The Portfolio Decarbonisation Coalition presented the results of an investor research titled "Flicking the switch: are electric utilities prepared for a low carbon future?" at an event organised by Finsif, CDP and Sitra on 25 August 2015. The theme of the event was "Managing climate risk in investments".

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CDP Investor Research
“Flicking the switch:
are electric utilities prepared for a
low carbon future?”
May 2015
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Content
 Key findings of the report
 Overall engagement themes
 Company level engagement topics
 Next steps
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Key findings of the report
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Scope of our research: geographies
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 Our report covers European electric utilities, as European companies provide the most comprehensive responses
to CDP’s 2014 questionnaire.
 Responders by market cap and by region:
• Europe, 85% ; US, 45%; Rest of the world, 25%;
• The current lack of responses outside of Europe make these datasets less useful.
 European utilities’ production by geography:
• Europe: 75% (including 50% in their domestic market);
• LatAm (10%), Russia (6%), US (4%) and rest of the world (5%).
 Our research covers the global assets of the European electric utilities. However, we assess the carbon exposure
and impact on earnings based only on the utilities’ European assets, as the EU is one of only a few regions with a
carbon trading market.

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Electricity production by geography
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Scope of our research: companies
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 We consider only companies that responded to CDP’s 2014 Climate Change questionnaire.
 We select 13 European electric utilities for our study, including 10 of the top 12 European utilities
by global electricity production.
 Together represent around 80% of electricity produced by European utilities and US$380
billion in market cap.
 The largest non-responders were CEZ (2.3% share), Polska Grupa Energetyczna (1.9%) and
Public Power Corp (1.3% share).
 Data sources: we have used CDP’s extensive databases and also external data from
organisations such as Eurostat, Eurelectric, CARMA, Enipedia, European Wind Energy
Association, as well as publically available company data.

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The Super-League Table
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 Ranks companies based on a number of emissions-related metrics.
 In aggregate could have a material impact on company performance.
 Our SLT rankings are not intended as definitive winners and losers for investment purposes;
however, it is more a proxy for business-readiness in an industry where a significantly higher
carbon price is required to meet stringent long term emissions-reduction targets.
 We would flag that companies towards the bottom of our SLT are possibly higher risk investments
than those towards the top.

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Scope of our research: four key areas linking emissions-related metrics to earnings
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Super League Table for European electric utilities

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Carbon risk
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Carbon risk: methodology
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 We analyse carbon risk for the utilities based on their global assets, with the exception of our
carbon cover metric where we calculate the risk exposure based on assets exposed to the EU
ETS (on average the utilities generate 75% of their electricity in Europe).
 Metrics used:
• Carbon cover: measure of how many times utilities can pay their carbon cost using EBIT;
• Emissions intensity in 2013 (normalised by revenue and production);
• Reduction in emissions intensity over 2010-2013;
• Emissions-reduction targets set by the utilities against science-based targets.

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Carbon risk summary
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Production by resource type and emissions intensity

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Metric 1: Carbon cover
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Metric 2: Emissions intensity in 2013
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Metric 3: Reduction in emissions intensity
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Metric 4: Emissions targets
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Scenario analysis: carbon risk exposure and impact on earnings
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 We assess utilities’ carbon risk exposure under three carbon pricing scenarios:
• 2013: we adopt the average carbon price for 2013 of EUR4.35;
• Scenario 1: we use a carbon price of EUR18. This is considered by Sandbag, an NGO which lobbies for
coal divestment, as a price needed for a large-scale switch from coal back to gas production (based on a
EUR16/MWh gas price – with a USD75/tonne coal price and EUR6/tonne carbon price);
• Scenario 2: we use a carbon price of EUR30. This is cited by the EU electricity association as a carbon
price that needs to be reached by 2020 in order to have any chance of achieving the EU’s 2030 target of
45% of electricity generated from renewables.
 Limitation: we assume a constant emissions intensity (at 2013 levels).
• We appreciate that the change in carbon price would affect the switch between gas and coal. Hence for
utilities that own both of these power generation sources may choose among them leading to their carbon
cost exposure would increase at a slower rate than the carbon price and in a non-linear fashion.

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Scenario analysis: carbon risk exposure and impact on earnings
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Renewable energy sources
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Renewable energy sources: methodology
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 We assess the utilities’ renewables generation portfolios based on their generation from hydro and
other renewables, evaluating the extent to which companies are capturing the opportunities in
renewables, and in doing so mitigating their carbon risk exposure.
 Metrics used:
• % production from hydro and other renewables in 2013;
• Increase in installed capacity from hydro and other renewables over 2010-2013;
• A comparison of companies’ increase rate in installed capacity from other renewables with
that of their domestic markets;
• The attractiveness of the markets they are exposed to.

