energy.10 The generation capacity of proposed solar, wind, and battery storage projects today is roughly the equivalent of the grid’s current total installed energy capacity, and exceeds the amount required to reach zero-carbon generation by 2035.11 With such a backlog of projects waiting to be connected to the grid, investment in transmission infrastructure poses strong financial prospects for utility companies.
Impact: Texas heat wave
For weeks this summer, Texas became the hottest place on earth with temperatures reaching a brutal 115 degrees Fahrenheit in some places.12 And it wasn’t the only record set – as air conditioning became a basic necessity, the state’s power grid, Electric Reliability Council of Texas (ERCOT), reported record usage. Unlike the state’s grid failures during the 2021 winter freeze that caused dangerous blackouts across the state, however, Texas was well prepared for the record usage.
Did you know?
In the first quarter of this year, Texas accounted for 70% of grid battery additions in the U.S. And last year, the state passed California in total installed solar.
Renewable energy sources have been found to be more reliable than fossil fuels during periods of extremely high demand. Since 2021, ERCOT has added roughly 3,000 megawatts (MW) of wind and 10,000 MW of solar since 2020. This rapid growth in wind and solar generation and grid-battery storage supported the grid during the worst of the heat. As the record temperatures peaked, several natural gas and coal plants were knocked offline, eliminating 9,600 MW of electricity in the state, or nearly a third of average demand.13 The renewable sources, meanwhile, provided 35% of the energy consumed at the peak of the heatwave. As the sun set each day, making solar power inaccessible, the grid’s battery storage kicked-in to support the demand.
During the infamous winter storm Uri, as natural gas and coal plants were knocked offline by the record demand, existing wind and solar weren’t prepared to support the grid. For decades, ERCOT ignored recommendations to winterize generation utilities, perceiving upgrades to be costly and unnecessary. While the economic impact of the storm is estimated at $300 billion lost, including the bankruptcy of three utility companies, the far worse impact was the death toll, with estimates as high as 900 individuals.14, 15
The positive economic impact of the investment in renewables in Texas may be easier to measure, but it’s the lives saved in Texas this month by a more reliable grid that are of far greater value .
Questions an analyst might ask
• Has the utility diversified its generation mix and what kind of investment have they made in renewable sources?
• Does the utility have a wildfire prevention plan?
• Has the utility invested in grid hardening, upgrading its infrastructure, and forecasting equipment?
• How is vegetation management prioritized on utility-owned properties and related to utility operations and equipment?
• Has the utility made investments in transmission innovation and equipment?
The bottom line
While U.S. reliance on fossil fuels is a highly debated topic, it’s difficult to argue that climate change and lack of diversification in energy generation is affecting the financial resilience of utility companies and is an important consideration for investors.
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The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
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Carlee Griffeth is an ESG Data and Research Analyst for Envestnet | PMC’s Sustainable Investing Team. Her work is focused on ESG and thematic impact due diligence. She is also responsible for sourcing and analyzing ESG data to support the development of sustainable products and reporting tools for advisors. Prior to Envestnet, Carlee served in the federal government for eight years, including the White House and both chambers of Congress. She earned her Master’s Degree in Urban Planning at Harvard University, where she focused her studies on sustainable development and decarbonized infrastructure.