Introduction & Problem Assessment
The cost of extreme weather is high, and in light of the frequent and intense extreme weather and climate-related event, the cost to life and property of extreme weather events has increased in recent years. For utility companies, the results have been grave; despite demand for energy on the rise, there is lower efficiency, higher expenses and more power outages. As per the Fourth National Climate Assessment (released in late 2018), “Infrastructure currently designed for historical climate conditions is more vulnerable to future weather extremes and climate change.”1
CalFire (California Dept of Forestry and Fire Protection) issued findings on May 15, saying that the Camp Fire, which burned 153,336 acres and killed 85 people in late 2018 was due, at least in part, by Pacific Gas & Electric’s transmission lines2. Not a surprise, PG&E concluded this themselves a few months ago. PG&E declared bankruptcy due to wildfire liabilities and CPUC (CA regulatory agency that deals with utilities) is considering breaking it up.
It is not just wildfires: hurricanes, tornados, snowmaggedons, heat waves, etc. The frequency and intensities of serious Atlantic hurricanes such as hurricane Irma, for example, has risen.
As predicted, if climate change is to result in a significant rise in sea-levels, this could be detrimental to utility companies. Many of the 8,625 power plants in USA were deliberately sited near the shore in order to have access to water. Consequently, when hurricanes strike, power plants already face significant flooding damage. During hurricane Sandy and Irene, eight power plants had to shut down or reduce service because of flooding. Similarly, during Hurricane Harvey in Houston, wind and flooding cause over 6,200 distribution poles and 850 transmission structures to be knocked down.
Consequences of climate change on utility companies; what the future looks like if nothing is done(Not serving a large population etc)
McKinsey’s Hauke Engel, Per-Anders Enkvist, and Kimberley Henderson outline 6 broad types of risks that confront businesses with respect to climate change that can be split into two, connected groups: value-chain risks (physical, prices, products) and external stakeholder risks (ratings, reputation, and regulation). They argue that utilities are vulnerable to price, physical, product, and regulatory risks–disproportionately affecting their value chain as they are increasingly exposed to extreme weather events.
For example, the Fourth National Climate Assessment, focused on the US and released in 2018, notes that climate change–and the extreme weather events that result–puts utilities in a precarious position balancing higher costs, lower efficiency, and more power outages with increased demand.
Floods threaten energy infrastructure like powerline foundations, pipeline crossings, energy production facilities, and fuel transportation infrastructure. Drought decreases the water supply used to cool plants and to refine fuel. Rising temperature increases demand for cooling, putting pressure on production and distribution networks that were designed for yesteryear’s weather conditions. As the frequency and intensity of these events increases, utilities must determine how to pay the costs to repair damages upgrade capital-intensive infrastructure while serving end consumers with clean, affordable, and reliable energy.
Pacific Gas and Electric (PG&E), northern California’s investor-owned electric and gas utility serves as an example of the challenges that utilities face with climate change. In 2018, more than 1.8 million acres burned in wildfires across the state, most notoriously in the Camp Fire previously mentioned which, tragically, is unlikely to be alone in size and destruction.
PG&E is increasingly exposed to wildfire risk since they can be caused or exacerbated by power lines coming into contact with dry, combustible vegetation. The utility has incurred over $30 billion USD in liabilities for wildfire-related damages over the last several years, filed for Chapter 11 bankruptcy in January of 2019, and questions abound as to what comes next in terms of liability, rebuilding infrastructure, recouping costs, and serving customers.
In California, inverse condemnation allows utilities to be held liable for fire damages, even if there was no negligence and all safety rules are followed. It is possible for the utilities to file with the CPUC (California’s utility-regulating body) to retroactively recoup some of the costs, but it begs the question of who should pay (ratepayers? taxpayers?) and which customers the utility can afford to serve. For example, in more remote regions of the state, PG&E only provides electric services since the infrastructure cost of installing gas would be too high. If these areas also overlap with high-fire risk areas, could the utility opt not to serve those customers at all?
Ideas to improve the situation
Utilities can adapt their assets and businessl models to be more resilient to climate change, such as reallocating asset portfolio, strengthening the grid, exploring investments in batteries and macrogrids, working on environmental initiatives, working with new partners (i.e. public-private partnerships, reinsurers), de-energizing, or investing in new technologies.
