Climate Change-Associated Threats Increase Operational Uncertainty for Utility Providers

Climate events can alter how investors perceive a country’s stability. Record floods in Pakistan in 2022 caused billions of dollars in damages and triggered a climate-induced sovereign risk event, leading to emergency International Monetary Fund (IMF) talks and raising concerns about the country’s governance and resilience. The convergence of political and market risks stemming from increasingly frequent or consecutive disasters often forces states and utilities to incur urgent and unplanned expenses for repairs and social relief. The resulting financial strain can weaken sovereign ratings, ultimately raising financing costs and exposing countries to policy instability.

Climate change is also intensifying cross-border competition for water, electricity, and other essential resources. If a country diverts a strategic resource, such as gas or water, during a climate crisis, local projects may face sudden supply constraints or even government takeovers on national security grounds. During its 2021 heatwave, Iran cut electricity exports to neighboring Iraq as its grid came under extreme stress. These climate-driven trade restrictions can raise geopolitical tensions and directly impact the accessibility of utility markets.

Governments are also increasingly protective of critical resources as supply chains come under strain amid the global energy transition. Countries like the Democratic Republic of Congo (DRC) and China have tightened export conditions for cobalt and rare earths, respectively, to capture more value domestically. Indonesia has progressively banned exports of unprocessed minerals and is leveraging its nickel resources for its domestic electric vehicle industry. Consequently, companies dependent on international supply chains for key inputs should anticipate further export restrictions and geopolitical bottlenecks that could delay projects and drive up costs.

On a broader scale, climate change is driving great power rivalries in emerging renewable technologies, with major players such as the US, EU, and China competing to secure strategic advantages. Developing countries seeking related investments face a complex dilemma shaped by domestic priorities, geopolitical pressures, and competing policy incentives, such as favorable financing or adherence to specified standards. Organizations operating in these markets will face increasingly turbulent and polarized regulatory conditions.

Social unrest can erupt when extreme weather disrupts basic needs, impacting public sentiment and operational stability, particularly in the event of curfews, strikes, or physical damage to assets. Power blackouts or fuel shortages in many developing countries can quickly trigger street demonstrations and civil disorder. For example, in the 2024 heatwave in Pakistan, temperatures rose above 50 C (122 F), leading to surging electricity demand and prolonged power outages. This triggered widespread protests across multiple cities. Similarly, a simultaneous extreme heat and drought event in 2021 sparked protests in Iran and Iraq over water shortages and blackouts.

Utilities and infrastructure providers are often in the spotlight during such crises, and those perceived as “brown” energy suppliers face a higher likelihood of political backlash. Governments may also accuse independent power producers of hiking electricity prices during a heatwave or infrastructure providers for local resource issues, prompting the imposition of punitive measures. The 2022 global energy crunch, partly driven by the Russia-Ukraine conflict and Europe’s drought-induced hydropower shortfall, led to record Liquefied Natural Gas (LNG) prices that forced the UK to implement a windfall tax to cap consumer energy prices. As climate events strain infrastructure and force rapid policy interventions, companies must prepare for similar emergency price caps and/or mandatory run orders, which can further complicate business operations. 

Alongside investing in resilience measures and engaging with government and stakeholders, best practices across the industry include embedding physical climate risk scenarios into enterprise risk management. Companies can forecast various climate scenarios, such as flood, drought, and storm probabilities, to assess vulnerabilities across their businesses, supply chain, workforce, and regulatory environments. These assessments should regularly inform contingency plans, such as securing alternative fuel suppliers, arranging insurance coverage, or negotiating contractual protections in power purchase agreements for force majeure events.

Another consideration involves enhancing the monitoring of climate risk indicators in key markets by tracking relevant metrics like reservoir levels, storm alerts, and social media sentiment to stay ahead of emerging weather events. Companies can then proactively activate crisis management and continuity plans ahead of anticipated climate crises. Early actions could include temporarily increasing output from unaffected plants to compensate for disruptions, pausing nonessential maintenance, or advocating for government relief measures. By acting preemptively, utility firms can mitigate climate-induced operational disruptions and the likelihood of disproportionate regulatory measures.

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