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Renewable energy sources summary
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Renewable energy sources summary: other renewables
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Renewable energy sources summary: hydro
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Metric 1 (i): Production from other renewables in 2013
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Metric 1 (ii): Production from hydro in 2013
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Metric 2 (i): % change in installed capacity of other renewables
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Metric 2 (ii): % change in installed capacity of hydro
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Metric 3: % Increase in installed capacity of other renewables relative
to increase in domestic market
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Metric 4: Renewables country attractiveness
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Coal exposure
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Coal exposure: methodology
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 We perform a detailed review of the generation portfolio of coal and lignite of each utility.
 The utilities reduced their combined installed capacity by 3% pa over 2010-13; however,
favourable economics for coal plants meant that operating hours and therefore coal production
increased over the period.
 Metrics used:
• Production from coal and lignite in 2013;
• The reduction of installed capacity of coal and lignite over 2010-2013;
• The percentage of subcritical coal plant (i.e. the least efficient and the most carbon intensive
coal-fired power generation) in utilities’ coal fleet, in terms of installed capacity and
production.

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Coal and renewables as % of electricity production
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Coal exposure summary
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Metric 1: Production from coal in 2013
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Metric 2: Change in installed capacity of coal over 2010-2013
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Metric 3: Proportion of subcritical coal power plants by production
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Metric 4: Proportion of subcritical coal power plants by capacity
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Water risk
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Water risk: methodology
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 We evaluate water risk facing utilities based on the following metrics:
• water strategy
• supply chain management
• risks and opportunities
• water use intensity
• targets and goals

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Water risk summary
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Metric 1: Water strategy
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Metric 2: Supply chain management
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Metric 3: Risks and Opportunities
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Metric 4: Water use intensity
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Metric 5: Targets and goals
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Overall engagement themes
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Engagement
 Individual and collaborative engagement with companies prioritised by CDP
 CDP actively supporting institutional investors in Individual and collaborative
engagement with companies
 Will provide additional information, support and coordination when needed.
 Work in progress – share your thoughts and ideas
 Traffic light coding:
Green = good performance
Amber = monitor performance, possible concern
Red = area of concern, engage with company
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Overall engagement themes: carbon risk (1)
Three key requirements for companies:
1) Set clear, strong, long-term emission reduction
targets, both absolute and intensity, in line with
science-based targets.
Emission reductions are key to meeting existing
regulatory requirements, being prepared for future
requirements and providing economic solutions for
customers.
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Carbon risk: exposure to carbon risk is directly linked to the cost of meeting regulatory demand

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Overall engagement themes: carbon risk (1)
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2) Set targets and demonstrate progress to achieve emissions reductions.
3) Demonstrate resilience to a shifting price of carbon.

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Overall engagement themes: renewable energy sources (2)
Renewable Energy Sources (RES): an assessment of utilities’ RES portfolio and potential
opportunities
Companies should demonstrate a clear strategy to increase production from renewables.
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Coal exposure: production from coal, especially inefficient coal, and the risk of
stranded coal assets
1) Demonstrate a clear strategy to shift from coal-fired assets to lower-carbon assets
2) Increase disclosure on the different grades of coal plants, including the sub-critical
plants (SCP)
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Overall engagement themes: coal exposure (3)

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Water risk: potential physical risks may reduce production and constrain the growth of the
power generation business
1) Demonstrate your awareness of water risks and opportunities and how these could affect
the success of your organization’s growth strategy
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Overall engagement themes: water risk (4)

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Overall engagement themes: water risk (4)
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2) Set clear, strong, long-term water
targets and increase the quality and
availability of water accounting data at a
river basin level.

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Carbon risk: areas for company engagement
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Other renewables: areas for company engagement
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Coal exposure: areas for company engagement
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Water risk: areas for company engagement
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Company level engagement topics
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RWE
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Rank Carbon risk Renewables Coal exposure Water risk
13 E D E D
Key strengths Key Engagement actions
 RWE has reduced its installed coal capacity
and has not been substantially increasing its
production emissions-intensity relative to
others at the bottom of the league table.
 RWE is bottom of the SLT with very high coal
production and therefore a high carbon risk.
 Incomplete disclosure on production by country
and resource type
 Given it is operating in a receptive domestic
market, it should increase its investments in non-
hydro renewables

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EnBW
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Rank Carbon risk Renewables Coal exposure Water risk
12 E C D n/a
Key strengths Key Engagement actions
 EnBW has demonstrated an effort to reduce its
coal installation capacity even though coal
represents nearly half of its production.
 EnBW has a consistently high-risk carbon profile
 EnBW should be encouraged to replace its coal
production with renewables sources, especially
given its domestic market’s receptiveness
 EnBW can improve its ranking as CDP will
engage the company on its water risks

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Endesa
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Rank Carbon risk Renewables Coal exposure Water risk
10 D E C C
Key strengths Key Engagement actions
 Endesa’s production sources are highly
diversified, with a low proportion coming from
coal and a significant percentage from hydro and
nuclear.
 Explore scope for reduction of coal capacity and
shift towards non-hydro renewables.
 Should address its increase in carbon emissions
intensity and get back on track for its emissions
targets.

