Updated: Dec 28, 2021
This is part eight of a series on climate change and the electric power industry.
In our last post, we discussed the importance of updating electric utilities’ rate structure to ensure sustainable revenue into a future with climate change. With consistent revenue throughout the year, utilities could set aside funds in an escrow account for use towards climate change mitigation strategies.
In this post, we’ll explore the ways in which escrowed funds can be used to update infrastructure, and how the process of implementing grid enhancements and repairs will change. Before we get there, we’ll look at the way in which utilities have traditionally made changes to their infrastructure, both after a storm and when planning to build new facilities.
We’ll also discuss how escrow can enhance utilities’ emergency response by providing funding for temporary measures while damaged components are updated. Let’s take a closer look at how escrowed funds can help utilities advance to the next generation electric power grid.
Grid Components and Recovery Today
Today, electric utilities develop systems that serve maximum summer load at as low as reasonably achievable (ALARA) costs with as high as reasonably achievable (AHARA) resiliency. This has led to the widespread construction of open air substations and overhead power lines that lack the resiliency needed to withstand severe weather events.
To recover as quickly as possible after a storm, damaged components are quickly replaced with components that are comparable to those that were storm damaged. When upgrades or new facilities are needed, utilities are expected to follow a set procedure for funding.
Today’s Model for Grid Updates
When infrastructure needs to be updated today, electric utilities rely on a retroactive increase in the cost of electricity per KWH to fund projects. The standard procedure for grid updates today is as follows:
The utility determines components that need to be replaced because they are near end of life; or the utility determines additional facilities that are needed.
Next, the utility informs the regulator of plans and estimated costs.
The utility either replaces old components or builds new facilities. Open air and overhead components are replaced in kind.
After facilities are energized, the utility notifies the regulator that the project is used and useful, and requests permission to increase their rates.
The regulator reviews the utility’s request, and typically authorizes new rates.
Consumers see rate increases on their electric bills after projects are complete.
In this process, electric utilities fund grid updates with the understanding that consumers will see an increase on their electric bill after the project is complete. Because revenue is received post project completion, only a limited amount of funds is ever set aside for grid enhancements and increased climate change resilience measures.
Funding for Enhanced Severe Weather Resilience
After updating rate structures to include funding for both routine use and investment purposes, electric utilities should follow a new procedure for enhancing and repairing grid infrastructure, as follows:
After determining those components that must be replaced, the utility will inform the regulator of their plans, estimated costs, and escrow drawdown.
Once the regulator has approved the plans, the utility will start construction.
After the project is complete, the utility will notify the regulator that facilities have been built, and the cost of construction after funds in escrow were applied.
Only if the cost exceeded the funds available in escrow would the utility request permission to increase their rates.
Our vision of the updated rate structure and escrow allocations are presented in Table 1. When only 5% of an electric utility’s revenue is placed in an escrow account that funds enhancements, improvements, and additional facilities, funding will be available to routinely replace aged components without increasing rates.
With this new system, some rate increases would still be necessary; however, they should be lower in cost and less frequent. As we discussed in our previous post, consumers would see consistent electricity bills throughout the year, rather than bills that fluctuate with the seasons. This structure will provide utilities with the funding necessary to follow the new procedure.
Emergency Response Repair Kits
Even with this new procedure in place, electric utilities will still need to develop emergency response plans to provide temporary electric power during an emergency, such as when a blackout occurs, until long term changes can be implemented.
Utilities with escrow should use some of the funds to purchase emergency repair kits. Components from repair kits should remain in place until long term enhancements are completed, or a maximum of 90 days.
By setting aside funding for use on grid enhancement projects, electric utilities can update the power grid after it is damaged, rather than replacing damaged components with the same pieces. This enhances grid resilience so that it can face the challenges and demands of climate change.
Escrow Helps Utilities Face Climate Change
Once the new procedure for grid repairs and enhancements is in place, utilities will have funds available to allocate for updated weatherization and resiliency projects so that grid infrastructure can better withstand severe weather.
Additionally, the new process should provide a seamless method of integrating renewable energy into the grid by establishing funding for enhancement projects. This will create a more resilient system with funds set aside for emergency response.
To learn more about Prescient’s recommended updates to improve grid resiliency and reliability, check out our next generation blog collection or our other posts, including: