Top 8 Risks to Critical Infrastructure in 2021
Just ten years ago, most people went about their days without considering the power lines spanning their communities or the coal burned to generate electricity.
But the world is changing profoundly.
Blackouts, cyber attacks, and ailing critical infrastructure dominate the news - while advancements in renewables, battery storage, and smart tech disrupt the industry.
In short, utilities are at an inflection point.
As they navigate a sector that’s rapidly transforming, risk management is critical.
There are two key questions at the heart of risk management:
- What lies in the future for your organization?
- What can you do to mitigate those risks?
Identifying risks - including opportunities - is a crucial first step.
To become the utility of tomorrow, carefully assess and rank risks today
Top Risks at an Inflection Point
Energy trends are interconnected, and ranking risks presents a classic chicken-or-the-egg dilemma. But one thing is clear: climate change must be central to utilities’ decision making for the future.
Utilities are grappling with the immediate threat of rising temperatures and extreme weather, alongside big picture shifts in energy generation and environmental policy.
1. Climate Change
According to NOAA, the U.S. faced 22 billion-dollar disasters and the most active wildfire season on record in 2020.
By September, 2020’s total blackout hours approached 1 trillion, surpassing all of 2019.
COVID-19 may have been front and center, but with the summer wildfires in California and Oregon, corresponding outages, Texas’s winter storm and grid failure, and historic hurricanes - extreme weather in 2020-2021 was impossible to miss.
With power lines spanning hundreds of thousands of miles, extreme weather poses a significant risk to power transmission and distribution - and requires rethinking the traditional production model, where power travels on a single line, in a single direction.
In a 2020 report, Southern California Edison listed increasing wildfires, flooding, mudslides, storms, wind gusts, rainfall, drought, and sea level rise as “a key driver for the evolution of the grid”.
2020 was, according to NOAA, the 5th-warmest year in the U.S.
Naturally, this contributed to increased wildfires, but higher temperatures also impact demand for electricity. As temperatures rise, customers turn on fans and A/C - creating peak demand in summer months and stressing the grid.
Higher demand can lead to forced outages in order to manage the load.
As the grid endures unprecedented strain - and customers face outages - policymakers and utility providers are taking action.
- The Cost of Extreme Weather: Navigating State Regulation and Safeguarding the Grid in Texas, New York, and California [White Paper]
- Inside Utility Storm Response with Melanie Spring [Event Recording]
2. Environmental Policy & Renewable Energy
Rising temperatures and extreme weather make climate change tangible. For the majority of Americans, climate change isn’t a theory - it’s an immediate threat to their communities.
Increasingly, the federal government, states, and utilities are committing to clean energy to mitigate climate change.
Commitment to Clean Energy
State legislation has a significant impact. Approximately half the growth in renewable energy generation is due to state requirements.
And as the Biden Administration moves forward on aggressive climate goals, federal policy will also affect utilities. President Biden wants the U.S. economy to reach net zero emissions by 2050, and for utilities to achieve 100% carbon pollution-free electricity by 2035.
Climate change is taking a toll on the grid and spurring government intervention - as a result, utilities are investing in renewable energy and decarbonization.
Since 2018, at least 35 utilities and independent power producers have embraced net-zero emissions by 2050.
Renewable Energy and Decarbonization
Long the king of energy, coal has been declining precipitously since the early 2000s.
The Institute for Energy Economics and Financial Analysis (IEEFA) concludes coal “will be pushed out of the electricity sector completely” after it fell to less than 20% of the U.S. electricity market in 2020.
Natural gas and hydrogen’s prognosis may be less clear, but it’s certain wind and solar are on the rise.
As technologies advance, wind and solar have become cheaper and more efficient, and states rely more and more on these renewables.
To meet California’s carbon neutrality goal, Southern California Edison expects an exponential increase in wind and solar power, along with a huge boost to customer solar and energy efficiency, according to its Pathway 2045 plan.
Modernizing and digitally transforming the grid is essential to meeting these goals and addressing climate challenges.
3. Digital Transformation & Grid Modernization
Technological advancement may help mitigate energy’s many challenges - improving grid resilience and efficiency - but it’ll also disrupt longstanding business models.
