A New Year’s Resolution: Utilities Can Reap the Rewards of Resilience

Extreme weather events are occurring more frequently and with greater severity across the U.S., from scorching heat in many areas to major hurricanes battering coastal regions. Throughout the U.S., utilities must adapt to a changing climate with an ever-increasing need to harden infrastructure to mitigate the damage from catastrophic weather events.

Utilities in states with exceptionally high exposure, such as California (wildfires) and Florida (tropical storms and hurricanes), are investing billions of dollars to adapt and protect their customers from these extremes. Most utilities, however, whose historic exposure has not yet necessitated a transformational level of resilience investment, are still grappling with how to assess extreme weather’s risk to their assets.

Utilities are ultimately constrained by customer affordability and resources to invest in hardening their network. The combination of growing resilience risk and cost constraints calls for optimization. In order to optimally deploy capital and operations and maintenance (O&M), utilities must forecast resilience risk in dollars at the asset level. It is this forecasted financial impact that is explicitly linked to climate science-backed forecasts that substantiate resilience investments to the regulator, while giving utilities the confidence they are buying down the most risk possible.

Extreme Weather—No Longer a Matter of ‘If,’ but ‘When’

Climate-related disasters have increased globally by 83%—from 3,656 events during the 1980–1999 period to 6,681 events during the 2000–2019 period, according to a report in Yale Environment 360. Superstorm Sandy was one of the most catastrophic storms to hit the East Coast, decimating parts of New York and New Jersey after it made landfall in October 2012. Roughly 8.5 million people lost power across 21 states, including New York, which suffered an estimated $19 billion in damages as subways and highway tunnels were flooded with water. Thousands of utility poles had to be replaced in New York alone as 1.9 million homes and businesses remained without power for up to a month after the storm made landfall.

Superstorm Sandy exposed weaknesses within New York’s infrastructure, which led state officials as well as utilities to take a more proactive approach to prevent this scale of destruction from happening again. Consolidated Edison (ConEd) is one of the largest energy companies in the U.S., servicing millions of New Yorkers. Since 2012, the utility has spent more than $1 billion on storm hardening, including the installation of 100 miles of new cable, 4,000 poles, and 1,000 switches. Under New York Senate Bill S7802, which became effective in 2021, electric utilities are required to submit climate resilience plans and provide regular compliance reports. According to ConEd’s 2023 Climate Change Vulnerability Study Summary, compound and consecutive extreme events are expected to increase in frequency and intensity over the next 25-plus years, making efforts to upgrade New York’s infrastructure and strengthen the resilience of electric utility assets to climate change impacts even more vital.

In February 2021, Texas suffered catastrophic blackouts and below-freezing temperatures as the costliest winter storm event in the U.S. gripped several states. Data showed roughly 4 million people in Texas lost electricity at some point during the storm, for an average of 42 hours. After the incident, Texas lawmakers passed energy grid legislation to prevent future electricity blackouts, requiring power companies to upgrade their plants to better withstand more extreme weather. More and more states will follow suit and adapt new policies aimed at future-proofing infrastructure as extreme weather events become even more common throughout the U.S. The hope is that by proactively forecasting resilience risk, utilities don’t have to wait for the once-in-a-century extreme weather event to serve as a catalyst for change.

Infrastructure Resiliency Reflects Historic Exposure

While Texas and New York have only recently passed legislation to protect their infrastructure against major weather events, some states have been investing money, time, and resources in preparedness measures for years. Within the past five years, Florida has experienced three Category 3+ hurricanes, including Hurricane Ian in September 2022, which was the fourth-most-powerful storm to ever hit Florida.

1. Utilities in areas prone to wildfires know they need disaster response plans, which include not only restoring power after an event, but planning how to reduce their risk from future incidents. Here utility workers survey damage from the 2018 Delta Fire in California. Courtesy: Baringa/U.S. Forest Service

Wildfires (Figure 1), exacerbated by climate change, are wreaking a heavy toll on the U.S. economy. According to a recent report by the U.S. Joint Economic Committee, wildfires cost the U.S. economy between $394 billion and $893 billion annually. Utilities on the West Coast are spending billions of dollars to mitigate wildfire risk. These wildfires often cause a level of damage that is higher than the market cap of the utility itself. In 2020, California suffered its largest wildfire season ever as 4.2 million acres burned across the state, resulting in more than $19 billion in economic losses and roughly $2 billion in firefighting costs.