The immediate response may be to strengthen existing assets. For example, New Orleans Entergy has invested USD1 billion to strengthen its transmission and distribution infrastructure in preparation for extreme events as Hurricane Katrina. Although long-term benefits and costs are too early to tell, these responses give business confidence boost in anticipation of extreme weather.
Another possible way is to diversify risk exposure and build real options, such as by installing smaller-scale facilities or investing in microgrids. For example, utilities can invest in alternative storage methods such as battery to backup in the case of spiking demand.
Moreover, active management of external environment to reduce climate change’s negative impacts may also provide additional protection for the business, such as by supporting initiatives to protect costal wetlands.
De-energization (or cutting power, to read between the lines) during high-risk periods may also act as a measure of last resort. For example, the California Public Utilities Commission (CPUC) is examining the feasibility of the practice of proactively de-energizing power lines during high-risk conditions that could spark wildfires. The plan includes real-time monitoring, enhanced vegetation management, re-inspections of critical electric infrastructure and the potential for proactively shutting down power based on extreme conditions. However, de-energization will also create hardships and risks to communities affected, and may bring unintended consequences and vulnerabilities to those without power.
Some other ways to respond to climate change requires transformation of utilities’ business model, such as divesting from transmission assets or separating transmission from distribution grid. Currently, utilities make a large profit from transmission and build up their risks over time in some large transmission projects. By divesting transmission to a private company or the state, utilities can reduce their risk exposure and focus on innovations especially on distribution.
Also, by applying emerging technologies such as AI and data analytics, utilities can better model the external threats to business and make smart decisions based on predictive instances. In the case of wildfire risks, utilities may use drone-mounted LiDAR technology to assess electric systems, which may be more effective and cost-efficient than tree-trimming and vegetation management. However, the current cost-of-service business model for most utilities may hinder the adoption rate of new technologies. Private players may need to work with government and policy makers to ensure right incentives and co-create new technologies for different user cases in response to the climate change.
Sources:
1 https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/why-and-how-utilities-should-start-to-manage-climate-change-risk
2 https://www.utilitydive.com/news/california-concludes-pge-responsible-for-states-deadliest-wildire/554927/
3 https://www.mckinsey.com/business-functions/sustainability/our-insights/how-companies-can-adapt-to-climate-change
4 https://www.utilitydive.com/news/how-to-protect-california-ratepayers-expand-clean-local-energy-and-avoid-b/554564/
5 https://www.utilitydive.com/news/legislation-to-shield-pge-from-fire-liability-bankruptcy-is-not-an-optio/542931/
6 https://www.utilitydive.com/news/as-california-considers-breaking-up-pge-utility-open-to-a-range-of-solut/545011/
7 https://www.utilitydive.com/news/california-sees-rule-potential-to-de-energize-power-lines-in-wildfire-condi/543967/
8 https://www.utilitydive.com/news/how-to-protect-california-ratepayers-expand-clean-local-energy-and-avoid-b/554564/
9 https://www.utilitydive.com/news/california-concludes-pge-responsible-for-states-deadliest-wildire/554927/
10 https://www.utilitydive.com/news/averting-disasters-with-innovation-utilities-pressing-need-for-predictive/554476/
Created by: EA Rachel Zhu, Sanjana Sud, Ashley Wiseman
Really interesting point of view of the impact of Climate Change on Utilities. Definitely, there is a large infrastructure that allows energy to flow and that can suffer from these extreme events. Any energy disruption can have huge impact on the GDP/economy of a country.
Normally, the main impact analyzed is the Regulation, and how they need to transit from conventional electricity generation towards renewable technologies. Furthermore, adding to this, they are also reinventing the consumers to “prosumers”, involving clients in the decision making and allowing them to reduce their carbon footprint. This is done by allowing decentralized generation (e.g., rooftop solar PV), giving them real-time information about their consumption so they can consume more when renewable technologies are functioning or helping them create smart homes where consumption is more efficient (e.g., heating system that is adapted to customer’s patterns/way of living)
Very interesting blog! I was aware that work for power delivery services was on the rise in the US at least, for example with transmission line design, but I had initially assumed this was due to helping utilities meet EPA regulations through environmental retrofits of their existing physical power plants, and not due to helping utilities address the direct effects of climate change already like flooding. Interesting to see another perspective.