Digital transformation and grid modernization promise significant change in the grid’s organization and a utility’s relationship with its customers.
Ultimately, the modern grid will be less centralized and more distributed.
Distributed Energy Resources (DERs)
When someone installs solar panels on a house and connects these to the grid, energy is being generated on a small-scale at the distribution level.
This is a DER.
In a centralized grid model, energy is generated at a larger power station, like a nuclear power plant or dam, often far from the actual customers.
With DERs, on the other hand, customers, businesses, or larger communities have their own mini power plants, which can then feed back into the grid and help balance demand.
Due to this significant shift in generation, utility and power professionals identified DERs as the number three overall risk to their industry in a 2018 survey.
Electric vehicles, microgrids, and battery storage - all DERs - will play a considerable role in the grid’s future.
Electric Vehicles (EVs)
EVs have momentum:
- California will require new cars be zero-emission by 2035 - banning the sale of new gasoline cars. Additionally, 20 million light-duty EVs are expected in California by 2045.
- By 2035, GM has committed to only producing electric cars - and Ford anticipates 40% of global sales to be EVs by 2030.
- EV models are expected to triple in 4 years.
This is good news for cutting emissions, but EVs pose a risk to utilities.
Electrifying every light-duty vehicle in the U.S. would increase electricity demand by 25%, putting more pressure on the grid. That’s a challenge for grid reliability and resilience.
However, many see an opportunity in EVs to strengthen the grid. PG&E’s ChargeForward pilot program, for instance, offers incentives if customers charge their vehicles during periods when the grid has the energy to spare. This can save hundreds of millions of dollars.
Further, there’s hope EVs - batteries with wheels - can be bidirectional and integrated into the grid, storing energy and helping to supplement the grid during high demand. Rather than a threat, EVs can be an asset.
The challenge will be building EV infrastructure and integrating EVs into the grid.
Microgrids, smaller and decentralized energy production, can be separated from the main grid. They’re self-sufficient and serve a smaller community.
Factories, office buildings, and schools may have solar panels on their roofs, and if the grid fails, these can operate independently, keeping the lights on in a single building or larger town.
With a microgrid, customers are less dependent on a power line traversing wildfire country.
Like other DERs, microgrids can also supplement the main grid during peak energy consumption.
One challenge with wind and solar is consistent energy generation. It’s a risk to depend on these renewables when their peak generation may not align with peak demand.
This is where battery storage comes in.
Finally cost effective, battery storage can parallel wind and solar installations, capturing excess energy and storing it until the grid really needs it.
U.S. energy storage will be a $7.6 billion annual market in 2025, up from $1.7 billion in 2020.
Like solar energy, battery storage has boomed as costs lower.
And battery storage is also viable on the customer-level.
Utility pilot programs - like Green Mountain Power’s effort in Vermont - install Tesla batteries at customer homes, store energy in these batteries during low-demand times, and then use that energy to meet peak demand. Like utilities’ efforts to coordinate with EV owners, this program can save millions of dollars.
Smart Meters and the Smart Grid
More and more devices are connected, and utilities have an opportunity to leverage the Internet of Things (IoT), big data, edge computing, and artificial intelligence for improved efficiency, automation, customer engagement, and grid resilience.
Smart meters help customers and utilities track real-time energy usage, and empower customers to make better informed decisions regarding use.
If a customer understands the cost of electricity varies throughout the day, they can adjust their habits - washing clothes, using an air conditioner, charging an EV, etc. - to save money and support the grid.
In front of the meter, a smart grid will also be more responsive and efficient itself, rerouting electricity to respond to demand or failures.
As utilities rely more and more on DERs, renewable energy, and battery storage, they need agile and smart systems. A flexible web, not a rigid chain.
If utilities don’t modernize the grid, they risk using an outdated business model.
4. Aging and Stranded Assets
While utilities begin investing in decarbonization and embracing a more decentralized, distributed model, aging infrastructure remains.
Assessing these risks, utilities must weigh what to update, convert, repair, or retire.
