Power Sector Risks Loom Large Over the Energy Transition
High-level scenarios often paint the energy transition as a smooth trajectory—a gradual evolution toward a more modern, cleaner, more intelligent system that addresses climate change, as well as furnishes the world with secure, affordable energy. In reality, change often has sharp edges, and in the vast and diverse power space, it can be volatile and disjointed, characterized by friction and imbalances among its many participating entities.
As a critical infrastructure industry whose primary mission is to provide safe, reliable electricity, the power sector has always faced some degree of uncertainty and change, and many companies have mature risk measures and controls in place for their networks and assets. But as overall system complexity ramps up, POWER’s analysis suggests they are now facing a lengthy list of looming exposures. Several industry experts from insurance, financial consultancy, and market rating firms pointed out to POWER that many existing risks are rooted in the industry’s changing business profile, specifically related to potential impacts from decarbonization and past reliance on natural resources. Newer risks, however, can be pegged to pandemic tumult that has had a broader reach, they suggested.
“The world as we know it is being completely reshaped. No country or company will simply bounce back or rebound to the way they were before. Consumer behaviors are changing, supply chains are being rewritten, institutions are shuttering, business models are being fundamentally reshaped, and expectations of governments are shifting. Energy as a sector will be no different,” noted Aon plc., a global professional services firm that provides a broad range of risk, retirement, and health solutions.
While the level of risk can’t be easily quantified given the array or markets, applications, and size of operation, the following are some risks to which experts called specific attention. While not detailed here, stakeholders notably also highlighted risks related to fuel uncertainty, business model overhauls—including through mergers and acquisitions—asset divestment and decommissioning, safety, and geopolitical concerns, such as trade disputes and political volatility.
Natural Disasters. Climate change is adding new stressors to power operations, and that is raising a paramount interest in resiliency against severe weather events for power companies and utilities. According to the Edison Electric Institute (EEI), a trade group representing all U.S. investor-owned utilities, “risks are differing in different parts of the country and evolving,” which is why they require specific planning for mitigation. Examples include risks of hurricanes, floods, wildfires (Figure 1), and extreme heat or cold events, as well as decreasing water availability. Since Superstorm Sandy in 2012, EEI said its members have invested more than $340 billion to harden their investments.
Reliability and Environmental Compliance Requirements. The extreme cold weather event that forced three grid operators, most prominently in Texas, to implement rolling blackouts last February, and the summer 2020 heat wave–related brownouts in California, resulted in billions of dollars in losses for market participants and highlighted supply-demand mismatches. Ensuing reliability measures may require costly generator upgrades….