A new look at Climate Change risk management in the energy sector

November 24, 2015

What does “adaptation to climate change” mean to energy sector businesses? A seminal 2011 World Bank study, to which the UNEP DTU Partnership (UDP) contributed, shed light on the issue by presenting the key options available for managing operations in the energy sector against the background of a changing climate. Earlier this year, UDP contributed additional insights through two innovative studies: Adaptation to Climate Change in Nicaragua’s Hydropower Industry, and Adaptation to Climate Change in Colombia’s Oil and Gas Industry. These studies are the first of their kind that take a long-term perspective, as opposed to a general focus on adaptation measures in the energy sector. Using high-resolution estimates of weather data combined with industry, socio-economic, and geographic data, the studies estimate climate-change-related weather events that could affect the countries’ energy sectors in both the short and mid-term. Based on these estimates, the studies provide the basis for a risk-management strategy in each country.

Uncharted Territory
The studies relied on high-resolution downscaling of global climate model outputs for each country to identify anticipated climate hazards at a fine geographical scale. Projections were obtained for maximum and minimum temperature, precipitation, and wind speed. In order to quantify the uncertainty associated with the projections, ten different models were used.

Together with information on recent climate-change related impacts, industry and socio-economic data were assessed to identify vulnerabilities and, ultimately, potential exposure to climate impacts in various locations. The industry data related to technology standards in use (e.g., the extent to which water pumps are “climate proof”), as well as preparedness and response capabilities (e.g., the extent to which procedures are in place to manage climate change-related events, such as flooding). The socio-economic data related to past and future trends in areas such as land use and urbanisation, energy demand, and water use.

While the studies did not result in full-fledged risk management plans for either of the two sectors under consideration, they did provide an overview of key issues and data gaps that will need to be addressed when such plans are prepared. To facilitate this task, all study findings were structured around the various elements identified in the ISO 31000 risk management framework.

The studies highlighted the fact that both industries have a long way to go with regard to risk management for climate change. Lack of data compounds the problems of limited awareness and experience both within the industry and its supply chains. Inadequate data also makes it difficult to make appropriate choices in regard to climate-related events, thus increasing the risk factor. The critical developmental role that both sectors play underscores the pressing need to make progress in this area.

Next Steps
Several recommendations are detailed for each industry studied, with a view to promoting increased dialogue among stakeholders and setting up crucial data collection mechanisms. The case is made that is essential to frame these initiatives as a part of the industries’ regular quality assurance mechanisms, rather than presenting them as parallel processes that are separate from day-to-day management practices.

In addition to these comments, specific recommendations were made for each industry. For example, the studies encouraged Colombian authorities to create an insurance scheme that effectively rewards progress in the area of risk management. This type of scheme could engage many of the actors in Colombia’s oil and gas industry, which is rather fragmented.

The studies were part of a larger Canadian International Development Agency-funded programme administered by the Latin American Energy Organization (OLADE).

For additional information, contact Daniel Puig (dapu@dtu.dk).