Dive Brief:

• Although most investor-owned utilities have set targets for decarbonization, many have also under-estimated the cost of failing to accelerate their decarbonization efforts, according to a new report from Deloitte.
• Based on public filings, utilities anticipate a price of carbon in the range of $3-55 per metric ton by 2030, and $60-120 per metric ton by 2050. However, last March, Wood Mackenzie estimated that the price of carbon could run as high as $160 per metric ton by 2030 if the world is to limit global warming to 1.5 degrees.
• The potential costs to utilities will likely escalate if action is delayed, according to Jim Thomson, vice chair, U.S. power, utilities and renewables leader for Deloitte. Utilities will need to work with regulators to deploy needed adaptations in time, he said.

Dive Insight:

Utilities must step up the pace of decarbonization in order to limit global warming to 1.5 degrees Celsius — but they could stand to save money in doing so, according to a new report from Deloitte.

A region-by-region analysis shows that while utilities in some parts of the country are better positioned than others, the potential financial impact of climate change to utilities exceeds the likely cost of climate adaptation in all cases. However, utilities have consistently underestimated the financial risks they face, potentially contributing to the lack of urgency reflected by regulators and in utilities’ climate ambitions, Thomson said.

Deloitte’s review of public filings by investor-owned utilities found they anticipate carbon costs of up to $120 per metric tons, but these figures fall short of the $160 cost of carbon Wood Mackenzie has estimated will be required to limit the rise in global temperatures to 1.5 degrees.

Most of the filings reviewed by Deloitte also indicate utilities face potential stranded asset risks associated with natural gas infrastructure, but they have yet to establish a plan to decarbonize these assets. Potential cybersecurity risks associated with the rapid build-out of new renewable generation and transmission have been overlooked and many utilities have not fully considered the physical threats posed by climate change, although these risks vary by region, according to the Deloitte report.

"The cost of not investing can be much higher than the assumptions utilities have today," Thomson said.

Utilities in the northeastern U.S. have made the most progress toward decarbonization, while the Midwest and the South currently face the largest gap between current plans and global climate ambitions, according to the report. These two regions also face the greatest potential costs in the event of inaction. Climate change could cost individual Midwestern utilities $2.5 billion annually, while Southern utilities face $3.6 billion in potential annual costs, according to Deloitte.

While many utilities have plans to achieve decarbonization by 2050, moving the target to 2035 could result in considerable savings for utilities by reducing risks associated with carbon taxation, penalties for emissions noncompliance and lost investment opportunities, Thomson said. It would also reduce the probability of extreme weather events, which would further reduce costs—and the savings could be rolled over into additional adaptation and grid hardening efforts, he said.

However, he noted that utilities can’t act unilaterally. Action by regulators will also be required to accelerate emissions reductions, and more accurate representations of the potential cost of climate inaction could spur a greater sense of urgency for both utilities and regulators, Thomson said.

"Utilities can get stuff done," he said. "But they can’t do it if they build something new, and there’s a massive multiyear backlog for transmission line approval."