Flipping the Switch: Why Utilities Need to Shed Light Now on Carbon Risk

Although the precise contours of the U.S. greenhouse gas (GHG) regulatory framework have not been finalized, the need for some form of carbon accounting is becoming widely acknowledged as necessary and inevitable. Notwithstanding the nation’s relentless march into the world of carbon regulation, many businesses have decided to defer taking any action until requirements become absolutely clear. Thus, it’s no surprise that a December 2008 study from Gartner Group shows that less than one in five enterprises have carbon management plans in place.

Sitting at the epicenter of the current carbon emissions discussions, the utility sector cannot afford to embrace the “wait and see” strategy for carbon. Utility companies that embrace a reactive posture will forgo the opportunity to influence a debate that strikes at the heart of their future competitiveness. Furthermore, as some companies in the sector implement examples of carbon management systems, the bar that must be hurdled to attain credibility for access to the debate rises; cost-effective systems exist today that provide auditable, actionable carbon footprints, and having such a system is becoming a requirement for companies that wish to be “relevant.”

Credibility on carbon is mission critical to utility companies in ways that elevate the urgency of this issue to a prominent bell-ringing in the boardroom. In order to command the respect of public utility commission (PUC) regulators before whom power planning presentations must be made, an auditable, reliable carbon footprint and the ability to project future CO2 emissions will become standard. As mirrors of the community, and of the complex relationship between the power providers and ratepayers, PUCs are likely to increasingly reflect impatience with short-term carbon strategies and to reflect this impatience in decisions that adversely affect shareholder value. That is, the PUCs will reflect the limited carbon reduction approach by not including carbon reduction costs in customer rates.

Study data suggest that consumers’ opinions on carbon are shifting rapidly toward concern for capture and that consumers agree that steps need to be taken to address the problem. In a June 2009 survey by BBMG, three-quarters of U.S. consumers (77%) said they “can make a positive difference by purchasing products from socially or environmentally responsible companies,” and 72% say they have “avoided purchasing products from companies whose practices [they] disagree with.” Investors are demanding change, too: As reported by BusinessWeek (June 1, 2009), U.S. and Canadian companies have filed 67 global warming–related resolutions during the 2009 proxy season, up from 57 last year, according to Ceres, a national network of investors, environmental organizations, and public interest groups.

Apart from shareholders and regulators, utility companies must implement auditable carbon-tracking systems to insulate themselves from new risks stemming from the fact that this carbon data is financial data, not just compliance data. False numbers in the carbon world will increase more than the risk of a fine. They can trigger massive economic mistakes in power and strategic planning, enforcement actions by the Securities and Exchange Commission (SEC) for inaccurate market information, public and private actions grounded in the Sarbanes-Oxley economic reporting reform passed in the aftermath of the Enron collapse, and a host of other challenges not experienced in the traditional world of financial compliance. In recent weeks, both the SEC and the Federal Trade Commission have taken action or made statements clearly signaling an intention to increase the level of vigilance on carbon-related statements and claims. Given that carbon reductions are commodities, the Federal Commodities Trading Commission might also have jurisdiction over carbon trades. Those jurisdictional issues are likely to get addressed in final congressional legislation.

Finally, in addition to traditional compliance-related risks and new financial-related risks, the emergence of a new trend—“supply chain environmentalism”—may place significant pressure on utilities to address the need for carbon transparency and reduction planning.

Supply chain environmentalism is characterized by the efforts of a buying community to repaint the competition in the commodity marketplace by looking at carbon content as a differentiator for commodity products. Think of one big-box retailer competing with the others because its $1.39 widget has 10 pounds less carbon than its competitor’s $1.39 widget. Large, commercially powerful “supply chain environmentalists,” in their quest to compete on low carbon content, will exert dramatic marketing pressure on power providers whose energy is used to manufacture products sold on the retail shelf.

And there is a lot at stake for these environmentalist claims: Based on an estimated price of $20 per ton of carbon dioxide (consistent with European Union prices over the past two years), the S&P 500 companies could be responsible for payments for carbon ranging from $60 billion to $80 billion each year, according to Forbes magazine (June 2009).

Title V Systems: Taking the “Air” Out of GHG Risk

The good news about greenhouse gas data is that its substantial similarity to emissions data managed under Title V of the Clean Air Act means that successful Title V systems can also be used to manage GHG, as long as the system provider brings demonstrable domain expertise in GHG.

Environmental management information systems (EMIS) software developed to manage all types of environmental compliance issues, provides the data capture/analysis, task management, and reporting that will be essential for any successful GHG management regime. Because good environmental management systems are built by domain experts with a deep foundation in the physics and chemistry of emissions data, companies can rest assured that the GHG data they report avoids many potential pitfalls. For example, mistaking sulfur hexafluoride (SF6) for carbon dioxide (CO2) is the kind of error that could result in a very material—by a factor of almost 24,000—understatement of actual emissions, as SF6 is a much more potent GHG than CO2.

In selecting a system, care should be taken to understand the differences between traditional computer platforms and Internet-based software systems, also known as software as a service, or SaaS. SaaS systems are generally viewed as quicker to deploy and easier to standardize across an organization. These systems offer on-demand information and are connected to the in-house provider team, which generally consists of an interdisciplinary group of GHG and compliance domain experts and software specialists.

By contrast, most traditional enterprise resource planning or related systems treat carbon management as an afterthought—a bolted-on module to an existing platform from a company that may not understand the physics and chemistry of emissions data. The extent to which companies will need to reach third-party suppliers in connection with their carbon management solution makes Internet-based software an attractive and scalable option.

Regardless of the software platform chosen, care must be taken to evaluate the provider’s understanding of the underlying GHG data and how their system takes this domain expertise and maps it to an organization’s processes. Credible customer references will validate that the system works and that the provider has the requisite experience to truly operationalize GHG management. Auditable and reliable data management and reporting must be at the foundation for sound strategic planning. For this reason, understand how data used to measure the success of any carbon management program is tied to any all reporting, including dashboards.

The Future Is Now

No shareholder, PUC commissioner, rate payer, or environmentalist would ever applaud a decision to install electric typewriters to manage billing. They will take the same dim view of the use of spreadsheets and disconnected software programs to attempt the task of managing GHG.

Utilities of various sizes—from the largest in the U.S. to midsize and smaller providers—have already implemented Internet-based systems that manage Title V emissions and have also extended these systems to seamlessly bring the required visibility to GHG management. The technology is well established, certified for security, can connect with virtually every enterprise system on this planet, and has been proven to save money via workflow automation.

It’s time to flip the switch on a carbon management system.

—Lawrence E. Goldenhersh is president and CEO of Enviance Inc., a provider of Internet software solutions designed to help utilities manage carbon and other regulatory risks.