Whether it’s upgrading aging infrastructure, adapting to changing regulations, or protecting grids against outside threats, utilities have a range of challenges to navigate these days.
In this deep dive, we’ll review the top issues facing the industry, and how capital planners can respond by strategically and responsibly allocating capital to growth, maintenance, and regulatory projects that best meet organizational objectives and provide strong returns on invested capital.
Shift to renewables puts energy security at risk
Utilities find themselves in the difficult position of needing to deliver sufficient power to their clients before renewables have fully matured. Renewable energy sources like wind and solar are more intermittent than coal and natural gas, and to ensure a stable power load, continued investments in energy storage solutions and distribution infrastructure are essential.According to POWER Magazine, “a few capital-intensive, but critical, projects to help utility companies move forward” include “undergrounding transmission or distribution infrastructure, interconnecting decentralized renewable resources, moving back-office systems to the cloud, and transitioning fleets to electric vehicles.” While wind and solar are the best-known renewable energy sources, utility leaders should also keep an eye on hydrogen. In June 2022, the U.S. Department of Energy (DOE) approved $8 billion in funding for regional hydrogen hubs, called “H2Hubs,” that will “create networks of hydrogen producers, consumers, and local connective infrastructure to accelerate the use of hydrogen as a clean energy carrier.” Integrating hydrogen into a renewable energy portfolio can help utilities supplement the energy demand gap, but the infrastructure to do so is largely nonexistent. Utilities across the country have identified these challenges, and are taking action. For example, American Electric Power, one of the nation’s largest electric companies, plans to invest more than $40 billion in capital on transmission, distribution, and renewable energy projects between 2023 and 2027. And, as a whole, U.S. utilities spent over $150 billion on total Capex in 2022, up 12% year over year.
Protecting grids against cyber and physical threats
Utilities face growing cyber and physical threats to their infrastructure. Software-based supply chain attacks are one of today’s top threats, but they’re notoriously difficult to detect. As Utility Dive points out, “high-profile attacks on substations [in late 2022] in Washington and North Carolina have raised the spotlight on both cybersecurity and physical grid security. Federal regulators may consider new security rules, and there is a growing focus on vulnerabilities in distributed energy resources [DERs] and supply chains.”According to the Federal Energy Regulatory Commission (FERC), “Attackers are evolving their practices and capabilities against new technology faster, and malicious actors are positioned well to enter DER energy systems,” and this, among other factors, “is creating market forces for critical infrastructure investments.” One estimate has the total demand for utility cybersecurity software and services reaching $32 billion by 2028. Market and regulatory pressures point to the need to make critical investments sooner rather than later. A Capex management solution such as Finario makes this much easier with its stack ranking and ROI modeling capabilities.
Climate change and other headwinds will strain grid reliability
For years, many Americans took reliable electricity being instantly delivered to their homes for granted. But recent severe weather events like the Texas Freeze, Hurricane Ida, and Dixie Wildfire highlight how climate change is placing greater pressure on an already-strained U.S grid system.The need for improvements is vast. According to The Brattle Group, utilities will have to spend around $10 billion per year to replace old transmission infrastructure. The aforementioned American Electric Power company estimates 30% of its 40,000 miles of transmission lines will have to be replaced over the next decade.
And it’s not just the age of the infrastructure that’s an issue—it’s also the location. Currently, the U.S. network of transmission lines is centered around cities where demand is strongest. As the energy transition continues, transmission lines must be relocated closer to wind and solar production, which tend to be far from large population areas.Navigating the energy transition while ensuring grid reliability will be a difficult balancing act for utilities, but solutions such as precise forecasting powered by artificial intelligence (AI) can aid in their efforts. Spending on AI software in the utilities industry is expected to reach $4.5 billion by 2026, which should facilitate better planning and regional collaboration. NextEra Energy is leading the way through its machine learning (ML) investments to avoid power fluctuations associated with its U.S. wind projects.
Microgrids are growing in popularity
Energy security is a hot topic these days, and many regions are seeing the benefits of microgrids for safeguarding their power supply. These small networks of users rely on a local source of electricity (often wind or solar), and can function independently from the centralized grid, insulating them from broad outages.As electric vehicles (EVs) grow in popularity, local microgrid projects to support charging stations stand to increase. North Carolina-based Duke Energy recently announced a new EV development center that will “be able to be connected either to the Duke Energy grid, charging from the bulk electric system, or powered by 100% carbon-free resources through [its] microgrid” and is “the first electric fleet depot to offer a microgrid charging option.” There are drawbacks, though, including interoperability challenges with the centralized grid. As microgrids become more common, there’ll be a need for capital investment in advanced systems that leverage AI and ML to optimize energy usage, predict demand, and manage energy storage. The global microgrid market reached $30 billion in 2022, and is expected to grow at a CAGR of 15% through 2029. This level of growth presents a clear need for utilities to make investments to adapt to this emerging trend.
Utilities will rely on AI to manage a dynamic regulatory environment
Company leaders in various industries have had to contend with shifting environmental, social, and governance (ESG) regulations in recent years, and more changes are likely. The SEC has proposed a rule that would require public companies to provide detailed disclosures on “climate-related financial data and greenhouse gas (GHG) emissions insights.”PwC thinks that these proposed rules “could be uniquely challenging for energy and utilities because of the industry’s complexity and massive footprint,” but on the other hand, “solving for these complexities as [they] move toward investor-grade climate and emissions reporting could spark giant leaps forward in [their] cleaner energy transition.” Utility leaders are making capital investments in AI technology to help them manage these changing regulations. These programs are able to keep track of GHGs across a utility’s portfolio, allowing them to comply with reporting standards and minimize fugitive emissions. One utility was able to realize Capex savings between 40% and 60% by leveraging advanced analytics powered by AI. These savings came about by prioritizing replacement of its riskiest assets and optimizing preventative maintenance. Intelligent capital planning can help utilities navigate a changing landscape
Utilities face an uphill climb as they navigate a rapidly changing landscape. The energy transition towards renewables is well underway, but the infrastructure required for a wider rollout is sorely lacking. Cyber and physical threats to infrastructure are increasing, and climate change could exacerbate severe weather events going forward.Addressing these challenges will require significant capital investments in both the digital and physical spheres. Existing infrastructure such as transmission lines need to be repaired and replaced, and software systems need to be upgraded with cutting-edge AI technology to intelligently meet the needs of a more distributed energy network.
With so many projects to manage, ensuring your Capex dollars go to the highest risk-adjusted ROI projects is essential. To see how modern tools like Finario can take your capital planning process to the next level, schedule a demo today.