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Iberdrola
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Key Engagement actions
 Scores consistently very well across all four emissions
intensity-related metrics.
 A world leader in renewables (wind especially) and has
one of the lowest exposures to coal.
 Reduction of gas and coal production over the last few
years and switch to renewables.
 Bottom performer on the extent of new and non-hydro
renewable installed capacity.
 High percentage of subcritical (most polluting and least
efficient) coal-fired plants in the company’s total coal
fleet.
Rank Carbon risk Renewables Coal exposure Water risk
1 A A B A
Key strengths

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Enel
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Rank Carbon risk Renewables Coal exposure Water risk
4 B B C B
Key strengths Key Engagement actions
 High sales-adjusted carbon emissions intensity.
 High coal exposure: significant percentage of
electricity coming from coal.
 Lacking presence in countries that are more
attractive for non-hydro renewables.
 Good overall performance, with a consistent B grade
in 3 emissions-related metrics.
 Among the world’s top five wind farm owners.
 Ranked in the top 3 in terms of water strategy,
targets and goals.

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Centrica
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Rank Carbon risk Renewables Coal exposure Water risk
2 A C A B
Key strengths Key Engagement actions
 Very satisfactory overall performance in the 4
emissions-related metrics
 Ranks top in low-emissions intensity (no coal
assets; about half of energy production comes
from nuclear and the other half from gas).
 Very low percentage of renewables in the
company’s total electricity production.
 Below average increase compared to its
domestic market for new and non-hydro
renewable installed capacity
 Poor water strategy

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Verbund
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Rank Carbon risk Renewables Coal exposure Water risk
3 A D A n/a
Key strengths Key Engagement actions
 Low percentage of non-hydro renewables in the
company’s total electricity production.
 Lacking presence in countries that are more
attractive for renewables (excluding hydro).
 Engagement needed to clarify water strategy
 Very good performance in the carbon risk and coal
exposure metrics.
 One of the leaders in low-carbon emissions intensity.
 Has one of the lowest coal exposures due to high
proportion of hydro.

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EDP
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Rank Carbon risk Renewables Coal exposure Water risk
5 C A C B
Key strengths Key Engagement actions
 Shift from gas to coal production: ranks bottom in
carbon emissions intensity reductions for 2010-
2013.
 Almost no increase in non-hydro renewables
installed capacity during the same period.
 A world leader in renewables (wind especially), due
to a high percentage of electricity coming from wind
and a solid presence in countries that are more
attractive for non-hydro renewables
 Among the top performers for water management

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EDF
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Rank Carbon risk Renewables Coal exposure Water risk
6 B D B C
Key strengths Key Engagement actions
 Very small percentage of non-hydro renewables in
the company’s total electricity production.
 High percentage of subcritical coal power plants in
the company’s total coal fleet.
 High water-use intensity.
 Good score on carbon risk and coal exposure
metrics (majority of production coming from nuclear).
 Significant increase in non-hydro renewables
installed capacity (above domestic market average).
 Robust water risks and opportunities assessment as
well as targets and goals assessment.

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Fortum
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Rank Carbon risk Renewables Coal exposure Water risk
7 B E B E
Key strengths Key Engagement actions
 Very low score on the non-hydro renewables metric.
 One of only three companies to have increased its
installed coal capacity from 2010-2013.
 Unclear water management strategy.
 Performs relatively well in the carbon risk and coal
exposure metrics: low percentage of electricity
produced from coal.
 One of the top performers in terms of carbon cover
and reduction in emissions intensity.
 Has significantly increased its non-hydro renewables
installed capacity during 2010-2013.

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GDF Suez
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Rank Carbon risk Renewables Coal exposure Water risk
8 C C C C
Key strengths Key Engagement actions
 Has obtained an A grade for its CDP performance
band (2014).
 Has one of the lowest percentage of subcritical coal
power plants in its total coal fleet by capacity.
 Has developed a strong overall water strategy.
 Has strongly increased its installed coal capacity.
 Poor carbon emissions intensity.
 Far off track from reaching its emissions targets
(risky in a climate of increased regulation and
penalties).
 Poor water risks and opportunities assessment.

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E.ON
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Rank Carbon risk Renewables Coal exposure Water risk
9 C B D D
Key strengths Key Engagement actions
 Good performance on renewables. E.ON plans to
focus on increasing their renewables capacity.
 Currently reducing its installed capacity and
exposure to coal.
 Encouraging E.ON to reformulate its water strategy,
focusing on engaging its supply chain on water
management.
 Even though E.ON is planning on reducing its coal
exposure, it is currently operating a large fleet of
subcritical plants.

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SSE
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Rank Carbon risk Renewables Coal exposure Water risk
11 D B E E
Key strengths Key Engagement actions
 SSE ranks near bottom of three metrics, with 83% of
its energy production coming from non-renewable,
highly emitting fossil fuel sources, principally coal.
 SSE did not respond to investor requests for
transparency via CDP’s 2014 water questionnaire.
 SSE is increasing its installed renewables
capacity.
 SSE has decommissioned two of its coal plants,
retaining just one.

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Next steps
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Next Steps
 Individual engagement with companies
 Collaborative engagement with companies
 Dialogue with Aiming for A coalition on Centrica and SSE
 Updates to league tables when appropriate
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