Summer heat has hit hard in many parts of the United States, making modern conveniences like electricity essential in our daily lives. In North America, nearly 400 million people depend on electricity each day. As demand increases, supply shortages become a challenge across the United States and beyond. A single prolonged power outage or system failure can impact millions of people and endanger lives.
The Electric Reliability Organization (ERO) is made up of six main regional entities (further broken down into assessment areas), each with its own unique features but similar in size and complexity. These regional entities are overseen by the North American Electric Reliability Corporation (NERC), the regulatory authority that develops and enforces reliability standards. The current system was designed to produce reliable, resilient and secure power, and is successful the majority of the time. However, as we saw with the 2021 Texas electric grid blackout, not all parts of the grid are built for unseasonal or extreme temperatures. NERC’s recent Summer Reliability Assessment evaluates electricity generation and transmission capacity, spotlighting areas that require attention over the summer months of June to September. It is important for individuals and organizations to understand the limits of the electricity infrastructure in order to mitigate risks through the responsible use of electricity and other forms of energy.
While the report indicates “all areas assessed as having adequate anticipated resources for ‘normal’ summer peak load and conditions,” seven areas face the risk of electricity supply shortages in the case of extreme weather. While there are varying reasons behind the assessment or risk, some highlights by geographic region include:
- Central U.S. – Midcontinent ISO (MISO) and SPP: This area relies on a significant amount of wind power, which is less reliable than power generated by fossil fuels. When wind speed is low and demand peaks, the potential for outages increases.
- Western U.S – U.S. Interconnection (WECC): Higher risk here stems from dependency on solar power, which drops off at night, and reliance on regional transfers. The potential for wildfires in this part of the country adds to the risk.
- New England – NPCC: Decreasing resources in this area mean that in case emergency supplies are needed, operating procedures would need to be put in place.
- Central – SERC (TN and parts of GA, AL, MO, KY): Increase in demand and flat resources have put this region at risk during extreme temps.
- Texas – ERCOT: Strong growth in resources and demand makes for an uncertain equation. Texas also relies on wind power, which can be unreliable. Additionally, dispatchable generation from fossil fuels such as natural gas (which unlike wind and solar, can be transferred on demand) may not be enough to meet needs.
Statistics show that natural gas, which has inadequate infrastructure in the United States, may be worthy of more investment. In the United States, natural gas makes up about 41% of power generation, according to Bloomberg. In a recent article, Bloomberg notes that the pipelines used to transport natural gas to plants are not always built to withstand extreme weather, and are set up for just-in-time delivery, meaning there is no stockpile in case of emergency. Natural gas, until very recently, has been known for affordability. Additionally, it is produced in abundance from U.S. shale and has significantly lower carbon emissions than coal. For these reasons, an enormous amount of natural gas-fired power plant capacity additions have occurred over the last several decades. In fact, according to the Bloomberg article, the Pennsylvania-New Jersey-Maryland Interconnection (PJM) grid alone added about 33 gigawatts of new natural gas-fired capacity between 2014 and 2022, enough to power more than 26 million homes, Bloomberg said, citing data from the International Energy Agency (IEA).
While natural gas is indisputably a preferred alternative to coal, over-reliance on any single source of power comes with reliability issues. There is debate over whether recent major outages are attributable to reliance on natural gas plants, as no one knows whether a different power source mix would have delivered a different outcome. What we do know is that if natural gas continues to play a key role during the period of the energy transition, which we think it will, it will be important to continue investment in infrastructure surrounding the production of natural gas-fired power. In addition to infrastructure upgrades and investment, citizens play a key role in preserving power. Individuals and businesses should be aware of the critical role they play in keeping the power on during peak periods.
Adjusting day-to-day behaviors such as using energy-efficient appliances, unplugging an electric vehicle (EV), turning off lights, monitoring water use and switching to cleaner energy sources like solar panels all play a role. As we discuss below, clean energy investment is on the rise; however, it will not take over with the flip of a switch. Alternative energy and fossil fuels will together drive energy production in the U.S. and must co-exist – the trick will be finding the right balance. It is important to carefully consider reliability as energy source diversification continues to evolve.
Clean energy investment on the rise
The global energy landscape is undergoing a major transformation, with clean energy investment on the rise and fossil fuel investment declining. This shift is driven by various factors, including the increasing cost-competitiveness of clean energy technologies, the imperative to reduce greenhouse gas emissions, and the growing public demand for clean energy.
According to a recent report on world energy investment by the International Energy Agency, global clean energy investment soared to a record high of $1.6 trillion in 2022, marking a 28% increase from 2020. In North America, investment in fossil fuels witnessed a 30% decline from its peak in 2018, while investment in clean energy increased by 36% in the same period.
Source: IEA 2023 World Energy Investment Report
Notably, the growth in clean energy prompted BloombergNEF to raise its forecasts, suggesting that the world may be on track to achieve the target of net-zero emissions (NZE) by 2050 under its mid-case scenario.
Governments are incentivizing this growth through billions of dollars in tax credits and subsidies, such as those in the United States’ $1.2 trillion Inflation Reduction Act and Bipartisan Infrastructure Law. Middle market companies are well positioned to take advantage of these benefits. Some of the clean energy technologies seeing increased investment include:
- Wind and solar power: These technologies are becoming increasingly cost-competitive with fossil fuels, owing to lower prices and increased efficiency. Wind and solar power, in particular, demonstrate immense potential for growth, and are projected to increase from 13% of electricity generation in 2020 to 45% by 2030, and 76% by 2050, according to the BloombergNEF NZE scenario.
- Carbon capture and storage (CCS): Deployments vary from power plants to standalone facilities, but they share the objective of capturing carbon dioxide from the air and storing it underground. Companies operating carbon capture and storage facilities, for example, will sell carbon credits to companies or other organizations that are struggling to reduce their emissions, such as airlines.
- Hydrogen: While still in its early stages, hydrogen shows promise as a clean energy source that can play a significant role in the transition toward a sustainable energy future. It has the advantage of being a clean-burning fuel that produces no emissions. Furthermore, the production of “green” hydrogen, which is truly NZE, will create additional demand for renewable energy to power the facilities responsible for its generation, as opposed to “blue” hydrogen produced using fossil fuels.
Source: BloombergNEF
Recognizing the importance of the clean energy transition, several major oil and gas companies have also made substantial investments, with some committing to achieve NZE status by 2050. Many middle market businesses are looking to larger companies to prove the viability of these investments, while those at the leading edge have already begun to deploy capital. Beyond environmental, social, and governance (ESG) initiatives, these companies recognize the business imperative of diversifying and expanding their revenue base as demand for fossil fuels diminishes in the coming decades. Meanwhile, smaller companies in the clean energy sector will expand, pushing into the middle market amid the high demand for their products and services.
The shift toward clean energy represents a major transformation already underway. With continued investment, clean energy has the potential to address some of the world’s most pressing challenges, and presents significant opportunity to businesses along the way.
