Extreme Heat and Beyond: Power Infrastructure for a More Demanding Future

Always enjoy it and thanks for the work that you and Vera and the whole team do at C2ES. It's just terrific.

I'm sorry you with Arshad.

You know, thanks Nat. Let me start with this. Next week will be 10 years since I became CEO and one of the things that we've done during that decade has been to really invest a lot of time and human capital around this whole topic of the net zero transition. You know, we're in a state that has it in statute that the economy will be net zero by 2045. So a number of the white papers that we produce are focused at that climate change mitigation theme. What does California need? And you know we've talked in the past about using a lot of clean electricity to electrify a lot of the economy, 90 plus percent of buildings and vehicles by 2045, etc., and that leading to a nearly doubling in load. So that's a really important discussion. But one of my concerns over the years has been that there's tremendous focus on how do we try and bend the climate change curve, honestly not enough discussion on how we deal with the curve that is locked in because it's going to be not fun in 2050. We did our first paper on that topic about four years ago. And then we just released this Monday our latest white paper, 'Adapting Today, Energizing a More Resilient Tomorrow.' You always need a cute name, right? But that one focuses, and we'll get into it, it focuses not only on what's going to happen and what utilities need to do, but importantly it focuses on the partnerships that are needed across the economy. And I just want to note, you know, even in the utility sector, and we will get to that report in a sec, but I see PG&E here. Obviously California has been at the forefront both of the net zero transition and some of the adaptation challenges, but other utilities we talked to throughout the country are also starting to think about their own resilience challenges. I know EPRI has been a leader on that as well in terms of helping utilities think about that. But I also want to point out there are some connections almost directly between the two, between these issues around mitigation and adaptation in the following sense. In particular, you know, right now the electricity conversation, the energy conversation, I don't need to tell folks, I mean the whole political conversation is focused on affordability, right? We see that of course throughout the economic sector, but in particular in the electric utility sector. I think what's less appreciated, but that you all see, is the connection between affordability concerns around prices and the investments that you all need to make on the adaptation and resilience side.

Yeah. No, right. And start by saying there's actually good news in the transition. Some of our earlier work showed that when we think about the total cost of energy, and it's important to think about the total cost of energy, not just electricity, because we are in a clean energy transition. So as more commodity use shifts from natural gas and gasoline to electricity, if you really want to think about this in an apples-to-apples way, you need to think about those three things combined. And so a lot of the work that we've done has focused on how we expect that for our average customer, that total energy bill will go down by 40% in real terms through 2045 as they electrify more of their energy use. So that's the pot of gold at the end of the rainbow. Actually in California, folks are surprised when I say this, but our average customer at SCE today has a total energy bill, think about a share of wallet, that is in the lowest cost quartile in the country. Lowest cost quartile. Today though, they're spending about 7% of household income on that.

We actually think that goes to about 3% as you go to 2045. But there's a lot of focus on affordability for a few reasons. It is a national conversation in part triggered by data centers. Even though data centers done right can actually help support affordability. I mean, we think in our area, and this is very regional, right? So I admit that local market rules matter, local resources matter. But we think in Southern California, a gigawatt data center done right can reduce system average rates by 0.5 to 1.2%. And save customers anywhere from a billion to as much as $1.8 billion over the life of that data center. Because you got more kilowatt hours in the denominator, not as much investment in the numerator. That helps the ratio, right? So the problem in California is that if you tack on housing costs, that's where you then sense the pain that people have, and then electricity is an easy place politically to go look for affordability savings. EIA had interesting stats that they shared where if you look at the average American's how they spend each dollar of income, rough numbers, about 16.5 cents goes to healthcare, about 15.5 cents goes to housing, 7.5 cents goes to groceries. You know how much goes to electricity? 1.3 cents. But you wouldn't know that from the national discussion, right? And again, ours is a very sensitive sector. It's one that politically is in the forefront, and again the data center discussion has exacerbated that, driven by cost allocation questions depending on market structures regionally.

Absolutely. And so when you look at the combination of load growth, resilience needs, etc., and using EI numbers, the estimate is that collectively those of us in investor-owned utilities are going to be investing about $1.4 trillion over the next five years. At our company, it's a capital plan of 38 to 41 billion between 2026 and 2030. In our white paper, we talk about some of the investment needs that are more tied to adaptability or adaptation. And so maybe to answer your question, can I get into a couple of the insights from the paper?

Yeah, and so we use the global climate models to look at what the impacts are going to be for California by 2050. And it's all going to happen. We're going to see more floods, more droughts, more extreme heat to use the title of the session, more wildfire risk, more sea level rise. We forgot to write about the grasshoppers and the locusts and I don't know what else, you know, just biblical. But you know, using extreme heat since that's the title here, we expect to see in the base case about three degrees Fahrenheit higher temperatures on average by 2050. That means that in our desert communities, those are going to see very hot days, probably around 200 days a year of very hot days. Some of our prior analysis has said that if you look at the top percent of hot days, they'll be seven times more prevalent and hotter.

And I just to come in on that really quick because you know this but it's a good reminder, when we talk about climate impacts we so often talk about that 3 degrees.

And people say well, 3 degrees Fahrenheit, right? Well, I don't even notice if it's, you know, it's nine degrees warmer than when I went for a run this morning or whatever, like three degrees. But it's that shifting the whole distribution. So the number of those really hot days.

