The Sustainability Agenda

Decarbonization of the utilities industry and the RMI’s Utility Transition Hub

Episode Summary

Episode 4 of a five-part mini-series in partnership with RMI’s Center for Climate-Aligned Finance. Dominique Barker is in conversation with Sarah LaMonaca who is the Lead on Utility Finance for the Center’s Global Climate team. They discuss the utilities industry and the Utility Transition Hub in addition to the challenges the industry and financial institutions face on transitioning to low carbon.

Episode Transcription

Dominique Barker: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I'm your host, Dominique Barker. Please join me as we explore today's most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Sarah Lamonaca: So in fact, I think on the tax side, one of the things that's exciting is that in the Build Back Better bill, what we're seeing is some changes that would help to address this problem so that you don't need tax equity, which is a relatively expensive and inefficient way to invest in renewables.

Dominique Barker: In partnership with The Centre for Climate Aligned Finance or The Centre, we're pleased to welcome you to the fourth episode of our series. On today's episode, we'll be focusing on the utility sector and the different tools available to help this industry decarbonize, including The Centre's Utility Transition Hub, which we'll be talking about today. So today I'm speaking with Sarah Lamonaca, who leads on the utility finance for The Centre. Good morning, Sarah. Welcome to The Sustainability Agenda.

Sarah Lamonaca: Thanks so much, Dominique. Glad to be here!

Dominique Barker: So let's set the stage and talk about how carbon intensive the utilities industry is and we're going to focus on the US. Can you give a bit of an overview for our audience on where the emissions are coming from and how material they are?

Sarah Lamonaca: Sure. So electricity generation is a major contributor to carbon emissions in the US. It comprises about a third of total US energy related carbon emissions, that was as of 2020. In the past, coal has contributed a higher proportion of those emissions, maybe around two thirds. That's really dropped now down to a little over half from coal and a little less than half coming from gas. There's a couple of other important trends, I think, to note here. Power sector emissions have been coming down in the US thanks to the retirement of coal plants. We've also seen, unfortunately, that the drop in emissions has been offset by the buildout of new gas. So that's kind of the broad context of where we see emissions coming from. And I think it's also important to highlight here that the power sector is a particularly important one to decarbonize because we expect to see electricity load overall increase as we decarbonize and electrify other sectors. So we think about how much more electricity is going to be needed to power a fully electric passenger vehicle fleet or fully electric building, heating and cooling systems. As we transition those services away from fossil fuels to electricity, it's really critical that that power generation is fully decarbonized.

Dominique Barker: And I'll add to that because if we are going to have green hydrogen, we need additional electricity and direct air capture or carbon removal technologies also tend to be quite energy intensive. So as you say, electricity is extremely important to decarbonize because it will be an important energy element. So what are the challenges or maybe the barriers to decarbonizing the utility industry? And I have to say I've covered the regulated utilities for a number of years, and I would have thought that this would be an easy transition because it just adds to rate base, which of course, is better for the shareholders and bondholders. What are you seeing in terms of challenges?

Sarah Lamonaca: Sure. I think that's a logical kind of framing. The background, or sort of context I would add here, is overall I think we see really strong momentum. Across the regulated utility space we're seeing over the last several years, nearly every one of kind of the top emitting parent companies have made net zero by 2050 commitments. So that's a really strong kind of signal for where the industry is headed. The question, of course, is how they're going to achieve those commitments. But another trend that we've seen at the same time is that since 2005, despite a drop in emissions and despite an increase in renewables, fossil assets on utility books have more than doubled. So that's largely been driven by investments in coal plants in order to meet regulations that would reduce pollution and keep those plants operational. So you're paying more for the existing coal capacity that you have. And so those fossil assets are really at an all-time high. And so the big picture is that utilities have really tied up a lot of capital in existing fossil assets. Customers are paying more for less energy from those carbon intensive assets, and that's really taking up pretty valuable real estate on customer bills. So when you get to this question around, kind of what are the key challenges, I would say one is you can only raise rates so high and utilities have already sunk a lot of that capital into fossil assets. So that reduces the availability, of course, of capital to invest in renewables. There's another challenge, and this one is a little bit more technical, I think, which is that regulated utilities have not historically been able to take advantage of some of the policy incentives that have made renewables attractive to other types of developers, and that has to do with tax treatment. So if it's helpful, I'm happy to talk a little bit about how we solve for some of those problems.

