Center on Financial Risk in Environmental Systems: Catawba Basin
Catawba Basin (Duke Energy)
Evaluating the Physical and Financial Vulnerabilities of Power Systems to Drought in the Southeastern U.S.
Combined modeling of electric power systems and surface water infrastructure (reservoirs, dams) is used to understand the impact of drought on thermal power plants and hydropower production, as well as associated impacts on the financial performance of Duke Energy, the largest electric power utility in the U.S.
There is increasing recognition of the financial vulnerability of electric power systems to drought and the potential for both climate change and a shifting generation mix to alter this vulnerability. Nonetheless, the considerable research in this area has not been synthesized to inform electric utilities with respect to a key factor that influences their decisions about critical infrastructure: financial risk for shareholders. This study addresses this gap in knowledge by developing a systems framework for assessing the financial exposure of utilities to drought, with further consideration of the effects of climate change and a shifting generation mix. We then apply this framework to a major utility in the Southeastern U.S. Results suggest that extreme drought could cause profit shortfalls of more than $100 million if water temperature regulations are strictly enforced. However, even losses of this magnitude would not significantly impact returns for shareholders. This may inadvertently reduce pressure internally at utilities to incorporate drought vulnerability into long term strategic planning, potentially leaving utilities and their customers at greater risk in the future.
Kern, J. D. and G. W. Characklis. “Evaluating the Physical and Financial Vulnerability of Power Systems to Drought Under Climate Uncertainty and an Evolving Generation Mix,” Environmental Science & Technology, 51, pp. 8815-8823, doi:10.1021/acs.est.6b05460.
Duke Energy Foundation