How wildfires increase financial risk for utility companies

Hello and welcome back to Energy Source, coming to you from New York.

All eyes are on Washington this morning as Donald Trump’s picks to fulfil his pro-fossil fuel agenda face confirmation hearings in the US Senate. Today’s hearings include former NY congressman Lee Zeldin, the president-elect’s choice to lead the Environmental Protection Agency, and North Dakota governor Doug Burgum, Trump’s “energy tsar” tapped to lead the Department of Interior.

Yesterday, Senate Democrats pressed Chris Wright, the shale executive and Trump’s energy department secretary nominee, on his stance on climate change, which he acknowledged was driven by the burning of hydrocarbons.

My Financial Times colleague Malcolm Moore has reported on the trouble facing BP’s chief executive Murray Auchincloss, who has come under pressure for the company’s vague strategy, high debt and disappointing quarterly results. Since he formally took charge a year ago, BP’s shares have dropped more than 7 per cent over the past 12 months, while rivals ExxonMobil, Shell and Chevron have all risen by 8 per cent or more. An investor told Moore: “The market is telling us something has gone badly wrong at BP.”

In today’s Energy Source we look at the mounting financial risks facing utility companies in an era of more frequent and extreme natural disasters from climate change. Shares of three publicly traded utility companies in California have sold off as investors react to potential liability they could face in the aftermath of the Los Angeles wildfires. — Alexandra

Wildfires increase the risk for utility companies

As wildfires continue to devastate southern California, some victims have already started suing their utilities, shining a spotlight on the mounting financial risks facing the sector in an era of more frequent and extreme blazes from climate change. 

While the cause of the fires is still under investigation, multiple lawsuits were filed against utility Southern California Edison alleging it had failed to properly shut off power lines that the plaintiffs claimed caused the outbreak of the Eaton fire, the second-largest ongoing blaze. 

Shares of the three largest publicly traded utility companies in California —Edison International, Sempra and Pacific Gas and Electric (PG&E) — sold off as investors reacted to the potential liability utility companies face in the aftermath of a wildfire.

Edison International, the parent of Southern California Edison, has lost 23 per cent of its market capitalisation since the start of the year. PG&E and Sempra are down 15.7 per cent and 5.4 per cent, respectively, this year.

The victims of the Eaton fire have already invoked California’s law of inverse condemnation liability, a legal doctrine that could result in Southern California Edison being liable for damages if the blaze started from its equipment, regardless of whether the utility behaved negligently.

The same doctrine was used against PG&E, forcing the company to file for bankruptcy protection in 2019 after it was found liable for billions of dollars in damages from wildfires in northern California, including 2018’s Camp fire, which killed 85 people. 

As wildfires in western states now occur year round and arise in places that traditionally don’t experience large blazes, utility companies are facing rising risks of costly litigation and damages to infrastructure that threaten their bottom line and investability. 

Since 2019, downgrades on North American utilities from S&P Global Ratings have surpassed upgrades. Between 2020-24, the firm downgraded 128 utilities, up 21 per cent from the previous five-year period, according to a report released this week.

“The potential liability that electric companies face when there are questions about the cause of these fires do have an impact on our access to capital and ultimately do make it harder to invest in resilience, grid modernisation and a clean electricity fleet,” said Scott Aaronson, vice-president of security and preparedness at the Edison Electric Institute, a utility trade group

Warren Buffett has cast doubt on the business of utilities, as Berkshire Hathaway’s largest electric utility, PacifiCorp, faces billions of dollars in damages after being accused of contributing to wildfires in Oregon and California, warning of a “spectre of zero profitability or even bankruptcy” across the utility industry in his annual letter to shareholders last year.

Even if Edison International is found liable for the Eaton fire, it likely won’t suffer the same fate as PG&E because of its participation in California’s $21bn wildfire fund that was established in 2019. .

A Southern California Edison spokesperson said the cause of the fire continued to be under investigation but added: “Preliminary analysis by SCE of electric circuit information for all of the energised lines going through the area for 12 hours prior to the reported start time of the fire show that there were no interruptions, operations or electrical anomalies until more than an hour after the reported start time.”

Utility companies are responsible for fewer wildfires than those started by human activity, but still tend to be more destructive. According to researchers at University of California, Berkeley, electricity infrastructure caused 8 per cent of wildfires in California but 60 per cent of structure losses from 2013 to 2023. 

Many utility companies have already started investing in wildfire mitigation strategies, particularly the capital-intensive undergrounding of power lines. The same UC Berkeley researchers have found that structure losses from power sector-caused wildfires in California decreased 90 per cent in the past five years.

“All of the utility companies are more cognisant of the risks, and depending upon the individual company, some of them are doing a better job than others at eliminating that risk,” said Mikal Watts, a lawyer who has represented wildfire victims in California and Hawaii. “If they don’t eliminate the risk, I hate to say [they’re] playing with fire.”

The UC Berkeley team found that investments in wildfire mitigation made by California’s three largest investor-owned utilities would soon reach $9bn annually. Much of that cost has been passed down to consumers in California.

But wildfire protection can only go so far, warned Meredith Fowlie, director at the UC Berkeley Energy Institute. 

“You can’t stop wildfires in California . . . We have to live with some level of wildfire risk unless we want to cut every tree down,” she said. “We should put some lines into the ground in high-risk areas, but there are going to be other areas where it’s going to cost a lot and the risk reduction is not huge.” (Alexandra White)

Power Points

• Saudi Aramco is expanding its investments in lithium production to build a supply chain for the metal that is vital for batteries and electric cars.

• The cost of building the Sizewell C nuclear power station in Suffolk, England, is forecast to reach close to £40bn.

• Canada’s minister of energy and natural resources has called for North American allies to build an energy and minerals security partnership as the US neighbour faces potential export tariffs that could affect its oil industry.

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at [email protected] and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.