Power companies' exposition to climate risk

Power companies are particularly exposed to climate risk. The severity of this risk has been growing continuously due to increase frequency of extreme temperatures, storms or floods. The most important risk factors are wind and water. Power companies started the climate risk response building reinforced energy infrastructure - strengthening the overhead transmission and distribution grids, installation of flood-proof equipment at power plants and transformer stations, rivers’ temperature forecasting systems, equipping power plants with production control systems. The necessity of financing risk response investments transfers the climate risk of power industry to portfolios of financial institution.

The climate risk of power companies consists from two elements:

1) risk of transition period – risk that results from changes in the business and regulatory environment of energy industry towards green economy. This risk just caused loss in operations of coal power plants. There appears a problem of security of supply under conditions of decommissioning of coal power plants what can take place by end of this decade;

2) physical risk – risk that results from undesirable impact of physical factors’ extreme dynamic (mainly weather phenomena) on energy market conditions, fixed assets and operations of power companies. This element of climate risk causes price movements in the commodities and financial markets.

Climate risk varies in terms of geographic factors, sectors of the economy, and regulatory and legal conditions. The problem is also the small amount of data in terms of its impact on various companies in the power markets. However, most factors of climate risk are characterized by low probability and high cost of materialization - therefore, the extreme conditions resulting from the advancing climate change have a specific financial dimension for the power industry due to its characteristics, as it concerns the power and financial markets (revenues, business profitability), physical assets (damage as a result of extreme weather events), regulatory and social areas.