United States Electricity Generation, Transmission, and Distribution

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The U.S. power grid has garnered attention for tragic reasons in 2021. From February 10-20, Texas suffered a severe power crisis due to a confluence of catastrophic winter storms. Blackouts occurred in all types of power generation facilities: natural gas, coal and nuclear power plants were shut down and wind turbines froze. Problems followed as the compressors needed to pump natural gas through pipelines suffered during the initial power outage, which cut off natural gas supplies to facilities that remained active. According to the University of Houston Hobby School of Public Affairs, “[m]More than two in three Texans (69%) lost power at some point from Feb. 14-20, for an average of 42 hours, during which they were without power on average for a single consecutive block of 31 hours , rather than during short rotation periods.

Electricity plays a central role in matters of life and sometimes death. Although some of our critical infrastructure has some degree of outage mitigation – hospitals with their on-site generators, for example – many power generation facilities and much of the transmission and distribution network are exposed. Many key facilities in Texas were vulnerable to extremely cold temperatures, and when such an unexpected and widespread weather event occurred, electrical infrastructure collapsed painfully.

In February 2021, Texans learned firsthand the price to pay if electrical systems fail. The cost of failure can be deadly. Power system operators and regulators have since refocused their efforts on identifying cost-effective ways to improve the reliability of America’s power infrastructure, from the generating stations that generate electricity to the transmission and distribution lines that carry electricity to our homes, schools and businesses.

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

Analysis methodology

In analyzing the U.S. electric generation, transmission, and distribution sector, this report relied on two primary data sets:

  • Reports from the U.S. Energy Information Administration (EIA), which tracks market-wide metrics such as total power generation, power generation capacity, pricing, and power consumption and the cost of fuels used to generate electricity, among others.
  • Quarterly and annual reports of publicly traded U.S. electric power generation, transmission, and distribution companies, which provide information such as revenues, costs, cash flows, asset valuations, and more.
Table 1. List of publicly traded US companies with power generation capacity analyzed in this report. Source: Pinnacle

conclusion

Operators responsible for the generation, transmission and distribution of electricity in the United States are in the midst of considerable disruption. Even before the pandemic, environmental concerns pushed these operators to drastically reduce their carbon footprint. Our economy is also becoming more and more electrified, motivating these operators to increase their capacities. The result is an aggressive shift in energy sources, largely away from coal and toward natural gas. Solar and wind power are developing rapidly. The intermittency of these renewable sources highlights the importance of nuclear and hydroelectric sources, which provide a more stable base of low-carbon energy. Intermittency challenges have also raised the profile of energy storage, where capital is flowing into larger-scale research and development efforts. The COVID-19 pandemic has only exaggerated the disruptions as labor has become scarcer and more expensive. After the fall in fuel prices induced by the confinement, the economic recovery has led to inflation which weighs on the income statements of these operators.

During our analysis, Pinnacle found four key pieces of information regarding the impact of reliability on the performance of power generation, transmission, and distribution operators in the United States:

  • Operators are navigating a decade of transition and are able to adopt new approaches to investment and asset maintenance. There is an industry-wide push to reduce greenhouse gas emissions and increasingly electrify the economy. This push has forced operators to analyze the life cycle costs of assets in new ways. Future costs of high-carbon energy sources have increased, not only due to rising commodity prices, but also due to the expectation of more costly future regulation and reduced market access capital. As a result, traders have been nimble in assessing their existing asset portfolios and proactively moving those portfolios where necessary. This mindset and the associated flexibility are important in reinventing how these assets should be optimally maintained. Some operators of legacy complex processes have approaches that are firmly entrenched in their execution and maintenance programs. US utilities have already overcome this entrenchment and are well positioned to implement world-class reliability programs.
  • Operators have achieved margin expansion through tighter cost controls, but must set aggressive reliability targets to achieve their next big improvement. The COVID-19 pandemic has forced operators to manage an increasingly difficult labor market. Workers were less available and those that were available were more expensive. This dynamic has pushed operators even further towards automation and the use of third parties for labor support. These were understandable and necessary immediate responses to an unforeseen public health crisis. Now these operators are able to rethink how their assets will be inspected and maintained. The players in this space have a strong dominant affinity for data. The next step is to use existing data and capture high-value data that is overlooked today, all in the service of building a rigorous quantitative understanding of how system-wide performance depend on specific assets. The combination of models and subject matter expertise will open up new avenues to deploy repair and maintenance dollars to their most profitable outcomes.
  • Operators are slowly and steadily increasing their assets, which means that excess capital is not needed to fill historical investment gaps. The group of 32 publicly traded U.S. power companies spent between $100 billion and $150 billion a year in capital expenditures in 2020 and 2021. This level of investment has increased the asset base of real estate, plant and equipment from $1.1 trillion to $1.2 trillion over a two-year period. This trajectory means that this set of operators invests at a sufficient level to take into account the continuous depreciation of their equipment. Not all economic sectors reacted in the same way. For example, in Pinnacle’s “Economics of Reliability” report on the global chemical industry, it was determined that declining profitability led to collective underinvestment in 2019 and 2020. This underinvestment created gaps in asset management that needed to be addressed before these operators could effectively review their approach to maintenance. Utilities have avoided this lack of investment, which puts them in an excellent position to design and implement high-performance, data-driven reliability workflows.
  • On average, operators spend 7% of their revenue on reliability programs, although the most efficient operators spend less than 5% of their revenue. Power companies in S. spend about 7% of their revenue on reliability. This spending intensity is significantly higher than the 2% revenue observed in petroleum refining and chemical manufacturing. In the field of energy, the lightest expenses in terms of reliability represent less than 5% of revenues. The biggest spenders spend more than 9% of their income on reliability programs. Every percentage point of revenue dedicated to reliability, without the corresponding performance improvement needed, eats into the 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 never.

To read the full report, visit pinnaclereliability.com.

Jeff Krimmel, Ph.D. is director of market and data analysis at Pinnacle. He has extensive analytical experience in the areas of trade and market intelligence.

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