2. Hurricane Ian, shown here in a view from the International Space Station on Sept. 26, 2022, intensified rapidly before striking Florida’s Gulf Coast. Scientists have said the changing climate, which is pushing ocean temperatures higher, creates conditions under which storms will grow more quickly into major hurricanes. Source: NASA   

Aggressive resilience investments from utilities in both Florida and California have massively reduced outages and ignitions respectively, demonstrating the importance of maintaining a resilient infrastructure as major climate events increase further. Florida Power & Light reported zero transmission structure failures during Hurricane Ian (Figure 2), despite being exposed to 155-mph winds. Southern California Edison (SCE) notes, “We’ve reduced our risk of major fires from SCE’s equipment by 85% just since 2018.”

Wildfire and hurricane-free states, however, are not immune to the effects of extreme weather. In the Southwest, recent flash floods have caused massive economic damage to Las Vegas. Water scarcity is a growing issue, especially for thermal plants that use water for cooling. In the Pacific Northwest, statistically impossible heat waves caused a massive strain on the grid as demand spiked while supply dropped from thermal plants derating.

In today’s changing climate, the absence of a catastrophic event historically is no longer sufficient to assess future risk. Increased risk from climate hazards such as flooding, extreme wind, extreme temperatures, and wildfires plague utilities’ ability to maintain reliable service when their customers need it most.

Low-Income Customers Particularly Vulnerable

Economic circumstances mean some customers are increasingly sensitive to rising utility bills. According to the Department of Energy, low-income customers spend on average 8.6% of their income on energy bills, compared to 3% for most users, and are more challenged to recover from sustained outages when they occur. For low-income customers in smaller communities, utilities face optimization challenges, specifically around how to buy down the most amount of risk given what customers can afford. In states like Florida that have experienced massive population growth, utilities are able to socialize the cost of hardening investments over more customers without having to significantly raise rates, but not all states enjoy the same luxury.

Despite being hit by three Category 4 storms or higher over the past decade, not enough has been done to reinforce Louisiana’s power grid. Louisiana also has one of the highest poverty rates in the U.S., according to a May 2023 ranking by U.S. News & World Report, and significant upgrades to the power grid would undoubtedly result in an increase in customers’ bills. In October 2023, the Biden administration announced $3.5 billion in grants aimed at protecting the aging U.S. grid from extreme weather—the largest direct investment to date in the power grid. Louisiana will reportedly receive more than $300 million to harden the electric grid in New Orleans and set up resilience hubs throughout the state where residents will be able to access electricity during outages. The funds also will help offset the cost burden on customers.

How Utilities Can Factor in Climate Risk—and Why It’s Important

Many utilities are challenged to quantify resilience risk and directly link it to asset investment decisions. This requires conversion of downscaled climate forecasts into dollars of risk, giving the utility an addressable baseline against which to substantiate investment that avoids outages. While the annual probability of these extreme events may seem low, utility assets last decades and so the odds of experiencing at least one extreme event over an asset’s useful life can be high. A 50-year lived asset has a 40% chance of experiencing at least one event with a 1% annual likelihood. That lifetime risk grows to 65% when the annual likelihood is 2%.

When it comes to buying down risk, utilities need to assess how the climate will impact an asset over the course of its useful life, which is typically 40 to 50 years. They will be stuck with their design choices for a long time. If a distribution pole in a specific area fails at 100 mph, a utility company needs to forecast the likelihood of the wind exceeding 100 mph in that location over the next 40 to 50 years. Multiplying that by the cost of failure, which could be repairing the pole and the value of lost load to the customer, allows the utility to calculate resilience risk.

With the example of the failed distribution pole, a utility has the option to upgrade the class of the pole, truss it, or underground it—all of which have different costs and mitigate different amounts of risk. Expanding this same logic across all asset types, factoring in all hazards and future weather events allows a utility to construct an optimal portfolio that mitigates resilience risk. Utilities that fail to assess how weather and other factors can impact any given asset over the course of its useful life risk premature replacement, which is costlier to customers and drives up O&M costs.

Despite global efforts to improve the environment, climate change remains a major issue. The rewards of resilience are enjoyed by utilities that are actively assessing the negative impacts of extreme weather. This allows them to build a stronger, more sustainable network that will cost less in the long-term, improve shareholder value, and benefit customers.

Michael Levy is the U.S. Networks lead at Baringa, a consultancy with expertise in power and utilities strategy.

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