Much of the U.S. grid was built not long after WWII.
Ernst & Young notes global organizations will need to invest more than $40 trillion in decades-old water and power infrastructure and natural gas pipelines between 2016 and 2040.
In the U.S. alone, 60% of utility grid components have exceeded their optimal performance lifecycle.
Repairing the aging grid would be an enormous undertaking in any year - but in the 21st century, simply maintaining the status quo won’t cut it.
As coal and nuclear energy are overtaken by renewables, utilities are left with power plants that aren’t financially viable and don’t align with climate goals.
According to IEEFA, even natural gas may decline, too, as prices rise.
Because the power industry is heavily regulated, negotiating the cost for retiring these plants is complicated, and allocating funds for expansion is often easier than recovering assets.
Infrastructure and a business model built on coal have lasted for decades, but utilities are undergoing radical transformation, and they must work with regulators to modernize the grid.
A Broad Attack Surface
Modernizing the grid will improve efficiency, resilience, and emissions, but a host of new technologies - EVs, smart meters, charging stations, wind farms, etc. - is a tempting target for cybercriminals.
Because utilities manage so many diverse assets and technologies from generation to distribution, hackers have countless opportunities to access IT or OT networks.
Cybersecurity experts must secure physical sites, a utility’s networks, and their hardware and supply chain.
A Prime Target: Critical Infrastructure in the Crosshairs
Not only is cybercrime on the rise globally - 1% of the global GDP in 2020 - but critical infrastructure’s outsized impact on society and the economy incentivizes an attack.
For-profit cybercriminals will often receive payment to decrypt a utility’s files if their ransomware has paralyzed operations.
Likewise, if a foreign government wants to flex its muscles, there’s no better way than infiltrating systems that are crucial to the U.S.’s basic functioning. Many recent large-scale cyberattacks, like SolarWinds or Notpetya, were traced to a foreign government’s hackers.
And because utilities still rely on coal, natural gas, and nuclear energy, hacktivists - who are opposed to these energy sources - may also launch an attack.
In a 2019 survey, 56% of utility providers reported at least one shutdown or operational loss each year due to cyberattacks.
- Defending the software supply chain [White Paper]
6. The New Consumer
While utilities grapple with new technologies and threats, customers are also shifting in profound ways.
In the past, a utility interacted with a customer on a few occasions: inspecting the meter, sending the bill, maintaining power lines, and responding to outages.
The customer experience was uniform, they were passive, and competition was nearly nonexistent.
That’s all changing.
Now, with affordable and efficient DERs, customers can generate their own power. They’re active participants, not mere consumers. Electricity’s flow between customers and the grid can now be two-way.
And as DER adoption varies among customers, a utility can’t rely on a universal model.
Some people may adopt EVs, install battery storage, or invest in solar panels, but many customers will still prefer a more traditional relationship with a utility, at least initially.
Managing customer demand and generation is a challenge moving forward and requires a more responsive and flexible grid. California Edison expects an increase of 60% in electricity demand - and 40% in peak load - by 2045, along with more variable demand from DERs.
DERs aside, smart meters also transform a utility’s relationship with customers.
Advanced metering empowers individual customers to manage their electricity, understand patterns in demand, and adjust their behavior to support the grid.
With a smart grid, utilities will need to swap the monthly newsletter for more dynamic messaging, as customers become partners in grid resilience and reliability.
For this to become a reality, utilities must offer rate customization, and actually use the data from smart devices. In 2019, utilities were leveraging less than 4% of grid data for analytics.
Customers are experiencing more personalization, data, and digital communication everywhere in their lives. And they’ll expect the same of utilities.
WestMonroe identifies “delivering on the customer promise” as a key investment for utilities in decarbonization.
That said, a 2018 study ranked utilities among the lowest-performing industries in digital.
The Internet of Things (IoT) empowers a customer to monitor their health, microwave, dog, and home security through a multitude of devices. In this ecosystem, companies offer a range of plans to meet an individual consumer’s needs. Utilities must follow suit.
And as climate change affects more people’s lives, customers won’t settle for energy that’s not emissions-free.
