In the last decade, 10 out of 10 of the most severe outage events, impacting 1 to 6 million customers, were caused by extreme weather. These events are not isolated anomalies; they represent a new norm. We’ve seen winter storms knock out power across entire cities, wildfires force the preemptive shutdown of transmission lines, and hurricanes leave behind billions in damages. The grid is now expected to withstand not only rising demand, but increasingly volatile and destructive conditions.
For 20 years, there was little to no change in annual electricity demand. But that has begun to change; both the boom in data centers (powering artificial intelligence) and electrification are driving a significant increase in demand. Today, forecasts are projecting between 3% and 5% load growth nation-wide and upwards of 9% in some areas of the country.
Because the grid requires real-time matching of supply and demand, any increase in demand requires both substantial investment in new generation, and upgrading the transmission and distribution network to deliver more electricity. But while capacity ensures the grid can meet demand, resilience ensures it can maintain service during and after extreme weather conditions. In other words, capacity investments keep the lights on under normal conditions, but they don’t guarantee that power stays on when disaster strikes.
Nonetheless, utilities are required to prioritize near-term capacity issues because of their obligation to serve customers. Even though these investments are non-discretionary, they can end up deferring critical resilience projects to bolster against high-consequence, low-frequency extreme weather events such as a hurricane or winter storm.
But when these outages do occur, they carry high societal costs. Loss of power for a hospital or nursing home isn’t just an inconvenience; it can be life-threatening. Businesses lose revenue, households lose access to critical services, and vulnerable populations suffer disproportionate harm.
However, it can be challenging to reflect these impacts in traditional planning models because of their probabilistic and stochastic nature. Outage risk from extreme weather tends to be highly concentrated in these tail risk events that are only expected to occur once every couple of decades, or even once per century.
What’s often missing is a full accounting of the value the grid provides, not just in reliably delivering electricity during normal conditions, but in preventing costly and disruptive outages when extreme events hit. Without factoring in the cost of those outages from tail risk events, utilities risk underinvesting in the very upgrades that would keep the grid running when it matters most.
Embedding weather risk in utility investment strategies
Embedding weather risk requires a shift in how utilities assess value. Instead of solely evaluating infrastructure based on historical load or failure rates, utilities need to include projections that capture the probability and consequence of climate-driven events. This allows for a more proactive approach, one that identifies which assets are most vulnerable and prioritizes upgrades accordingly while future proofing the assets against extreme weather expected over their useful lives.
Often utilities will conduct simulations of these stress cases, but a simulation is not a forecast of what is expected to happen — a “what-if” simulation. It can be challenging to justify spend to regulators based on simulations alone.
As a result, utilities should revisit traditional cost-benefit analyses. A pole upgrade to a stronger class that once looked marginally more expensive on paper may now represent a high-value investment when the risk of wildfire or storms are fully accounted for. Prematurely replacing the same asset that was not appropriately designed for the future is extremely costly to customers.
Utility assets last 50-plus years and so they are stuck with the design choices they make for decades. As a result, they should be taking a multi-decadal view on future risk as well. After all, adaptation is a fraction of the cost of restoration.
Integrated system planning: A holistic approach
Historically, reliability and capacity planning have been handled separately. But as extreme weather grows more frequent and demand continues to rise, these investment priorities are now in direct competition for limited resources, forcing harder tradeoffs than ever before.
Imagine two circuits: circuit A and circuit B. Circuit A serves 10 hospitals, has sufficient capacity, but is nearing the end of its useful life and is therefore more sensitive to extreme weather events like storms. Circuit A has a very high expected cost of failure and therefore a very high “net present value” (or NPV) when replacing the assets to avoid outages to the hospitals.
Circuit B serves 100 homes and is relatively new, but all the homes just bought electric vehicles, so the circuit’s capacity will need to be upgraded to avoid exceeding it with the new demand for charging. The NPV of addressing the capacity issue on Circuit B is not nearly as high as Circuit A because the societal cost of that downtime is much lower. Addressing capacity issues, however, is non-discretionary. With only enough money for one circuit, the utility must invest in the circuit serving more customers — meaning Circuit B over Circuit A.
What’s often missed is the opportunity cost of failing to explore non-traditional investment alternatives that may defer the capacity violation long enough to free up dollars to invest in Circuit A instead. For example, instead of upgrading Circuit B, the utility could put the customers on a managed charging program where they shift customers’ charging behavior to no longer be coincident with the circuit’s peak thereby deferring the capacity violation and the investment.
There is a massive opportunity cost of deferring reliability and resilience investments to address capacity issues. To fully understand that opportunity cost, utilities must price the benefits of avoided outages in dollars from all types of asset investments — including forecasted extreme weather risk.
Only then can they optimize where and when investments are made against the constraints of customer affordability, with the potential to ultimately reduce costs for customers long-term, and improve reliability and resilience.
Michael Levy is a partner and the U.S. utilities lead at Baringa. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.
