Climate change: risks and opportunities

Climate change: risks and opportunitiesTernai is a utility whose business is the transmission of electricity, i.e. the service of transporting electric power from producers to distributors, to whose networks end users are connected. Except for the development of the photovoltaic project, the Company is not involved in any way in the generation of electricity , and thus is not subject to any obligation to reduce emissions or to any emission trading scheme.    
Therefore, government intervention through taxation (e.g., a carbon tax) or regulation (emission-reduction targets, inclusion in emission-trading schemes) with direct consequences on Terna’s business and financial performance are to be excluded. Climate change does not constitute a threat for Terna as far as its foreseeable business prospects are concerned. On the contrary, the development of the photovoltaic project – which was made possible by, among other things, the legislation favorable to renewable energy sources that was a response to climate change – constitutes an example of the concrete business opportunities provided by the current scenario.      
Nevertheless, Terna’s management recognizes the increasing importance of climate change and has identified potential, albeit remote, risks and opportunities connected with the warming of the Earth and the reactions that it might cause in governments, as well as in the habits of consumers.     
The potential repercussions on Terna’s business regard the following aspects:

  • The task of keeping injections and withdrawals of electricity on the transmission grid in balance, which Terna performs in Italy as the transmission system operator, becomes more difficult when the climate is extreme, for example when water is scarce or the temperature is extremely high. In some areas of Italy, there is an increased probability of critical situations, which can entail the temporary disconnection of users and consequently cause the attention of the public authorities and the mass media to focus their attention on Terna. Such situations do not threaten the corporate accounts, but rather Terna’s reputation. On the other hand, good management of critical situations constitutes an opportunity for Terna to consolidate its reputation as a reliable company.
  • The general favor enjoyed by the development of renewable energy sources generates risks and opportunities for Terna, from which public opinion expects business conduct that is attentive to repercussions on the environment. New power plants running on renewable energy with more than 10 MW of power must request Terna to connect them to the transmission grid. There have been numerous requests in the last few years. So far, Terna has issued connection solutions for plants that – if they were all constructed – could produce up to 130,000 MW, i.e. more than twice the power consumed in Italy at times of peak demand. After the connection solution was obtained from Terna, only some of these proposals have been developed into projects and initiated the authorization process. The investment in the transmission grid made necessary by the connection of renewable-energy plants is therefore already a source of revenue for Terna. Furthermore investment to develop the grid also entails significant consequences in terms of emission reduction in the entire electric system. Terna’s image can be enhanced by this positive role. The Company can also develop business opportunities regarding the long-term development of solar plants in Africa to satisfy European consumption, which requires the parallel development of infrastructure to interconnect the two continents.   
  • The increase in the production of energy from renewable sources – for which incentives are often provided by specific provisions of the law – requires Terna to prepare technical instruments that are appropriate for the new scenario. Because of its even sudden variability deriving from changes in the atmospheric conditions, wind production entails particular problems for the regulation of the system. Since 2008, an incentive scheme has been in place for the period 2008-2011 that assigns Terna bonuses or penalties on the basis of the Company’s ability to correctly forecast wind production (maximum bonus: 3 million euro, maximum penalty 1.5 million euro). In each year of the three-year period the scheme has generated a bonus of 3 million euro for Terna (the maximum obtainable) thanks to its improvement of the forecasts.      
  • The concern about climate change or the increase in the price of energy raw materials could lead to a reduction of the income elasticity of the demand for energy. All other things equal, the trend of energy conservation and the effort to improve energy efficiency could cause the growth of the demand for electricity – and thus for the transmission service – to be lower it is currently. However, the rules adopted so far by the AEEG exclude the possibility that a reduction in the volume demand could lead to a significant reduction in Terna’s revenue. In effect, in 2008 the AEEG introduced a mechanism that partially neutralizes the volume effect for the remainder of the regulatory period (2009-2011).