TODAY’S STUDY: THE HOLE IN THE U.S. GRID

Failure to Act; The economic impact of current Investment Trends in Electricity Infrastructure

April 2012 (American Society of Civil Engineers)

Executive Summary

This report illustrates the importance of electric power generation, transmission and distribution systems to the national economy. The analysis performed focuses on a trend scenario that presumes the mix of electricity generation technologies (e.g. electricity generation from oil, natural gas, coal, nuclear, hydro, wind, solar) continues to evolve as reflected in recent trends, including a long-term evolution towards smart grid technologies.

Context

Electricity relies on an interconnected system that is composed of three distinct elements, as described below and illustrated by Figure 1:

1. Generation facilities—including approximately 5,800 major power plants and numerous other smaller generation facilities;

2. High-voltage transmission lines—a network of over 450,000 miles that connects generation facilities with major population centers; and

3. Local distribution systems that bring electric power into homes and businesses via overhead lines or underground cables. The first two elements are usually referred to as the bulk power system.

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The United States’ system of generation, transmission and distribution facilities was built over the course of a century. Centralized electric generating plants with local distribution networks were started in the 1880s and the grid of interconnected transmission lines was started in the 1920s. Today, we have a complex patchwork system of regional and local power plants, power lines and transformers that have widely varying ages, conditions, and capacities.

The aging of equipment explains some of the equipment failures that lead to intermittent failures in power quality and availability. The capacity of equipment explains why there are some bottlenecks in the grid that can also lead to brownouts and occasional blackouts. These concerns make it critical to understand what investments may be needed to keep the system in a state of good repair, and what implications any shortfall could have on the nation’s economy.

During the past decade, electric energy infrastructure has improved through an upturn in investment, and the negative economic impacts noted in studies of 10 and 20 years ago have been partially mitigated. However, more investment is needed to further reduce the incidence of service disruptions to households and businesses. The needs to maintain and update existing electric energy infrastructure, to adopt new technologies, and to meet the demands of a growing population and evolving economy over the next 30 years will impose significant requirements for new energy infrastructure investment.

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Projected Demand for Electricity

In the near term, there is close to adequate capacity to meet demand. Over the short term from 2011 through 2020, national growth in generation is expected to be 8% and demand for electricity in all regions is expected to average 8% or 9% based on projections from the U.S. Energy Information Agency. Divergence across different areas in the United States is not expected until the 2021-2040 period. Over the long-term there is expected to be significant regional differences as use is expected to increase by 39% in Florida, 34% in Western states and 20% in the Mid-Atlantic area.

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Recent Investment Trends

Investment in electricity infrastructure has increased in the past decade. From 2001 through 2010, annual capital investment averaged $62.9 billion, including $35.4 billion in generation, $7.7 billion in transmission, and $19.8 billion in local distribution systems (in 2010 dollars).

The average rate of this investment is used as the basis for calculating the gap between investment rates and expected future increases in investment needs. However, it is important to note the widely varying annual investment levels from 2001 to 2010, which ranged from $44 billion to $101 billion. Spending for generation showed the widest range, while distribution was the most narrow in range. Over the recent ten year period, estimated investment in electric generation facilities varied from $18 billion to $72 billion, while transmission and distribution investments varied from $6 billion to $10 billion and $17 billion to $22 billion, respectively (all dollars adjusted to 2010 value).

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The Potential Investment Gap for Electric Infrastructure

Nationally, extending current trends leads to funding gaps in electric generation, transmission, and distribution that are projected to grow over time to a level of $107 billion by 2020, about $11 billion per year, and almost $732 billion by 2040, as shown in Table 2, and the flow of annual expenditures through 2040 is illustrated by Figure 2.

In 2020, distribution and transmission infrastructure are expected to account for more than 88% of the investment gap while generation infrastructure represent roughly 11.5%. By 2040, however, generation infrastructure is potentially the most costly element of the gap, accounting for 55% of the total, with transmission accounting for 15%, and distribution accounting for 30%.

This is a reversal from 2020, when generation is expected to be the best funded element of electricity infrastructure.

The cumulative total investment gap adds the generation, transmission, and distribution infrastructure gaps. Those results are shown by region in Table 3, and indicate that the investment funding gap will be highest in the Southeast, the West, and the Mid-Atlantic area, and lowest in the Southwest and Florida. Growth alone does not appear to be driving the gap, but rather a combination of supply, technologies, and demand.

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Estimate of Future Costs Incurred

A projected investment gap will be some combination of aging equipment and capacity bottlenecks that lead to the same general outcome—a greater incidence of electricity interruptions. The interruptions may occur in the form of equipment failures, intermittent voltage surges and power quality irregularities due to equipment insufficiency, and/or blackouts or brownouts as demand exceeds capacity for periods of time. The periods of time can be unpredictable in terms of frequency and length, but the end result is a loss of reliability in electricity supply which imposes direct costs to households and businesses.

A failure to meet the projected gap will cost households $6 billion in 2012, $71 billion by 2020, and $354 billion by 2040. It will cost businesses $10 billion in 2012, $126 billion by 2020, and $641 billion by 2040. Annual costs to the economy will average $20 billion through 2020 and $33 billion through 2040. It is notable that these estimated impacts are significantly lower than the impacts estimated from studies conducted in the 1990s and 2000s.

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These costs incurred by failing to close the investment gap are higher than the investment itself. This means that it is economically inefficient for households and businesses to allow this higher cost scenario to occur. Even if sufficient investment is made to close the investment gap, the result will not be a perfect network for electricity generation and delivery, but rather one that has dramatically reduced, though not eliminated, power quality and availability interruptions.

Table 4 breaks down the estimated impact by region. These costs are not felt equally across the United States. Cumulative cost increases in the Southeast will be 30% of the total and costs in the West will be 22% of the total.

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Future Impact on Economy

If future investment needs are not addressed to upgrade our nation’s electric generation, transmission, and distribution systems, the economy will suffer. Costs may occur in the form of higher costs for electric power, or costs incurred because of power unreliability, or costs associated with adopting more expensive industrial processes. Ultimately, these costs all lead to the same economic impact: diversion of household income from other uses and a reduction in the competitiveness of U.S. businesses in world economic markets.

As costs to households and businesses associated with service interruptions rise, GDP will fall by a total of $496 billion by 2020. The U.S. economy will end up with an average of 529,000 fewer jobs than it would otherwise have by 2020. As shown in Table 5, even with economic adjustments occurring later on, with catch-up investments, the result would still be 366,000 fewer jobs in 2040. In addition, personal income in the U.S. will fall by a total of $656 billion from expected levels by 2020.

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Conclusion

The cumulative need, based on anticipated investment levels and the estimated investment gap, will be $673 billion by 2020, an average of about $75 billion per year. Based on investment over the past decade, closing the gap is within reach: the average annual need projected from 2012 through 2020 falls within the range of annual investment totals in the last decade, and there is not a single year through 2020 that is projected to be outside that range.

Reliable electricity is essential for the functioning of many aspects of household and economic activity today. As the nation moves towards increasingly sophisticated use of information technology, computerized controls and sensitive electronics, the need for electricity reliability becomes even greater. For the entire system to function, generation facilities need to meet load demand, transmission lines must be able to transport electricity from generation plants to local distribution equipment, and the decentralized distribution networks must be kept in good repair to ensure reliable final delivery.

Deficiencies or shortfalls in any one of these three elements of electricity infrastructure can affect our nation’s future economic growth and standard of living.