The Economics of Reliability: U.S. Power Generation, Transmission, and Distribution

The U.S. power network received attention for tragic reasons in 2021. From February 10 through 20, Texas suffered a severe power crisis due to a confluence of catastrophic winter storms. Failures occurred across all types of electricity generation facilities-natural gas, coal, and nuclear plants shut down, and wind turbines froze. Problems cascaded, as the compressors required to pump natural gas through pipelines suffered during the initial power shutdown, which cut the natural gas supply for those facilities that remained active. According to the University of Houston Hobby School of Public Affairs, [m]ore than two out of three (69%) of Texans lost electrical power at some point February 14-20, for an average of 42 hours, during which they were without power on average for one single consecutive bloc of 31 hours, rather than for short rotating periods."

Electricity plays a pivotal role in matters of life and sometimes death. While some of our critical infrastructure has a degree of failure mitigation-hospitals with their onsite generators, for example-many power generation facilities, and much of the transmission and distribution network, is exposed. Many key facilities in Texas were vulnerable to extreme cold temperatures, and when such an unexpected, widespread weather event struck, the power infrastructure broke down in painful ways.

In February 2021, Texans learned firsthand the price to be paid when electrical systems fail. The cost of failure can be lethal. Power system operators and regulators have since refocused their efforts on identifying economically effective ways of improving the reliability of U.S. power infrastructure, from the plants that generate electricity to the transmission and distribution lines that carry power to our homes, schools, and businesses.

Pinnacle, a reliability data analytics company, recently released its Economics of Reliability" report for the U.S. power generation, transmission, and distribution industry. In this report, they studied the economics of the reliability of this infrastructure.

Analysis Methodology

In analysis of the U.S. power generation, transmission, and distribution sector, this report relied on two primary datasets:

• Reports from the U.S. Energy Information Administration (EIA), which tracks market-wide parameters like total electricity generation, electricity generation capacity, electricity pricing and consumption, and the cost of fuels used to generate electricity, among others.
• Quarterly and annual reports from publicly traded U.S. power generation, transmission, and distribution companies, which provide information like revenue, costs, cash flows, asset valuations, etc.

Table 1. List of publicly traded U.S. companies with power generation capacity analyzed in this report. Source: PinnacleConclusions

Operators responsible for the generation, transmission, and distribution of power in the U.S. are in the midst of considerable disruption. Even before the pandemic, environmental concerns have driven these operators to drastically reduce their carbon footprint. Our economy is also becoming increasingly electrified, motivating these operators to expand capacity. The result is an aggressive shift in energy sources, largely away from coal and toward natural gas. Solar and wind are growing quickly. The intermittency of these renewable sources highlights the importance of nuclear and hydroelectric sources, which offer a steadier base of lower carbon energy. Intermittency challenges have also raised the profile of energy storage, where capital is flowing toward larger-scale research and development efforts. The COVID-19 pandemic only exaggerated the disruption, as labor became more scarce and more expensive. After lockdown-induced drops in fuel prices, the economic recovery has brought inflation that is pressuring the income statements of these operators.

Over the course of our analysis, Pinnacle found four key insights around the impact that reliability has on the performance of U.S. power generation, transmission, and distribution operators:

• Operators have been navigating a decade-long transition and are in position to adopt new approaches to asset investment and maintenance. There is a sector-wide push to reduce greenhouse gas emissions and increasingly electrify the economy. This push has required operators to analyze lifecycle asset costs in new ways. The future costs of carbon-rich energy sources have increased, not just because of rising commodity prices, but also because of the expectation of more costly future regulation and reduced access to capital markets. As a result, operators have been nimble in assessing their existing asset portfolios and proactively shifting those portfolios where necessary. This mindset and associated flexibility are important in reimagining how these assets should be optimally maintained. Some legacy complex process operators have firmly entrenched approaches to their run and maintain programs. U.S. power companies have already overcome this entrenchment and are well positioned to build best-in-class reliability programs.
• Operators have realized margin expansion through stricter cost controls but need to set aggressive reliability targets to achieve their next big improvement. The COVID-19 pandemic forced operators to manage around an increasingly challenging labor market. Workers were less available, and those that were available were more expensive. These dynamics pushed operators even further toward automation and relying on third parties for labor support. These were understandable and necessary immediate reactions to an unforeseen public health crisis. Now, these operators are in position to rethink how their assets will be inspected and maintained. Players in this space have a strong prevailing affinity for data. The next step is to utilize existing data and capture high-value data that is being overlooked today, all in service of building a rigorous, quantitative understanding of how system-wide performance depends on specific assets. The combination of models and subject matter expertise involved will unlock new avenues for deploying repair and maintenance dollars toward their highest return outcomes.
• Operators are slowly and steadily growing their asset bases, meaning excess capital is not required to close historical investment gaps. The group of 32 publicly traded U.S. power companies have spent between $100 billion and $150 billion annually on capital expenditures in 2020 and 2021. This level of investment has caused the property, plant, and equipment asset base to grow $1.1 trillion to $1.2 trillion over a two-year period. This trajectory means that this collection of operators is investing at a level to account for the ongoing depreciation of their equipment. Not all economic sectors have responded similarly. For example, in Pinnacle's Economics of Reliability" report on the global chemicals industry, it was determined that falling profitability led to collective under-investment in 2019 and 2020. This under-investment created gaps in asset management that needed to be filled before these operators could effectively overhaul their approach to maintenance. Power companies have avoided this investment shortfall, which puts them in great position to design and implement high-return, data-driven reliability workflows.
• On average, operators spend 7% of revenue on reliability programs, though the most efficient operators spend less than 5% of revenue. S. power companies spend about 7% of their revenue on reliability. This spend intensity is notably higher than the 2% of revenue seen in petroleum refining and chemicals manufacturing. In the power space, the lightest reliability spenders come in at less than 5% of revenue. The heaviest spenders dedicate more than 9% of revenue to reliability programs. Each single percentage point of revenue dedicated to reliability, without the necessary corresponding performance improvement, eats away at margin. In an increasingly disrupted world, where power companies will need more and more capital to transition to a lower carbon, more electrified future, optimized, data-driven reliability programs are more important than ever.

To read the full report, visit pinnaclereliability.com.

-Jeff Krimmel, PhD is Chief Strategy Officer with Pinnacle. He has extensive analytical experience in the commercial and market intelligence domains.

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