Climate-related risks pose inevitable threats to investors and the assets in which they invest. Institutional investors have become increasingly concerned about-climate-related risks, but physical risks, which represent the direct physical impacts from climate change, are not well understood.

Water-related risks are prominent physical risks that affect a wide range of industries, including the thermal power sector. Using traditional financial analysis and econometric techniques, this paper introduces a new methodology to quantify the financial impacts of water shortages on India’s thermal power sector. The methodology leverages asset-level data from WRI’s 2018 working paper, Parched Power: Water Demands, Risks, and Opportunities for India’s Power Sector, and combines it with geospatial physical risk and corporate financial data to analyze the financial impacts of water-shortage-induced electricity generation outages at five publicly listed Indian thermal power companies from FY 2014-2017. It also uses outputs from Intergovernmental Panel on Climate Change (IPCC) climate models to project the impact of future water shortages on electricity production at the five companies.

This paper serves as a tool for investors to more effectively understand, analyze, and engage with thermal power companies on water-shortage risks.

Key Findings

  • Water shortages can cause significant impacts to earnings at thermal power companies. Analyzing five Indian companies, water shortages caused electricity generation outages that resulted in quarterly impacts to earnings as high as 17.4 percent from FY 2014-2017.
  • Water-shortage-induced generation outages affected a much higher percentage of power plants using more water withdrawal-intensive once-through cooling technologies than units using less water withdrawal-intensive recirculating cooling technologies.
  • While baseline water stress is well suited to measure chronic water risks, drought indexes can provide more meaningful information when evaluating acute water-shortage risks.
  • Forward-looking climate scenarios project significant uncertainties in India’s future water availability. Stress-testing thermal power companies’ exposures to water-related risks is essential to ensure prudent investment decisions.
  • Investors need better data and disclosures to effectively measure and manage the impacts from water shortages on thermal power companies.

Executive Summary

Full executive summary available in the paper.