After electricity is restored in Houston, people may ask with respect to future electricity reliability: what's next? Well, in Houston we would characterize Centerpoint's response as being more or less typical for a regulated utility. The hurricane disrupted and damaged the local grid and the utility moved to restore power with much outside assistance asap in line with standard industry practice. So what's the problem? The problem is: what happens after the next hurricane or the one after that? Utility executives all around the world, not just in Houston or South Florida, will have to address that question. If climate predictions are even remotely correct, stronger, more frequent hurricanes will be a persistent feature of the utility operating landscape. Then this is a good time to rethink what is the appropriate response in rebuilding the grid after a major weather event. We think the key mischief maker, at least conceptually, is the word "response". Right now utilities act as if the grid consists of bowling pins. They get knocked down quickly by a violent storm and then quickly (or slowly) "reset" and often at a very high cost. Is there a better way to think about this?
We believe that utility managers should consider "adaptation", as opposed to system "restoration", as their guiding principle for storm restoration efforts going forward. Utility executives and planners are now trying to navigate their way through a changing operating environment, figuring out capital allocations as they go. How would "adaptive" thinking differ from the current practice of "responding" to widespread service disruptions? Planners would forecast storm restoration expenses over the next ten years. That's money that will almost certainly be spent in the future, but mainly on restoring legacy T&D systems in a timely manner. Utilities should, we believe, take these restoration funds and, rather than rebuild the old stuff, invest so as to actually improve the system.
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Let's assume Centerpoint's estimated future storm restoration costs over ten years reach $10 billion. Call that figure the "adaptation" capital budget. The question for utility managers becomes what kind of resilient, no outage/low outage grid could they build with that level of investment. The key thing is, assuming they remain committed to good service, they're going to spend that $10 billion anyway but this use of that money could mean a significant level of service improvement for many while reducing storm restoration costs. Perhaps the folks at Centerpoint decide that for the $10 billion they can bury all their transmission lines or give everyone in the service area a a powerwall battery that runs the house for a few days in an outage. There is a dark side to adaptation and that relates mainly to service area abandonment, places where the cost of service and constant restoration costs are simply too high.
The other reason we like the idea of adaptation, apart from spending capital dollars more wisely, is that it also addresses what we think is a slight misunderstanding about CO2 and related heat trapping emissions. Our guess is that many people believe that once we as a global society stop emitting pollutants the environmental degradation they cause will cease or quickly begin to reverse, the way opening a window cleanses a smoke-filled room. This was also our experience, as a society, with reducing sulfur dioxide emissions from coal burning power plants. But that is not the case with CO2. The billions of tons of heat-trapping pollutants we emit annually will persist in the earth's atmosphere, influencing our climate, for perhaps the next several hundred years. The US government's space agency, NASA, estimated that CO2 emissions can remain in our atmosphere for between 300-1,000 years. Said differently, utility managers are looking at a 300+ year climate-related assault on their infrastructure. When the Romans or the Chinese faced 300-year assaults, they literally built great walls, fortified castles with moats, and cities behind extremely high walls. But now the barbarians are wind, heat, water, and sometimes cold.
We don't expect anyone to have "the" answer or the "big idea" that would resolve this conundrum. We do think it's essential to realize the climate-related causes of our infrastructure's dysfunction, that they will persist, and to realize that if we keep responding in the same old way things won't improve. We realize that adaptive solutions to utility infrastructure problems over a 300-year planning horizon sounds crazy. Well, the Cathedral of Notre Dame in Paris was completed almost 700 years ago. And there are portions of Roman aqueducts still standing that were completed two hundred years prior to the birth of Christ. today we can still engineer and build our way out of a lot of problems if the adaptation resources are there.
By Leonard Hyman and William Tilles for Oilprice.com
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Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and… More