Following the recent warning from both U.K. utilities and the UK government that climate change threatened to undermine investment in the power sector’s generation and transmission assets, recent market activity in Australia suggests plenty of climate change investment opportunities abound.

Last year’s mildest winter on record and the regulatory forecast “lag” with climate change is creating exposure for smaller utilities especially those dependent on gas transmission revenues. Most regulators conservatively base their demand forecasts on historical long-term climate records which are becoming increasingly less reliable. This creates volume risk as the rigid regulatory framework produces asymmetric risks and rewards. Revenues are therefore harder to forecast in an uncertain climate which can lead to a negative market reaction.

Warmer winters impact not only retail load demands but also lower the efficiency of gas-fired power stations by as much as 5% or more. The electricity transmission sector is further exposed as the combination of extreme heat and the added demand for electricity to run air conditioning causes transmission line temperatures to rise.

Better forecasting combined with a regulatory approach based on climate science should help utilities plan for near term uncertainty. We think factoring exposure to climate risk will soon become embedded in strategy rather than using uncertainty as an excuse for inaction.