As climate change risk rises, economies are adapting to curb its harmful effects. What cities are doing to mitigate these risks is coming into focus. Densely populated with people, buildings and transportation systems, urban areas demand higher quantities of energy and water. Because of this, reducing the environmental impact of these communities is fast becoming an international priority. After considerable progress in Europe, in the United States, technological innovation and regulatory developments are laying the groundwork for one possible solution: creating a smart city.
The smart city of the future occurs at the intersection of ongoing advancements in sustainable power generation, energy efficiency, non-polluting vehicles and changes in local and regional electricity grids — all combined for a more climate-friendly metropolis.
The environmental and social benefits anticipated as a result of overhauling urban energy production and consumption are substantial. Low-carbon transportation, for example, not only reduces day-to-day pollution —improving citizens’ health — it also can help to mitigate the detrimental effects of climate change in the longer term. What remains to be answered, however, is how smart cities will be funded and the impact disruptive technologies could have on the credit quality of the various entities likely to take part in backing this sweeping transition.
Disrupting the status quo
The financial undertaking involved in creating smart cities will be no small task. Whether undertaken by a public sponsor, a private entity or under a public-private partnership scheme, we expect that the projects to build out smart cities largely will be funded by debt. That said, debt financing and an accumulation of debt also could lead to weaker credit quality among corporate and public entities, and utilities if a large time lag emerges between the spending and the related benefits. Substantial capital spending also can affect operating efficiency, making the rated entity’s cash flows more volatile as revenues become less predictable — a consequence, potentially, of jurisdictions with more regulatory uncertainty.
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