How does climate change affect portfolio investment decisions?

Let’s face it, global warming is here. The extreme temperatures experienced in the northern hemisphere over the last three months are likely to stay with us until at least 2022, and probably even a lot longer than that.

A study published in the journal Nature Communications by scientists Florian Sevellec from France’s National Centre for Scientific Research, and Sybren Drijfhout from UK’s University of Southampton has shown that there is a high possibility that we will be at the peak of an anomalously-warm phase for the next four years. This does not mean that Europe will definitely have more heatwaves, the US more forest fires, and the Arctic more ice melt. However, it does mean that the likelihood of these events will increase, the scientists have warned.

This is bad news for wind investors, as extreme weather conditions have an impact on energy production and, as a consequence, on wind farms’ profitability.

Weather data analysts at Vaisala have shown in a recent analysis that the heatwave experienced in western Europe in July has harmed wind farm performance in markets including the UK, France, Spain, Germany and much of Scandinavia. In these markets, wind operators saw available resource in July dip by as much as 20% from long-term averages. Imperial College London has shown that wind energy output across the UK has been down 40% year-on-year this summer.

This has already had an impact on wind farm owners. British utility SSE for example, said in July that, in the three months ending on 30 June, the output of its offshore and onshore wind turbines was 15% lower than planned, and this contributed to a quarterly profit £80m lower than expected.

This is a challenging scenario for wind investors. If wind speeds are expected to be lower than seasonal averages for at least the next four years, as a result of extreme temperatures, they will have to deal with low returns for their wind assets.

A study published by the journal Nature Geoscience in December 2017 showed how damaging this phenomenon could be. Changing weather patterns are set to cause an up-to-10% drop in wind across much of the northern hemisphere by 2050, with an up-to-18% drop by the end of the century. However, a small drop in available wind could translate into a bigger drop of wind energy capacity: a 10% drop in wind power could result in a nearly 30% drop in wind farm production. The study argues that this phenomenon would be less significant in east Australia, west Africa and Latin America.

Is there a solution? Well, this scenario calls for investors to adapt and, potentially, to open up to new opportunities.

Data analysed by Vaisala has shown a negative correlation between deviations in wind speeds and deviations in solar irradiance in July. This means that when wind was below average, sunshine was above average.

A very good example of this was in Germany. Wind energy production for July was 20% lower year-on-year. However, this shortfall was more than compensated by a 26% increase in its solar energy production in the same period.

However, Vaisala also points out that not all markets have seen this balancing effect, Portugal for example, experienced both low wind and low irradiance in July.

This does not mean that we shouldn’t invest in wind power. However, such changes must be taken into account in planning investing portfolio decisions.

"Often wind and solar technologies are played against each other, but the reality is that a diverse portfolio, obtained by building out both, to a large scale, will be the solution to long-term variability of this nature”, said Pascal Storck, director of renewable energy at Vaisala.

The past summer has highlighted the need for investing portfolios to become “climate resilient”. A diversified portfolio, both geographically and by technology, would be key for stable revenue flows in a scenario of extreme climate changes.