Nordic power sector: Beyond transition, preparing for a 2°C reality

Physical climate risks are intensifying across the Nordic power sector, with growing impacts from extreme weather events, hydrological variability and infrastructure stress. These risks are no longer distant threats but material factors that must be integrated into both operational and strategic planning.

As global warming trends point toward a 2°C scenario, the power sector faces a new reality where resilience becomes as critical as decarbonisation. This shift calls for a broader risk framework that complements transition planning with robust adaptation strategies.

From ambition to reality, the warming trajectory

The 1.5°C target remains a cornerstone of international climate policy, but emissions trajectories and policy implementation gaps suggest that this goal is increasingly out of reach. The Intergovernmental Panel on Climate Change (IPCC) and other scientific bodies now indicate that warming closer to 2°C is a plausible outcome, even under optimistic scenarios. For the Nordic region, this means more frequent and intense weather events, altered precipitation patterns and rising sea levels.

This shift from modelled ambition to physical reality challenges the assumptions embedded in many risk models. Infrastructure designed for historical climate conditions may no longer be fit for purpose. Planning based solely on transition scenarios risks underestimating the operational and financial impacts of physical climate change.

Physical risks in production and transmission

In the Nordic power sector, physical risks manifest across both production and transmission systems.

In production, hydropower faces increased variability due to changing snowmelt and rainfall patterns. Thermal power plants may struggle with cooling efficiency during heatwaves. Wind and solar resources are also affected by shifting weather regimes, potentially reducing predictability and reliability.

In transmission, the grid infrastructure is exposed to storms, flooding and coastal erosion. Substations and overhead lines are vulnerable to damage, leading to service interruptions and increased maintenance costs. The interconnected nature of Nordic grids means that disruptions in one area can cascade across borders, amplifying risk.

Integrating physical risk into internal risk oversight

Internal risk oversight frameworks must evolve to reflect the dual nature of climate risk. Traditionally focused on transition risk, these frameworks now need to incorporate physical risk as a core component.

From an impact, risk and opportunity (IRO) perspective, this means assessing: 

I) how physical risks affect asset performance, financial stability and societal obligations, 

R) the probability and severity of climate-related disruptions, including regulatory and reputational dimensions, and 

O) the potential for innovation, resilience and competitive advantage through proactive adaptation.

Companies should conduct scenario analyses that include 2°C and higher warming pathways. These analyses must be localised, reflecting regional climate projections and asset-specific vulnerabilities. Governance structures should ensure that physical risk is addressed at the board level, with cross-functional input from operations, finance and sustainability teams.

Short- to medium-term actions

To mitigate physical risks, Nordic power companies must act decisively in the short to medium term.

Infrastructure resilience is paramount and may include elevating substations, reinforcing transmission corridors and investing in distributed energy systems that reduce reliance on vulnerable nodes. Digital monitoring and predictive maintenance can enhance operational readiness.

Strategic planning must integrate climate adaptation into investment decisions. This involves using climate-adjusted cost-benefit analyses and embedding resilience criteria into procurement and project design.

Organisational capacity is also critical. Companies need to build internal expertise on climate science, risk modelling and adaptation strategies. Collaboration with research institutions and public agencies can accelerate learning and innovation.

Consequences of inaction

Failure to address physical climate risks carries significant consequences.

Financially, companies may face asset write-downs, rising insurance premiums and reduced investor confidence. Operationally, outages and service disruptions can erode customer trust and regulatory goodwill. Strategically, lagging on resilience may result in missed opportunities for innovation and market leadership.

Inaction also undermines the credibility of climate commitments. Stakeholders increasingly expect companies to demonstrate not only transition readiness but also physical resilience. Those that fail to do so risk being seen as unprepared and reactive.

Investing in adaptation, not just transition

As a financial institution committed to supporting the energy transition and climate resilience, we expect companies in the Nordic power sector to demonstrate a proactive approach to physical climate risk. This includes integrating climate adaptation into capital planning, asset management and governance structures.

We look for:

• robust scenario analysis, including warming pathways beyond 1.5°C
• clear strategies for infrastructure resilience and operational continuity
• transparent reporting aligned with evolving regulatory frameworks
• innovation in climate adaptation technologies and business models

Investments that fail to account for physical risks are increasingly exposed to downside volatility and reputational risk. Conversely, companies that embed resilience into their core strategy are better positioned to attract long-term capital and deliver sustainable value.

We encourage sector participants to engage openly on these issues. Collaboration across utilities, regulators and financial institutions will be essential to building a power system that is not only low carbon but also climate-resilient.

Physical climate risks are no longer distant threats, they are present challenges that require immediate attention. For example, Nordic insurance companies have reported a sharp increase in payouts following extreme weather events in recent years, and several power utilities have faced substantial costs due to storm damage to grid infrastructure and flooding of power stations. After an extreme weather event (a storm named Hans) in 2023, a survey carried out by the Confederation of Norwegian Enterprise (NHO) showed that about one-fifth of their members expected losses exceeding 20% of their annual revenue, and that nearly one-third had suffered losses that were not covered by insurance.

As physical climate risks intensify, Nordic power companies must embed resilience and adaptation into every aspect of their strategy alongside decarbonisation. By proactively addressing both transition and physical risks, the sector can safeguard reliability, protect value and demonstrate true climate leadership in a changing world. Planning for 2°C is not a retreat from ambition, it is a recognition of reality and a commitment to responsible leadership.