Over Heating: Financial Risks from Water Constraints on Power Generation in Asia

Key Findings and Context

Water-related risks are receiving more attention than in the past, yet the connection to power sector development is not well understood by investors, governments, and companies in South and Southeast Asia. This report presents a framework for investors and analysts to assess the risk of impacts from water-related issues, including growing water scarcity and declining water quality, on thermal and hydroelectric power generation plants. While this analysis focuses on publicly listed power generation companies in India, Malaysia, Philippines, Thailand, and Vietnam, the risks outlined may apply to listed power generation companies operating in other water scarce regions.

Emerging Asia is projected to have the fastest growth rate of power consumption in the world.

• The drivers behind this power appetite – economic and population growth – are also increasing demands on limited freshwater resources.

• The power sector requires a steady supply of water for cooling and generation to maintain loads and avoid disruptions.

The availability and quality of freshwater is rapidly declining in many parts of South and Southeast Asia due to demographic pressures and climate change.

• India in particular faces critical water shortages in the next decade.

• Malaysia, Thailand, the Philippines, and Vietnam are expected to face localized water pollution and shortages, with climatic patterns shifting towards longer dry seasons with more concentrated rainfall periods.

Investors are taking on more water risk.

• The power sector is being liberalized in many countries in the region to attract the investment necessary to meet economic goals, with higher risk-reward propositions for investors.

• Deregulated power markets may offer little or no protection to shareholders in the event of an outage or load loss resulting in lost revenues or increased costs (if stipulated by operating license).

• New thermal and hydro power development places long-term bets on water availability – yet future water supplies are often uncertain and potentially oversubscribed in the most electric power hungry and water scarce regions.

Technology will play a key role in mitigating water risk yet at a price and efficiency tradeoff.

• Advanced cooling systems for thermal power such as dry cooling can reduce or eliminate freshwater dependency yet increase carbon emissions per unit power output through efficiency losses.

• Likewise there are water penalties for carbon dioxide emission reducing technologies such as carbon capture and storage.

• These competing priorities make it difficult for investors and companies to anticipate the impact of future climate change and water policies on investments.

Water risk has been obscured to date by regulatory protections.

• Examples of water-related load losses or outages have occurred throughout South and Southeast Asia yet the financial impact has been limited due in part to heavy governmental support that minimizes shareholder risks.

• Shareholder protections will become more costly to sustain and may drive regulatory change as freshwater scarcity increases over the longer term.

74 GW – over half of existing and planned capacity for major power companies – is located in areas that are considered to be water scarce or stressed.

• WRI mapped water scarcity data with plant locations for the largest publicly listed power generation companies in the region.

In India, 79% of new capacity will be built in areas that are already water scarce or stressed.

• NTPC, Tata Power, and Reliance Infrastructure’s (including Reliance Power’s) new capacity is increasingly located in water scarce or stressed areas.

• Water scarcity is expected to intensify in the future as the impacts of climate change and demographic pressures decrease renewable water supplies.