As extreme weather spurs billions in utility resilience spending, regulators struggle to value investments
The clarity of hindsight has shown policymakers the value of investments against a pandemic or a Fukushima, but debates continue over extreme weather preparedness.
Hurricane flooding in the East and South and wildfire mayhem in the West have taught electric utilities they must invest billions in resilience, but it is still not clear which investments are the best use of ratepayers' money.
"Measuring how well utilities are keeping the lights on and getting them back on when they go off is easier than the intellectual gymnastics of measuring the value of resilience for individual solutions," former Illinois Commerce Commission Chair Brien Sheahan told Utility Dive. "Policymakers and regulators need to be more proactive, but the challenge is still the cost against an event's likelihood."
Utility proposals to regulators for resilience spending are growing, though their precise value and how they differ from traditional reliability investments is unclear, according to regulatory proceeding stakeholders. To settle debates about utility plans against specific threats, national lab researchers are working on a "value of resilience" metric that some say is urgently needed and others say is premature.
Defining resilience vs. reliability
"Resilience is mentioned more and more in utilities' grid modernization proposals, but it often gets conflated with reliability," Autumn Proudlove, senior manager of policy research for the North Carolina Clean Energy Technology Center (NCCETC), told Utility Dive.
Regulators tend to make the same mistake, often making "little or no distinction" between proposals for reliability and resilience, a 2017 Department of Energy (DOE) survey reported.
"The term 'resilience' means the ability to prepare for and adapt to changing conditions and withstand and recover rapidly from disruptions," according to the Obama administration's Presidential Policy Directive 21.
Reliability, on the other hand, is "maintaining the delivery of electric power" when there is "routine uncertainty in operating conditions," according to the DOE's Grid Modernization Laboratory Consortium.
"There is definitely a level of resilience investment many utilities are unaware of that would balance the cost with the losses if their assets went offline."
Communications Director, 427
But "resilience is closely related to reliability," the National Association of Regulatory Utility Commissioners (NARUC) acknowledged. A major distinction is that reliability is about preventing disruptions that are "more common, local, and smaller," and resilience "addresses high-impact events" that "can be geographically and temporally widespread," NARUC added.
Another key distinction is in how reliability and resilience are measured, according to a 2017 DOE paper. Most regulators are familiar with reliability measurements like System Average Interruption Frequency Index (SAIFI) and System Average Interruption Duration Index (SAIDI) that show how well utilities keep the lights on and get them back on when they go out.
But "any definition or metric that is based on measuring outage frequencies, times, extents, or impacts on customers or systems does not get at the essence of resilience," the paper added. "The start of a sustained outage is the transition point from the domain of resilience to the domain of reliability."
The need to understand and address resilience is greater than ever, Natalie Ambrosio, Communications Director for climate-related risk firm 427, told Utility Dive. "More frequent climate change-related extreme weather is showing utilities the past is no longer an accurate representation of what the future might look like."
The urgency of investments
Resilience investments are urgently needed, according to DOE research published in the April edition of Nature. In some modeled scenarios, climate change-related extreme weather created a gap of as much as 34% between supply and demand, and as climate change worsens, the extreme scenarios are more possible, DOE reported.
The 427 data used in a January 2020 assessment by Moody's of climate risks for 49 regulated U.S. investor-owned utilities (IOUs) also showed "87% of U.S. utilities are exposed to heat stress and 22% are exposed to floods," Ambrosio said. And those impacts "are likely to worsen over the next 10 to 20 years."
Climate change "increases financial, as well as physical, risk" for IOUs, Moody's concluded. And consequences of climate-related events "will affect every aspect of an electrical power system, from generation, transmission and distribution to end-user demand."
The resulting "sharp increases or declines in energy demand" could compromise utility earnings and create "cash flow volatility" that threatens financial stability, Moody's added.
"Regulators need to take leadership on the very difficult questions about the value of utility investments in resilience against the cost to consumers, because what we are seeing in this pandemic shows that investment in resilience can be worth the cost."
Former Chair, Illinois Commerce Commission
To plan resilience investments, utilities should begin by understanding which specific "critical assets are exposed," Ambrosio said. "There is definitely a level of resilience investment many utilities are unaware of that would balance the cost with the losses if their assets went offline."
A tool that "effectively quantifies the value of resilience would be very valuable if it recognized the enormous amount of nuanced, context dependent data," she added.
The importance of a tool with resilience-specific metrics is increasingly clear, but developing it remains challenging.
Resilience has become more important after 2019's 14 climate-related natural disasters that each caused damages of over $1 billion, according to an April paper from the Smart Electric Power Alliance (SEPA).
But financial decisions about resilience require quantifying its value "to determine what the best investment is," SEPA Manager of Industry Strategy and report lead author Jared Leader told Utility Dive. "Currently, regulators and utilities haven't come to a common agreement about how to quantify resilience."
Resilience is rarely, if ever, part of formal utility planning, according to NCCETC's Proudlove.
But it should be, former ICC Chair Sheahan said. "Regulators need to take leadership on the very difficult questions about the value of utility investments in resilience against the cost to consumers, because what we are seeing in this pandemic shows that investment in resilience can be worth the cost."
Many utilities understand the urgency, SEPA's Leader said. Some are revising the Interruption Cost Estimate (ICE) calculator, which compares the average kWs normally used with those not delivered in an outage to put a cost on interruptions of power delivery. But "an actual value is hard to determine" and the ICE may not "fully capture all the benefits of resilience."
