Catastrophic Droughts Put Utilities at Risk 

Extreme droughts are putting great pressure on hydro and thermoelectric power producers, which comprised more than 86% of the world’s total electricity generation in 2021.¹ For example, hydropower generation output dropped by as much as 32% in the first half of 2022 from the comparable period last year due to drought.

Mitigating operational risks

Droughts can reduce output for electricity producers which need water to cool thermal power plants. In addition, low reservoir levels can curb hydropower generation and shallow river levels can disrupt fuel shipments to coal-fired power stations. Droughts also increase the risk of wildfires,² potentially exposing electric grid operators to lawsuits.³

Utilities can work to manage the risk of water stress by making their operations more resilient. For example, they can increase power-generation efficiency by modernizing existing facilities (e.g., updating their turbines) and mitigate the risk caused by droughts by owning thermal power plants, which can be used when water reservoir levels become too low.

Similarly, thermal power generators can reduce a utility’s water intensity by replacing a once-through cooling system with a recirculating one. Finally, water companies’ can greatly reduce their water usage by minimizing leakages and encouraging their customers to use water more efficiently.

Investors globally are watching to see how different utilities respond.

 

This exhibit includes data for utility constituents of the MSCI ACWI IMI Index, as of Sept. 29, 2022.
Companies below the 10th and above the 90th percentiles have been omitted. Source: MSCI ESG Research LLC.

Drop in hydropower output year over year

This exhibit uses data for selected utility constituents of MSCI Europe Index, as of Sept. 29, 2022.
Source: MSCI ESG Research LLC, company filings.