US utilities should improve resilience as climate change hits market

18 July 2019

The impact of climate change on the global economy is expected to increase as storms become more frequent and intense. Utilities already face additional costs from increased storm activity, and costs are expected to increase further. A variety of infrastructure resilience improvements could reduce long-term costs and disruption.

Climate change is increasingly threatening human civilisation as more severe and frequent storms place considerable burdens on people, infrastructure, and property. As the negative impacts of events increase, cascading costs to adapt, mitigate and pay for disasters could begin to undermine budgets.

Transforming the global economy to function in line with the limits of ecosystems will be required to prevent the worst possible outcomes from climate change. This means sticking to the Paris agreement target without relying on unproven future innovation, according to climate scientists. 

Increased impacts from climate change are set to create increasingly high costs for transmission and distribution companies, among others, finds a new report from McKinsey & Company titled ‘Why, and how, utilities should start to manage climate-change risk’.Hurricanes and wild res are getting worse

Extreme weather and natural disasters are becoming more frequent and doing more damage. As the global climate becoming hotter, the frequency and severity of storm activity is expected to become worse – with a slew of top scientific journals and scientists calling for action to limit human induced climate change to a preferred 1.5C by 2100. This is required to limit the impact of changes to storm severity, sea level rises, and losses to ecosystems.

The material costs of the increased storm activity and strength is already being felt by utilities. The recent impact of Hurricane Irma saw the largest blackout in US history – and $50 billion in damages. The impact of storms and storm surges from rising sea levels on powerplants can be significant, with many built close to shore where recently significant storms have had dire impacts. Houston’s Hurricane Harvey in 2017, saw strong winds and catastrophic flooding destroy or damage around 6,200 distribution poles; 850 transmission structures; and a more than 21.4 gigawatts of generation.Taking action on resiliency can be cost-e ective, especially when future climate-change risks are taken into account

To understand the current impact of large storms on utilities, the firm analysed the financial records of 10 of the largest utilities in eight states prone to storm activity. The analysis shows that over a 20 year-period, on average, $1.4 billion in storm-damage costs were made to the utilities. McKinsey then used modelling from the Fourth National Climate Assessment report to predict costs to 2050 from storm-related activity would average $1.7 billion for each utility. The firm notes that this is a conservative outcome, and only related to storm activity – with other climate related factors adding potential additional costs.

However, while storm activity is set to create considerable additional costs, McKinsey found that investment in mitigation is able to offset negative outcomes through a variety of mechanisms. The report found that hardening of infrastructure by between $700 million and $1 billion could see up to $1 billion shaved of the damages felt by the utility.

Investment in resilience is relatively broad, however. For instance, direct changes such as hardening transmission lines would reduce their failure in storm events. Other measures are available that fit into wider changes to utilities – such as decentralizing generation, which reduces the need for long-vulnerable transmission lines into some areas; battery storage, which can provide additional capacity during storms as parts of the network are lost, while also enabling additional capacity from renewable generation onto the grid, thereby reducing the need for fossil fuel or large capacity dependence; and microgrids, largely renewables-based, offer local areas the ability to supply their own power if wider distributed networks fail.

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