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Consequences of the UK facing longer severe droughts

Drought severity is an increasingly problematic feature of the UK's climate as global temperatures rise. 2022 was the 6th driest summer on record for the UK since 1836, with four of the five warmest summers on record occurring since 2003 with most of England remaining in droughts this year, as shown in figure 1 below of droughts across Europe in August 2022 with parts of the UK on high alert.

This climate shift has been identified with the frequency of predominantly summer-type weather patterns extending into the beginning of Autumn and is likely to result in a substantial reduction in water scarcity. Referred to as emissions pathways, the strength of the shift in weather patterns is dependent on the rate of humans influencing greenhouse gas emissions (GHGs) emitted. The combination of warmer and drier autumns could rapidly increase the UK's risk of droughts and dry conditions. "With further global warming, we can expect stronger and more frequent summer droughts in the future," said Dominik Schumacher, a co-author from the Institute for Atmospheric and Climate Science in Switzerland.

Figure 1: Combined Drought Indicator (CDI v2.2) - beginning of August 2022
Figure 1: Combined Drought Indicator (CDI v2.2) - beginning of August 2022

The UK has experienced three major droughts since 2000, with England's reservoirs reaching their lowest level since 1995. It is a threat that has occurred faster than anticipated and continues to do so. Leakage rates are high; maintenance is slow; weak regulation and infrastructure designed for a different climate hinder the water management system of England and Wales due to a small number of private water companies that control the market, exacerbating the functionality of the UK's entire water sector to adapt to climate change. If action isn't acted upon in around 25 years, England will be unable to supply its water needs. James Bevan  of the Environment Agency said: "A complete gear change is needed [in the UK] for how water companies and all water users, from farmers to households, think about how they use water and understand its fundamental value."

This 'gear change' to measure water scarcity risk must be applied to several industries, including energy, transport, and heavy industries, requiring large volumes of water to avoid costly operational disruption and knock-on effects for banks, insurers and investors. Otherwise, we will align with increasing drought cost projections across the EU and the UK that currently cost around €9 billion annually and are projected to rise to more than €65 billion per year.

Keeping the Lights on

Droughts are putting enormous strains on energy power sources of hydropower, nuclear and solar renewable energy power that rely on water. This is especially the case for hydropower’s performance, with water shortages reducing the ability of facilities to produce electricity, becoming a challenge for all of Europe to reduce or even suspend operations that are highlighted in figure 2 below of GWh hydropower generation limitations between 2021 and 2022, there has only been an increase by 3,331 GWh. Despite the UK delivering a small amount of hydropower energy at around 2% of total power generation (4,700 MW), it dramatically experiences the knock-on effects of hydropower electricity shortages in mainland Europe. The energy shortage in Europe, invigorated by water shortages, directly impacts the UK as it imports over 6GW of electricity by cables from Belgium, France, Netherlands and Norway. The energy shortages increase the prices of other energy sources, including imported electricity.

Figure 2: Europe Hydro Power Generation (2018 - 2022E, GWh)
Figure 2: Europe Hydro Power Generation (2018 - 2022E, GWh). Source: GlobalData, August 2022.

As the strains of climate change continue to impact water availability, hydropower will need to adapt to harsher climates that could otherwise face risks of safety, technical and financial performance. Matteo Bianciotto, a senior policy manager at the International Hydropower Association (IHA), expects "hydropower to play different roles [in the future]" with an ability for plants to build their resilience to climate change. European hydropower plants are being developed to operate with greater water capacities. Plant operators could retrofit older plants to adapt to climate change conditions and retrofit existing dams for pumped storage.

Hydropower remains the largest renewable electricity technology by capacity and generation. Still, as rivers and reservoirs dry up, it's becoming an increasing challenge for hydropower facilities to generate electricity, with current trends not sufficient to place it under the Net Zero targets due to water availability disruptions and an ageing hydropower plant facilities with the need for climate risks to be accounted for how plants operate and their ability to produce electricity. As we develop other renewable energy sources that aim to become less dependent on water for energy production, the interconnectedness of the 'energy-water nexus' with energy supplies relying on water and water supplies relying on energy will remain. Thus, energy-related entities must account for climate risks of droughts in their water management plans to adapt effectively to the potential impacts of droughts and prevent decreased energy production.

The Hit on Industries

Years of optimising supply chains to minimise costs and use of assets have reduced businesses’ ability to absorb climate risks, especially droughts, that may not fully understand their reliance on water supply for their activities. Prolonged dry conditions and drought impact water availability and how it is used for industrial purposes that can disrupt and halt business operations, raise the cost of raw materials, production and disruption to supply chains. Two-thirds of all businesses face substantial water risk to their direct operations. Within their value chain, up to $301 billion of business value is at risk unless companies improve and innovate around water use, while the cost of response is estimated at US$55 billion.

For water intense industrial manufacturers, subsectors such as chemicals and chemical products, paper, metals, beverages and food products that require high volumes of water are more vulnerable to water shortages. Despite the high amount of businesses vulnerable to drought risk, there is no specific target or plan to reduce the overall water used by businesses in England. UK-based businesses depend on several products from water-stressed regions, such as cotton, tea, rice and many goods manufactured worldwide. Water shortages in businesses create a knock-on effect on the insurance industry. Increased claims for property damage and business interruption from water risk are realistic outcomes. In light of this, assessing drought risks in light of climate change is gaining more importance for the insurance sector, even if on a lower level when compared to flood risks or windstorms. 

Suzanne Scatliffe, global director of corporate social responsibility at AXA XL, stated, "When we’re thinking about our clients across industries, nobody is completely untouched from the issue of water scarcity” and “in almost all sectors, the cost of action is far less than the cost of inaction when it comes to being prepared for water-related risk.”

Overcoming Water Scarcity Risks

Heading into 2023, drought risk will increasingly continue. After record low rainfalls, droughts are expected beyond spring 2023, putting energy, insurance and heavy industry across the UK at risk, with companies needing to assure their investors that business operations will continue to be profitable. Firms must implement drought contingency strategies, such as increasing on-site water efficiency, to build resilience against the physical impacts of climate change.

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