Dominique Barker: Absolutely. That would be great. Are you talking about tax equity, for example?

Sarah Lamonaca: So in fact, I think on the tax side, one of the things that's exciting is that in the Build Back Better bill, what we're seeing is some changes that would help to address this problem so that you don't need tax equity, which is a relatively expensive and inefficient way to invest in renewables. So the Build Back Better bill, as it's currently drafted, would allow for wind and solar to opt out of the ITC and into a production tax credit. So rather than the investment tax credit, which is related to the upfront capital cost of the generation, the PTC is linked to performance over time.

Dominique Barker: Production Tax Credits, PTCs. Yeah.

Sarah Lamonaca: Exactly. And there's not the same kind of tax normalization issues associated with the PTC as there are with the ITC. So some of those changes, I think, will be very helpful.

Dominique Barker: And I think we would agree. I mean, I think the market for those tax equity, not only is it hard and expensive, it's also quite limited. So we're very, at CIBC, we're quite hopeful that the Build Back Better bill comes to fruition and that all of those incentives that could really unlock a lot of renewables capital will come to fruition. Would you agree with that?

Sarah Lamonaca: I do. Just the one other thing I thought might be helpful to highlight here is around securitization, so financing tools to actually get some existing fossil assets off utility books.

Dominique Barker: Hmm. Interesting. Thank you. That's helpful. The Centre launched the Utility Transition Hub and I saw a beta version of it. Can you explain to our viewers what that is and maybe where they can find it?

Sarah Lamonaca: Yeah, absolutely. So the Utility Transition Hub is a resource that RMI developed to provide both data and insights into the utility climate transition. But I would really highlight here the Hub's data portal. So I should say also that the tool is available. It's an open source tool. It's available at for anyone who's interested in checking that out. But what the tool really does, the data tool, is it aggregates data from a number of different public sources, so it really draws heavily on open source data that's coming from mandatory reporting to FERC, the Federal Energy of Regulatory Commission and the EIA, the Energy Information Administration, pulls that into a single place, really nice data visualization tools and allows for a few different dashboards so that you can kind of key in on some different questions around capacity, around operations, around policy, community impact and climate. And I think what's really exciting is that across all of those, the Hub allows for really specific and empirical comparison of regulated utilities so you can dig in on capacity, generation, scope one emissions. But you can also look in detail at things like what's driving utility earnings, which components of the utilities business are driving customer bills, what are the trends in employment by technology for each covered utility? And then, of course, there's the climate alignment dashboard. The climate alignment dashboard, I think, is really exciting in that it allows you to take a look at, for given utility, what is their stated climate goal so they might have a net zero by 2050 goal and maybe some interim goal for 2030, then allows you to compare that goal to what a climate aligned emissions trajectory would look like for that utility. So does the pathway to 2050 actually limit emissions to 1.5C? And I would note as well that the hub is an iterative tool. We're adding to it consistently. It will include things like emissions from purchase power so you can go beyond scope one emissions. It will include gas utilities and activities from the gas side of a utilities business, and it will also include the emissions implications of utility IRP, their Integrated Resource Plans. And that's one that I think is particularly exciting because you can overlay that into the climate dashboard. So you can see, in addition to what is the utility committed to, what would a climate aligned pathway be? You can also add in what is the likely emissions trajectory of that utility given where they've said they're going to invest in their fleet in the future?

Dominique Barker: That sounds fantastic, and that's really consistent with The Centre's goal of helping financial institutions decarbonize and help assist in our clients' decarbonization and having that data is really important. So maybe, Sarah, what are the challenges that financial institutions face on utilities and clean energy finance?