The Total Resource Cost Test and the Societal Cost Test are used in regulatory proceedings to assess the value of proposed utility energy efficiency investments, Regulatory Assistance Project Senior Advisor John Shenot, a former policy advisor to the Wisconsin Public Service Commission, told Utility Dive.
The Total Resource Cost Test could go "most of the way" toward a resilience value if regulators include "all customer benefits," Shenot said. The Societal Cost Test does that, but "most utilities and many regulators" don't like using it because it includes societal factors, like environmental impacts and jobs, that they see as "not what the electric utility does."
There is a clear need for "new metrics, new valuation methods, and new modeling tools to accurately include resilience in utility planning," he added.
Despite the absence of those metrics and tools, many utilities seem to be increasingly serious about resilience investments, Proudlove said.
PG&E and Southern California Edison have carefully weighed the cost of undergrounding lines to avoid wildfires against the cost of system hardening, their spokespeople told Utility Dive. The Sacramento Municipal Utility District (SMUD) has "emergency action plans and protocols in place to sustain reliability via grid resilience," SMUD spokesperson Chris Capra emailed.
After April 2011's 153 tornados caused outages for 850,000 Tennessee Valley Authority customers, it developed a "detailed resilience tool," utility spokesperson Scott Brooks emailed. It considers "13 potentially severe risks and components of response" to outages, on which it has based resilience investments for transmission and distribution system hardware across its system.
New York's Consolidated Edison and the eight-state Xcel Energy system have taken even bigger steps.
ConEd's investments recognize the harsh reality of climate change, company spokesperson Allan Drury emailed Utility Dive. Following October 2012's Hurricane Sandy, the utility "built walls around substations, installed pumps to remove water," and "stronger poles and wiring" and "smart switches."
A four-year Climate Change Vulnerability Study developed with Columbia University and released in December 2019, created a "resilience management framework" for "a system that is more resilient to extreme weather events and climate change," ConEd reported. But the study also recognized that decisions about "a broader suite of adaptation strategies" require more understanding of the value of today's resilience spending.
Xcel has "robust plans" that "focus on both reliability and resilience," Senior Vice President of Strategy, Planning and External Affairs Frank Prager emailed Utility Dive. The plans follow resilience guidelines in the 2018 National Infrastructure Advisory Council report on system design, he added.
This renewed interest in resilience adds to the importance of finding a way for utilities and regulators to compare the value of resilience investments, DOE researchers and power system stakeholders told Utility Dive.
A value for resilience
Power system stakeholders who see resilience investments as earning opportunities for utilities are "wrapping capital expenditures in a resilience flag," Rábago Energy Principal and former Texas electric utilities regulator Karl Rábago told Utility Dive.
But maintaining a high functioning power system is getting harder, which makes the risks, costs, and value of resilience more important, Rábago, who helped create the first "value of solar" tariff as an Austin Energy executive in 2011, added.
Knowing "the value of a proposed investment" would allow regulators "to clearly consider all costs and benefits" and resolve debates, Proudlove agreed.
Researchers at DOE's National Renewable Energy Laboratory (NREL) are developing a way to quantify resilience's value.
"Regulators do cost-benefit analyses for reliability investments, but not for resilience investments," NREL Energy Security and Resilience Center Senior Resilience Analyst and Group Manager Eliza Hotchkiss told Utility Dive. But they have not faced "the long-term outages they are forced to plan for now."
"One of the least appreciated powers of regulatory oversight is for every regulator to ask two basic questions of every resilience proposal made by a utility or proceeding stakeholder: How, and why, does it impact resilience?"
Principal, Rábago Energy
To create new metrics, researchers merged multiple "resilience considerations" into five existing NREL energy sector models and tools built for non-resilience energy research, a February paper reported.
One tool evaluates resilience in residential building stock. Another evaluates how energy storage can impact resilience during a multi-day disruption. Other tools model the value of lost load, analyze the use of redundancy in resilience planning, and assess how backup power can avoid costs for an outage.
A "one-size-fits-all metric" is not possible or appropriate, the researchers concluded. "A multilayered metric system will be needed."
A key limitation is the current lack of understanding of "what customers are willing to pay to avoid long duration power interruptions," the paper found. Quantifying a resilience investment's value "requires a more fundamental understanding of the relationship among a threat, its impacts, and the resulting consequences" and may require "a new model specifically for energy sector resilience."
The value of a value
NREL researchers found data on the full impacts of outages is inadequate to support a specific value of resiliency, Rábago said. "Maybe the best thing is to focus on how often the lights go off and how long they stay off," he said, echoing former ICC Chair Sheahan.
"That could over-simplify," Rábago added, "but statistical analysis should not be a substitute for the exercise of judgment."
It could be "wasting a lot of time and effort to create a tool to model the value of resilience for regulators too soon," he said. "One of the least appreciated powers of regulatory oversight is for every regulator to ask two basic questions of every resilience proposal made by a utility or proceeding stakeholder: How, and why, does it impact resilience?"
The objective of these questions is to build into the record over some time an understanding of resilience investments, Rábago added. "That will not produce a resilience metric, but regulators will be able to refer to the record to see if investments have the resilience benefits that utilities said they would, and that will create the understanding of resilience to build a metric on."
Regulators have reliability indicators and cost-benefit assessments, and stakeholders assure a diversity of opinions in most modern states, he said. "But we are still in the realm of exercising judgment on resilience. Let's focus on informing that judgment."
Correction: A previous version of this article had the wrong date for when Karl Rábago helped create the first "value of solar" tariff. It was in 2011.