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ESG ESG Newsletter published on September 18, 2023

Clear Goals, Measurable Progress Differentiate Companies

Comparing quantitative and qualitative metrics for two electric utilities illustrates material differentiators when evaluating alignment along a net zero greenhouse gas (GHG) emissions pathway.

Each utility (Company A and Company B in this example) operates a coal-fired power plant that accounts for a material proportion of its generation and ranks among the top five GHG-emitting plants in the U.S., per the Environmental Protection Agency (EPA). In each case, shutting the plant could result in reliability concerns for customers. (Please see the accompanying note about these examples.)

The companies operate in states with differing regulatory frameworks. Company A is headquartered in a state that targets GHG emission reductions over time and a goal of reaching carbon neutrality by 2050. Company B is headquartered in a state with a least-cost resource planning framework,1 with no state-level clean energy goal. States with clean energy mandates can leverage environmental policy to influence resource planning decision making. The differing state-level approaches may be reflected in each company’s approach to GHG reductions.

Although Company B has a Net Zero target, we believe the plan is less substantiated than Company A. The target implies only an 8 percent reduction by 2030 compared with Company A’s initiatives that outline a reduction greater than 70 percent by 2032.

Comparing the GHG emission reduction plans of these two utilities demonstrates material differences can exist among companies within the same sector—even high-emitting sectors—on their pathways to low-carbon operations. The differences may offer opportunities to capture potentially higher relative value through investment, while advancing portfolio objectives to achieve net zero financed emissions by 2050.

Company A (Aligning): Company A’s coal plant accounts for approximately one-third of it generation. An incrementally accelerated and regulator-approved closure plan expects two of the plant’s four units to shut down in 2028 and the remaining two in 2032. Company A has time-dated plans in place to reduce GHG emissions by an increasing percentage on the way to realizing net zero operations by 2050. Company A’s latest reported emissions are below a 2005 baseline. In addition, Company A plans to convert a smaller coal plant to a natural gas plant to operate during high-demand periods. The company also intends to increase production of renewable energy over the next 20 years. Its plan implies significant reduction in Scope 1 and 2 emissions by 2032, while generating savings for ratepayers in excess of $2 billion. It will also provide funds in support of low-income affordability programs and train workers impacted by plant retirements.

Company B (Committed to Aligning): Company B’s coal plant also accounts for about one-third of the operating company’s generation but has no planned retirement date. The parent company also targets net zero emissions by 2050, with one defined interim goal. The company reports 2022 emissions below a 2007 baseline. Regarding the large coal plant, senior executives affirmed during a recent roundtable that there is no set retirement date. Regulators have no plans to pursue closure of the plant. Management noted the plant is cost efficient, compliant with current and future EPA guidelines, and essential for service reliability. The coal plant runs nearly all year, making it a vital baseload resource. The operating unit received regulatory approval to build solar and wind capacity over the next six years, but we view spending as incremental. The operating unit accounts for a material portion of parent company earnings and a higher level of consolidated emissions.

Note: The examples have been provided to illustrate Breckinridge's net zero alignment classification approach. Classifications are subject to change. Since classification methodologies can differ, the same company may be classified differently at other firms. A favorable classification does not guarantee the company will meet its net zero targets or goals, be profitable or provide a positive return. 

[1] Least-cost means the utility and its regulators must identify the lowest cost mix of electricity supply that reliably meets forecasted demand. Solar and wind often have lower levelized cost of energy vs fossil alternatives, but the threshold is more difficult when comparing against large plants that are able to scale costs over a greater number of Megawatt hours.