Insights
Electric utilities in Europe must quickly adapt to some of the world’s most ambitious decarbonisation policies. We explore how investors can use IIGCC’s Cumulative Benchmark Divergence metric with regional pathways to identify potential transition risks.
IIGCC members: Access the CBD implementation guidance.
The power sector has a crucial role to play in achieving net zero. It represents around 15 gigatonnes of annual emissions and underpins the decarbonisation of numerous other sectors including industry and transport.
The International Energy Agency’s Net Zero Emissions (IEA NZE) by 2050 scenario requires the sector to reach net zero emissions in advanced economies by 2035, with other economies to achieve the same by 2040 or shortly after. That doesn’t leave long to transition.
Progress is being made at the national policy level, with EU countries representing more than 60% of the bloc’s energy sector committing to decarbonise their power sectors by 2035. Ten member states including Germany, France, Italy and the Netherlands have committed to this target, with a similar 2035 goal set in the UK, Switzerland the USA.
According to the IEA, nearly 510 gigawatts (GW) of renewable capacity was installed globally in 2023, up almost 50% from 2022. This is impressive but the sector must go faster. The average annual capacity additions in the balance of this decade must roughly double to meet the COP28 target of tripling renewables by 2030.
Those looking to understand the opportunities and risks created by the renewables transition in this sector want to know - are companies on track? Our Cumulative Benchmark Divergence (CBD) metric could contribute to building a fuller picture for consideration.
Using CBD
Many investors start by looking at company emissions targets. Figure 1 below is a “carbon performance” chart, for illustrative purposes only, showing the emissions intensity pathway between 2019 and 2050 of four utilities and a global sector 1.5°C pathway. It shows when companies are not aligned (above the shaded grey benchmark) and aligned (below).
However, it is difficult to compare companies or summarise the alignment of the whole pathway from this visual inspection alone.
Figure 1: Carbon performance of electric utilities against the global 1.5°C sector benchmark. Source: IIGCC analysis based on Transition Pathway Initiative (TPI) Centre data.
The CBD metric uses the same data to provide a quantitative alignment assessment by comparing the area implied by the company pathway and the benchmark. Its output is a single number; 0 or below means aligned and the higher the positive number, the more misaligned it is.
A cumulative perspective better aligns with the way that emissions impact the climate. For example, over 2019-2050, a company that delays emissions reductions until 2049 and then reduces by 100% will emit two and a half times more carbon than a company decarbonising by 7% annually.
CBD scores of the four companies are shown to the right of the chart in Figure 1. The positive ‘above the line’ CBD scores of RWE and Duke Energy indicate they are not aligned with the decarbonisation pathway required by 1.5°C. The respective areas under their emission curves are larger than the grey area of the global benchmark.
On the other hand, SSE and Enel both have pathways that, integrated through time, are lower than the benchmark. Therefore, they can be considered aligned with 1.5°C when using this metric.
This analysis used a global benchmark to assess the companies, however, different regions need to decarbonise their power sector at different rates. This is due to differing economic and technological starting points, and the ‘common but differentiated responsibilities’ principles of the Paris Agreement. Reflecting this, the Transition Pathway Initiative (TPI) has used the IEA NZE data to develop regional benchmarks (see Figure 2).
Since regional milestones are already being embedded into national power sector policies, investors looking to better understand transition risk could consider comparing the emissions targets of electric utilities with the appropriate regional benchmark.
Figure 2: Regional electricity generation pathways published by the TPI Centre.
Regional variances
The message from policymakers is clear: many utilities in Europe are expected to decarbonise their power generation by 2035. While rapid decarbonisation still needs to happen in the non-OECD and global pathways – generation intensity needs to fall by two-thirds to less than 0.2tCO2/MWh by 2030 – these pathways have five more years to reach net zero.
Figure 3 shows a net-zero alignment assessment of 12 European power sector companies against both the global and the appropriate regional benchmark, demonstrating the difference choosing a regional benchmark makes.
Most appear aligned (CBD =< 0) when compared to the global benchmark (grey), in keeping with Europe’s leadership status in policy ambition.
However, when calculated against the relevant regional benchmark in pink, the number of companies aligned drops to just three: Iberdrola, EDF and Fortum. Nine companies are now misaligned. Five companies that were aligned with the global benchmark (CEZ, Engie, SSE, E.ON and Enel) no longer have aligned emissions pathways against the regional benchmark.
Figure 3: CBD assessment of European CA100+ electric utilities. IIGCC analysis based on TPI and company reported data. Please note that the European benchmark is used to assess alignment for most companies.
While European utilities lead the global decarbonisation race, most do not have plans aligned with relevant domestic policies which are increasingly focused on net zero power systems by 2035. Assessing misalignment cumulatively using CBD, it is clear that there is still room for higher ambition.
Applying the CBD metric to emissions pathways could be a useful tool for assessing transition risk, with its value further enhanced where regional sector benchmarks are available.
Its outputs - subject always to investors making their own investigations, evaluations and seeking professional advice - can help inform investors which companies face the most significant risk. This can help them to prioritise engagement efforts in the coming years.
IIGCC members: Access the CBD implementation guidance to learn more about our cumulative benchmark divergence metric.
*All National Grid’s generation activities are in the US and hence it’s assessed against the N. American benchmark. Naturgy’s generation is concentrated in OECD countries (Spain, Costa Rica, Mexico, and Australia accounted for 98% of 2022 generation) and hence it’s assessed against the OECD benchmark.