Sarah Lamonaca: Yeah, I think It's a question you can answer in a lot of different ways, and probably depending on where you sit in the investment chain, that those challenges look different. I'd say there's quite a high level answer and a sort of more implementation level answer. I think the challenge at a high level is that fundamentally utilities are companies that are currently carbon intensive and they need capital. In fact, they need quite a lot of capital in order to fully transition, and they're critical to the climate transition. So the challenge for financial institutions, I think, is to allocate that essential transition capital in a way that shows leadership, shows meaningful action and also balances the expectations of clients and customers. So I think it's a little bit of a tricky needle to thread. How can you make sure that you're supporting transition that needs to happen while you're also, you know, effectively putting capital behind companies that are quite carbon intensive? And that's something that I think is really critical to our overall sort of outlook and perspective at The Centre for Climate Aligned Finance. It's why we're really focused on forward looking climate alignment. So we want to be able to support financial institutions in understanding very clearly what the transition pathway looks like for the utility sector, how aligned the utility's plans are, rather than just providing a snapshot of kind of where they've been historically or where they're at in this particular moment. I think as well at the implementation level, there's a few kind of more practical or applied challenges and those come down to things like, from an investor perspective, lack of standardization and labeling for ESG funds and products, a lot of money, of course, is in passive funds with utility holdings. It's really hard to know what those ESG indicators mean, so it's hard if you're trying to align your portfolio. Equally I think on the active side, there's not really a great standard for assessing corporates on their climate factors. And that's again, where I think we hope to fill in some gaps with our data tool. And then, of course, I think from the investment banking perspective, there's a whole range of challenges there, including the fact that current methodologies for aligning your portfolio don't usually cover capital markets activity. That's one where you might have a lot of exposure in that space and not a lot of tools to know how to align your business.

Dominique Barker: Yeah. And I would add another challenge that financial institutions generally have and not just banks, but asset managers, asset owners, is just that data. And so the work that The Centre is doing in this Utility Transition Hub is critical to that so I would just note that. Sarah, what are the benefits of transitioning towards cleaner electricity?

Sarah Lamonaca: So I think there's, of course, the climate benefits, which include a habitable planet which we're all excited about.

Dominique Barker: Right, I should've said that.

Sarah Lamonaca: But I think to your question, right, about sort of if we're thinking about economic benefits or other benefits that are not just the climate benefits. I think what I would point to is renewable power is cheap and it's getting cheaper. And some of my colleagues have done some really nice work on comparing the costs of planned gas plants with alternative portfolios of wind or solar paired with existing storage technology. Doing that analysis in a way that offers equivalent kind of reliability services as well, and what we found is that clean electricity portfolios are often cheaper than new gas and due to some continuing improvement in economics, they're really likely to become cheaper than existing gas in the coming decade. So the economics, of course, only get better when you compare renewables to the true cost of fossil fuels by pricing carbon. And I think there are some other systemic benefits to renewable electricity as well, and those can include less exposure to volatile fuel prices. They can include additional cost savings where you have distributed renewable resources that helped to avoid investment in grid reinforcements. And then, of course, you know, from kind of a more geopolitical benefit perspective there's certainly, I think, some national security and energy security benefits to avoiding an over dependence on fossil fuels.

Dominique Barker: And what is your opinion, and it could be a personal opinion, of the current government? Are they tackling the issue of decarbonizing electricity enough? And if not, what else could be done?

Sarah Lamonaca: I think there's a lot to be excited about. I'm excited about what could potentially come out of the infrastructure bill. That's going to include seven and a half billion dollars to build out a national EV charging network, 50 billion for resilience improvements to the grid, sixty five billion for transmission. And as I mentioned earlier, the Build Back Better bill, which has passed the House still needs approval in the Senate, contains a number of critical changes that we really think will help to align incentives for utility decarbonization. That includes extension of existing tax credits, expansion of tax credits to include storage and transmission investments, which are not eligible now. And then again, the adjustment of the way those tax benefits can be realized in a way that allows savings to accrue to customers in the form of cheaper electricity. So I think all of those continue to kind of be paired with state level policies, of course, that have driven renewable energy deployment over the last decade as well. So overall, I think there's a lot in place and a lot that's currently being considered that I think could be really helpful.

