Climate change and water scarcity lead to rising investment risks

With the UK Environment Agency declaring that seven regions in the east of England are officially in drought status, Standard & Poor’s Ratings Services today published the results of a collaborative study exploring the impact that climate change and water scarcity may have on the economy, industry and electricity prices in the east of England over the coming decades.

The study, Credit FAQ: How Water Shortages In Eastern England Could Increase Costs For UK-Based Utilities, was carried out in conjunction with Trucost, an environmental data organisation, and the Global Sustainability Institute at Anglia Ruskin University.

It finds that the east of England is likely to face severe water shortages over the next 20 years due to significant changes in rainfall patterns, a steadily increasing population and the growing impact of climate change. These are likely to lead to increased energy prices and create additional operating and financial challenges for utilities and energy-intensive businesses operating in the region, which in turn poses growing risks for investors.

Among the key findings of the study:

• Water shortages may increase both the cost of power and electricity tariffs. For example, EDF Energy PLC (A/Negative/A-1) could incur water scarcity costs totaling an additional £1.7 million per year for Sizewell B, the largest power station on the east coast in Suffolk, based on 2010 water consumption. RWE Npower PLC (part of RWE AG; A-/Negative/A-2), which owns the second-largest power station in the region, Tilbury B in Essex, could face costs of more than £51 million annually, based on the power station's estimated water usage in 2010. Water scarcity costs reflect the financial impact that water extraction has on freshwater replenishment, ecosystem maintenance, and the return of nutrients to the water cycle.

• Based on data from Trucost, if all nine power plants operating in the east were to internalize water scarcity costs and pass them through in higher power prices, median industrial electricity prices could increase by around 6% from 2011 levels.

• Infrastructure investment alone may not be sufficient to resolve predicted long-term water shortages. Without increased national and local focus on the management of water demand, water and power companies operating in the region are likely to face both continued water shortages and increasing operating and capital costs. These costs could harm the utilities' credit quality over the long term if not appropriately mitigated.

Among the key questions answered in the FAQ:

• How severe is the current water shortage affecting the east of England?
• Are the current drought conditions just a short-term problem?
• How will climate change affect rainfall in the future?
• How are the water utilities addressing the effects of climate change in the east of England?
• What other plans do the utilities have to conserve water in light of a rising population?
• What pressure will changes in water resources place on local water companies?
• What steps is Anglian Water taking to protect its credit quality in the face of such large investments?
• How could water shortages affect power companies and future electricity tariffs?
• Apart from shortages, what other water risks are facing the east of England?
• Are there any potential remedies that could help alleviate water shortages in the east of England over the longer term?

“Fixed income investors are increasingly concerned about how climate change, water scarcity and other environmental risks may impact the creditworthiness of regions and companies around the world over the coming decades,” said Michael Wilkins, credit analyst at Standard & Poor’s Rating Services. “This study sheds lights on the potential credit impact of the drought in the east of England for the first time and analyses how water scarcity may add a new dimension to credit risk for investors in critical infrastructure such as power stations and water utilities.”

Trucost research editor Liesel van Ast said: “More companies and investors are looking to manage water-related risk to supply chains and investment portfolios. Water shortages can lead to business disruption and rising water costs that reflect water stress. Applying water scarcity costs to water use data provides a proxy for related financial risk and enables organizations to adapt their strategies and develop more sustainable business models.”

"The importance of utility companies working in partnership with local authorities, government agencies and developers is underpinned by this research. The joint challenge of water scarcity and coastal flooding requires an integrated approach by all stakeholders to ensure consumers are protected as much as possible from these twin challenges," said Dr Aled Jones, Director, Global Sustainability Institute, Anglia Ruskin University.

Dr Candice Howarth, Research Fellow, Global Sustainability Institute, Anglia Ruskin University, added: "Managing the level of water demand in the East of England is seen as an important tool in tackling water scarcity. Understanding consumer behaviour and investing in consumer engagement processes is a priority."

*******

For further information or to request a full copy of the report, please contact:
Standard & Poor’s
Matthew McAdam
Email: Matthew_McAdam@standardandpoors.com
Tel: (44) 20 7176 3605

Trucost
Sarah Wainwright
Email: Sarah.Wainwright@trucost.com
Tel: (44) 20 7160 9816

Anglia Ruskin University
Jon Green
Email: Jon.Green@anglia.ac.uk
Tel: 0845 196 4717




About Standard & Poor’s
Standard & Poor’s Ratings Services, part of The McGraw-Hill Companies (NYSE:MHP), is the world’s leading provider of independent credit risk research and benchmarks. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,300 credit analysts in 23 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide

About Trucost
Trucost helps organisations understand the true cost of business in order to utilise resources more efficiently, today and tomorrow. With the world's most extensive and comprehensive dataset on corporate environmental impacts, Trucost works with clients who want to maximise their resource efficiency and minimise the financial and reputational risks associated with their impact on the environment.

About Anglia Ruskin University
Anglia Ruskin University is passionate about the advancement of knowledge and the education of students, and we pride ourselves on taking university education in imaginative new directions. Our key contribution is to the enhancement of social, cultural and economic well being. We have two main campuses, in Cambridge and Chelmsford, with around 30,000 students and 1,000 academic staff. Anglia Ruskin University’s Global Sustainability Institute (GSI) plays a critical role in allying academic disciplines from across the university together with business and governments. This new research institute focuses its efforts in understanding personal motivations and systems change.