And it also for us in our area, it's also seeing more humidity. So that let's talk about investment. A lot of the grid was designed post-World War II, different climate time. And so there was the assumption that transformers heat up during the day when people are using a lot of power and then they get to cool down at night because typically in California dry nights. I grew up in Puerto Rico and Florida, very humid. When it's hot, it's hot all 24 hours. My wife, you know, I followed her to California and in the middle of summer she would say to me when we first got there, 'Hey, we're gonna go to the beach, bring a sweater.' And I'm thinking, 'What the heck is she talking about?' Right? But you would see a 20 or 30 degree drop in temperature because the air was so dry. Not so much anymore a lot of the time. And so those transformers can't cool down at night. So translate to investment need. That means that we need to be thinking about more robust circuits, higher capacity. So that there's more capacity margin there. Since we know that there will be more days, more nights when we will not be able to get that cool down effect that we had banked on previously. To put it in terms of load, that temperature rise that I talked about earlier, we think will equate to adding, just because of temperature rise, about 3,000 gigawatt hours a year in 2050 of load. What does that mean? Our CFO probably did the math in his head already. But for us, that means that's the equivalent of adding about a half a million homes. Now we serve about 15 million residents. That's about five plus million customer accounts. Four million and change are residential customers, you know, homes. And so adding half a million on top of four million just from the temperature rise piece of that, that's significant. I'll give you one more example. So that we can go from extreme heat to sea level rise. So we have experienced eight inches of sea level rise in the last century. The global climate model suggests that we're going to see seven inches of sea level rise in the next quarter century. Okay. So in a fourth of that time, we're going to see almost the same level increase we saw in the last century. By the way, we're also going to see more extreme rain events along with more drought. We think we have something like 9,800 distribution poles that are then at significant risk of damage from flooding. By the way, that's at the 1.5C increase base model. If you go to a 2C increase model, that 9,800 becomes 12,000 something, 12,400 something like that. So that tells you the sensitivity to have an extra degree of temperature rise Celsius. Now this then goes to the other point we make in the paper. It's not just about the investments we need to make in reinforcing those poles or substations or whatever, but if you think about our coastal communities, many of which, by the way, got battered about three weeks ago when there was a hurricane a few hundred miles away that led to more storm surge and a bunch of homes were red tagged. And that wasn't even the El Nino that's coming later this year. Okay. So here's a question. Should we be working on hardening the infrastructure we have by the coast or should we be thinking about moving it inland? Answer: don't know until the community decides, right? So we really stress the importance of collaboration with local government, with communities, etc. And in California, and I'll be interesting, I hope I can still be around when the mayor from San Antonio is up. In California, there's state law that says that all local governments need to have climate adaptation plans. About 65% of them have fulfilled that, with a varying degree of quality around us. So we really need to accelerate how our local communities and governments prepare. We need to help them with that, but we're also helped by that in figuring out what investments we really need to make. Is it defend in place for flooding or for sea level rise and storm surge, or is it moving inland? So similar as we think about other investments we make, so important that the work that the team did on this helps us then influence our designs, our planning, so that investments we're making now will be resilient 30 years from now.

And by the way, we also need to think about how we protect our workers in the field.

Or our trucks can't get in there, then that doesn't help. And so resilience has to be at the community level.

I think one place where the utility industry maybe has a head start is that by definition we are long-term planners. And so it's not just us thinking about this. EPRI has been terrific, climate ready work a few years back really got into how do these science standards need to change as we see climate changing and more extreme weather impacts. So I think one lesson we can share with others is the importance of thinking about 2050 and beyond and how what that means in terms of making designs survivable, resilient, etc. I would add whole of economy is not just utility infrastructure that needs to be hardened. I mean you made the point around well what happens to the buildings and communities, what happens to the roads. So we live in an interconnected system, interconnected economy, and there are significant investment needs that I don't think are being addressed yet but need to be addressed. In California, we've had the wildfire, you know, heartbreaking tragedy. And the California Earthquake Authority put out a report last April looking at that whole-of-economy response. You know, in it there was actually an interesting table that went beyond wildfire. And it was comparing the cost for a number of other natural impacts, some climate related, some not like earthquake. My wife's an earthquake scientist, so that's one near and dear to home. And the amounts are staggering of the investment need across the economy. That's a little tough to handle in two, four, six-year political cycles. But reality is, I think industry, think tanks, different sectors all need to be thinking about what this means in terms of planning needs, design needs, re-engineering needs because in fact the outside group put out this analysis which I think is probably in the right ballpark. Every dollar, well let me back up. We've seen $2 trillion in climate-related extreme weather-related losses over the last decade. We've seen $260 billion just last year. But every dollar spent today on preparing for adaptation saves $6 in response efforts once an event happens and another $7 in avoided economic losses. So there is payback to this. It's just sometimes hard to see in the short-term political cycle.

Well, I'll start with a thank you because you're helping to enable a lot of those partnerships and the discussions that you and your team continue to foster across sectors and importantly including government, right? So one of the better sessions at the COP meetings I've been to are the ones that you sponsored that bring that government-industry collaboration. We do need government to be playing a role here, right? In setting some of the long-term vision, setting some of the planning standards. We need industries collaborating around how we prioritize the capital investment needs. By the way, there's another role of government in making sure that we then have the appropriate regulatory legislative structures that can allow different sectors to attract and form the capital that they need. And for utilities, we're living an example right now in California where more work is needed to strengthen the wildfire liability management framework because we're not there yet. Today, our company's sitting at the lowest investment grade rating. We have a negative outlook. We may well go into non-investment grade. If the state doesn't act with urgency on that, and that's costing customer dollars, significant customer cost. So this goes back to as a society, as an economy, we need to be working together to make sure that we are preparing for what we know is coming.