Dominique Barker: Okay. And maybe just to put a Canadian angle on it, just for our listeners, according to the government of Canada, we do have one of the cleanest electricity grids in the world. About 80% of our electricity comes from non-emitting sources and the aim they've recently announced that they would like it to be 100% renewable by 2035. So last question, one of the themes out of COP26 six was really this concept of race to resilience. How difficult will decarbonizing the utility industry be with the increasing number of natural disasters? And what can we do to mitigate or harden the assets and reduce the effects of climate change, for example?

Sarah Lamonaca: Yeah, I think the real squeeze potentially that you can see when you look at a potential conflict between decarbonizing and the increasing cost of natural disasters, right, is around cost. It's around, there's only so many dollars that can be spent. And if you're constantly kind of having to clean up after disasters and add reinforcements to the grid, and when you're looking at kind of really, really catastrophic situations like you've seen with Pacific Gas and Electric, PG&E in California, again, you're taking up a lot of kind of valuable real estate on customer bills in addressing climate disasters that are happening now rather than being prepared to invest capital that you need to transition. So it's sort of a challenge, I think if you're trying to do both at the same time. And so I think continued adaptation measures continuing to kind of remain sort of ahead of the curve on the physical transition risk piece, I think will absolutely help to continue to allow capital to be put to its kind of most useful purpose in decarbonizing the industry.

Dominique Barker: Well, this has been terrific. Thank you so much for taking the time to join our show today and thank you to our listeners. You've given us some good resources. I hope that our listeners go and check out the Utility Transition Hub. One last time, what was the website again?

Sarah Lamonaca: Yeah, that's

Dominique Barker: Great. Thank you so much for being with us today. This is very enlightening.

Sarah Lamonaca: Thanks so much, Dominique.

Dominique Barker: Please join us next time as we tackle some of sustainability biggest questions providing different perspectives to help you move forward. I'm your host, Dominique Barker, and this is the Sustainability Agenda.

Disclaimer: The materials disclosed on this podcast are for informational purposes only and subject to our Code of Conduct as well as IIROC rules. The information and data contained herein has been obtained or derived from sources believed to be reliable, without independent verification by CIBC Capital Markets and, to the extent that such information and data is based on sources outside CIBC Capital Markets, we do not represent or warrant that any such information or data is accurate, adequate or complete. Notwithstanding anything to the contrary herein, CIBC World Markets Inc. (and/or any affiliate thereof) shall not assume any responsibility or liability of any nature in connection with any of the contents of this communication. This communication is tailored for a particular audience and accordingly, this message is intended for such specific audience only. Any dissemination, re-distribution or other use of this message or the market commentary contained herein by any recipient is unauthorized. This communication should not be construed as a research report. The services, securities and investments discussed in this report may not be available to, nor suitable for, all investors. Nothing in this communication constitutes a recommendation, offer or solicitation to buy or sell any specific investments discussed herein. Speakers on this podcast do not have any actual, implied or apparent authority to act on behalf of any issuer mentioned in this podcast. The commentary and opinions expressed herein are solely those of the individual speaker(s), except where the author expressly states them to be the opinions of CIBC World Markets Inc. The speaker(s) may provide short-term trading views or ideas on issuers, securities, commodities, currencies or other financial instruments but investors should not expect continuing analysis, views or discussion relating to those instruments discussed herein. Any information provided herein is not intended to represent an adequate basis for investors to make an informed investment decision and is subject to change without notice. CIBC Capital Markets is a trademark brand name under which Canadian Imperial Bank of Commerce (“CIBC”), its subsidiaries and affiliates provide products and services to our customers around the world. For more information about these legal entities, as well as the products and services offered by CIBC Capital Markets, please visit