New Competition & Community Energy
If utilities don’t prioritize their customers’ wants and needs, they’ll risk losing them.
Before, customers didn’t have much of a choice whether to subscribe to a specific utility. For this reason, utilities are highly regulated, to ensure reliable and affordable energy.
But the rise of DERs, renewables, and community energy will disrupt the industry.
From Australia to Germany, community wind farms and solar arrays are on the rise globally, and companies are filling the vacuum in battery storage, EV infrastructure, and renewables installation.
Deloitte foresees greater competition: electric, transportation, and building sectors are converging as “many players seek to serve a growing clean power market in an economy increasingly moving toward electrification.”
If utilities don’t expand into unfamiliar territory - experimenting in the corners of a distributed, decentralized grid - they’ll risk being left behind.
7. Retiring Workforce and Talent Gap
Ultimately, the grid is…
- Transforming, and disrupting traditional business models
- Aging, and demanding crucial repair and upgrades
- Threatened by climate change and cybercriminals
To meet these challenges, utilities need a robust workforce.
However, not only is a retirement wave approaching, but utilities can’t hire the necessary personnel.
Roughly 50% of the industry’s workforce are retirement eligible within this decade, and 72% of employers struggle to make qualified hires.
Notably, grid operators and owners reported to GAO hiring a sufficient workforce was a major challenge in addressing cybersecurity. The U.S. cybersecurity workforce must grow 62% to meet demand, and utilities are struggling to compete.
Because critical infrastructure is going digital, utilities will recruit more and more employees beyond technical and vocational schools - they’ll see higher competition from all sectors.
Also, millennials - the future for utilities - have different expectations for an employer and professional development. This requires a new approach to workers.
Utilities risk a severe labor shortage and talent gap if they don’t...
- Equip millennials with marketable skills
- Ensure clear knowledge transfer
- Digitize the field
- Align their business with clean energy
- How to attract and retain the next generation workforce [White Paper]
Federal and state regulation will play a significant role in shaping utilities’ future.
According to a Deloitte report, increased regulation in the utilities and power sector is transforming and disrupting the market.
Clean Energy Policy
Utility Dive argued a key trend to watch in 2021 is FERC’s role in clean energy.
Likewise, as we’ve noted, the Biden Administration and many states have set ambitious climate goals, and a utility’s strategy for recovering stranded assets will also hinge on regulation.
DERs: FERC Order 2222
In September of 2020, FERC issued Order 2222 on distributed energy resources.
According to FERC, this order “enables DERs to participate alongside traditional resources in the regional organized wholesale markets through aggregations, opening U.S. organized wholesale markets to new sources of energy and grid services.”
Though the implementation of FERC’s Order is still evolving, FERC foresees more DER competition, lower costs, innovation, and greater grid resilience and flexibility.
Cybersecurity: The Biden Administration & NERC
While championing clean energy and rebuilding critical infrastructure, the Biden Administration is also promoting greater cybersecurity.
Biden’s recent executive order is a step forward for rigorous federal cybersecurity, threat intelligence, and software procurement.
Over the last decade, the federal government has increased its oversight of information sharing and critical infrastructure cybersecurity. After recent high-profile cyberattacks on federal agencies, the Colonial Pipeline, and JBS, the government’s role will only become more pronounced.
Utility providers scramble to comply with federal regulations, like NERC’s CIP-013, to avoid fines, but utilities can adopt a proactive stance as well - following best practices, identifying risks before they’re regulated, and leveraging government incentives for clean energy and improved cybersecurity.
- 3 utility compliance trends [Blog]
Conclusion: Identifying & Mitigating Risk
From climate change to a boom in new technologies, the energy landscape has shifted dramatically.
Utilities are at a crossroads: old business models are no longer relevant in a digital, zero-emissions economy.
This is where risk management enters the scene - and identifying and assessing threats and opportunities is a vital first step in risk management.
But looking to the future does little for your organization unless you factor these risks into strategy.
Q: How do you respond to an uncertain future?
A: Implement rigorous enterprise risk management (ERM).
Learn how you can build the utility of tomorrow through ERM.