Climate change: risks and opportunities

Pylons for electricity transmissionTerna is a utility whose business is electricity transmission, that is, the transport of electric power from producers to distributors, to whose networks end users are connected. With the exception of the recent photovoltaic project entrusted to SunTergrid, Terna is not involved in any way in the generation of electricity. For this reason, the Company is not subject to any obligations regarding emission reduction or emission trading schemes.

Therefore, the Company does not foresee any fiscal measures (such as a carbon tax) or regulatory ones (such as emission-reduction targets and inclusion in emission-trading schemes) with direct consequences on its business and its financial performance. As far as its foreseeable business prospects are concerned, climate change does not constitute a threat for Terna. On the contrary, the previously mentioned development of the photovoltaic project represents a concrete business opportunity that arose because of the Company’s interest in renewable energy sources, which climate change had stimulated, as well as the availability of assets whose value could be increased.

Nevertheless, Terna’s management acknowledges the increasing importance of climate change and has identified potential, albeit remote, risks and opportunities connected with the warming of the planet and the reactions that this could cause in governments and in consumer attitudes. The potential repercussions on Terna’s business regard the following aspects:

  • Terna’s task of keeping the injections and withdrawals on the transmission grid in balance becomes more difficult when the weather is extreme. Such conditions increase the probability of temporary outages, which consequently entail the intense scrutiny of public authorities and the mass media. Critical situations do not threaten the Company’s accounts, but rather its reputation;
  • the widespread favour encountered by the development of renewable energy sources creates both risks and opportunities for Terna’s image, given that public opinion expects the Company’s conduct of its business to reflect concern for repercussions on the environment. The owners of new power plants with a capacity of more than 10 MW of power from renewable sources have to ask Terna to connect them to the transmission grid. The authorisation process in these cases can be very long, causing Terna to have trouble connecting the new plants by the deadlines requested by producers. On the other hand capital expenditure to develop the grid also entails significant consequences in terms of reducing emissions in the entire electricity system (reduction of losses), (improvement of the production mix), (connection of new plants that run on renewable energy). Terna’s image can be enhanced by this positive role;
  • the increase in the production of electricity from renewable sources requires Terna to prepare technical instruments appropriate for the new scenario. Wind production, in particular, poses problems of system regulation given that it varies so much and can change quite suddenly because of shifting atmospheric conditions. Since 2008, an incentive scheme for the period 2008-2011 has been in effect which assigns Terna bonuses or penalties according to the Company’s ability to correctly forecast the quantity of electric power produced from wind. In 2008 and 2009, the scheme generated €3 million of bonuses, the maximum obtainable, thanks to the Company’s improved forecasts;
  • concern about climate change or an increase in the price of energy could lead to a reduction in the income elasticity of the demand for electricity. The trend of energy conservation and the pursuit of greater energy efficiency could result, all things equal, in a decrease of the demand for electricity and thus for the transmission service. The rules so far adopted by the AEEG, however, exclude the possibility that a reduction in the quantity transmitted could result in a significant reduction of revenue for Terna, even though the rate mechanism produces such revenue as the sum of per-unit rates times the quantity of electricity transported. In effect, recent resolutions of the AEEG have introduced a mechanism for partially neutralising the quantity effect for the remaining part of the 2009-2011 regulatory period.