Abstract
Electric power utilities face a wide range of risks that cause financial uncertainty, with potential impacts on prices for customers. Among these, weather variability and retail load defection are perhaps two of the most studied. Whereas weather extremes expose utilities to unpredictable swings in electricity supply and demand, retail load defection, in which customers adopt distributed energy resources or switch to alternative providers, can alter utility business models fundamentally. We showed for the first time that these two phenomena can interact dynamically, with potential negative consequences for electricity ratepayers. We found that retail load defection could alter utilities’ financial exposure to weather risk in a matter of years. Using open-source power system simulation software coupled with a utility financial model, we simulated outcomes for a major hydropower-producing California electric utility under stationary hydrometeorological uncertainty, and under three different load defection scenarios ranging from 0% to 90%. We found that as load defection increases, the utility’s three main businesses (wholesale generation, transmission, and retail distribution) shift in relative importance. As a consequence, the impacts of interannual variability in hydropower production and demand in the utility’s system (a function of streamflow and air temperatures, respectively) become significantly altered. Air temperatures (a proxy for demand) become more predictive of utility financial performance, whereas the utility’s exposure to hydrology is poised to shift in complex ways. Drought will remain a major risk, but extremely wet years (which historically are beneficial to the utility’s significant hydropower holdings) may become damaging due to their association with low market prices. Our results also suggest that load defection could put much more pressure on utilities to make major annual rate adjustments or quickly adapt current strategies for managing weather risk.
Get full access to this article
View all available purchase options and get full access to this article.
Data Availability Statement
All data, models, or code that support the findings of this study are available from the corresponding author upon reasonable request.
References
Bain, D. M., and T. L. Acker. 2018. “Hydropower impacts on electrical system production costs in the Southwest United States.” Energies 11 (2): 368. https://doi.org/10.3390/en11020368.
Bartos, M., M. Chester, N. Johnson, B. Gorman, D. Eisenberg, I. Linkov, and M. Bates. 2016. “Impacts of rising air temperatures on electric transmission ampacity and peak electricity load in the United States.” Environ. Res. Lett. 11 (11): 114008. https://doi.org/10.1088/1748-9326/11/11/114008.
Bryant, S. T., K. Straker, and C. Wrigley. 2018. “The typologies of power: Energy utility business models in an increasingly renewable sector.” J. Cleaner Prod. 195 (Sep): 1032–1046. https://doi.org/10.1016/j.jclepro.2018.05.233.
California Public Utilities Commission. 2020. Generate rate case. San Francisco: California Public Utilities Commission.
Castaneda, M., M. Jimenez, S. Zapata, C. J. Franco, and I. Dyner. 2017. “Myths and facts of the utility death spiral.” Energy Policy 110 (Nov): 105–116. https://doi.org/10.1016/j.enpol.2017.07.063.
Collins, S., P. Deane, B. Ó Gallachóir, S. Pfenninger, and I. Staffell. 2018. “Impacts of inter-annual wind and solar variations on the European power system.” Joule 2 (10): 2076–2090. https://doi.org/10.1016/j.joule.2018.06.020.
Deng, S. 1999. “Financial methods in competitive electricity markets.” Doctoral dissertation, Univ. of California Berkeley.
Deng, S. J., and S. S. Oren. 2006. “Electricity derivatives and risk management.” Energy 31 (6–7): 940–953. https://doi.org/10.1016/j.energy.2005.02.015.
Deng, T., W. Yan, S. Nojavan, and K. Jermsittiparsert. 2020. “Risk evaluation and retail electricity pricing using downside risk constraints method.” Energy 192 (Feb): 116672. https://doi.org/10.1016/j.energy.2019.116672.
Denholm, P., M. O’Connell, G. Brinkman, and J. Jorgenson. 2015. Overgeneration from solar energy in California. A field guide to the Duck chart. Golden, CO: National Renewable Energy Laboratory.
Foster, B. T., J. D. Kern, and G. W. Characklis. 2015. “Mitigating hydrologic financial risk in hydropower generation using index-based financial instruments.” Water Resour. Econ. 10 (Apr): 45–67. https://doi.org/10.1016/j.wre.2015.04.001.
Franco, G., and A. H. Sanstad. 2006. Climate change and electricity demand in California. Rep, No. CEC-500-2005-201-SF. San Francisco: California Climate Change Center.
Griffin, P. A. 2020. “Energy finance must account for extreme weather risk.” Nat. Energy 5 (2): 98–100. https://doi.org/10.1038/s41560-020-0548-2.
Gunther, S. J., and D. Bernell. 2019. “Challenging the system: The role of community choice aggregation in California’s transition to a renewable energy future.” Electricity J. 32 (10): 106679. https://doi.org/10.1016/j.tej.2019.106679.
Kennedy, S. F., and B. Rosen. 2021. “The rise of community choice aggregation and its implications for California’s energy transition: A preliminary assessment.” Energy Environ. 32 (2): 262–280. https://doi.org/10.1177/0958305X20927381.
Kern, J. D., and G. W. Characklis. 2017. “Evaluating the financial vulnerability of a major electric utility in the Southeastern U.S. to drought under climate uncertainty and an evolving generation mix.” Environ. Sci. Technol. 51 (15): 8815–8823. https://doi.org/10.1021/acs.est.6b05460.
Kern, J. D., G. W. Characklis, and B. T. Foster. 2015. “Natural gas price uncertainty and the cost-effectiveness of hedging against low hydropower revenues caused by drought.” Water Resour. Res. 51 (4): 2412–2427. https://doi.org/10.1002/2014WR016533.
Kern, J. D., Y. Su, and J. Hill. 2020. “A retrospective study of the 2012-2016 California drought and its impacts on the power sector.” Environ. Res. Lett 15 (9): 1–13.
Kraft, B. 2018. “Shedding light on stakeholder power in a regulated market: A study of variation in electric utilities’ climate change disclosures.” Organ. Environ. 31 (4): 314–338. https://doi.org/10.1177/1086026617718429.
Laws, N. D., B. P. Epps, S. O. Peterson, M. S. Laser, and G. K. Wanjiru. 2017. “On the utility death spiral and the impact of utility rate structures on the adoption of residential solar photovoltaics and energy storage.” Appl. Energy 185 (Part 1): 627–641. https://doi.org/10.1016/j.apenergy.2016.10.123.
Mazdiyasni, O., and A. AghaKouchak. 2015. “Substantial increase in concurrent droughts and heatwaves in the United States.” Proc. Natl. Acad. Sci. U.S.A. 112 (37): 11484–11489. https://doi.org/10.1073/pnas.1422945112.
Nierop, S. C. A. 2014. “Envisioning resilient electrical infrastructure: A policy framework for incorporating future climate change into electricity sector planning.” Environ. Sci. Policy 40 (Jun): 78–84. https://doi.org/10.1016/j.envsci.2014.04.011.
O’Shaughnessy, E., J. Heeter, J. Gattaciecca, J. Sauer, K. Trumbull, and E. Chen. 2019. “Community choice aggregation-challenges, opportunities, and impacts on renewable energy markets. Golden, CO: National Renewable Energy Laboratory.
Pacific Gas and Electric Company. n.d.-a. Departing load. San Francisco: Pacific Gas and Electric Company.
Pacific Gas and Electric Company. n.d.-b. PG&E reorganization information. San Francisco: Pacific Gas and Electric Company.
Pacific Gas and Electric Company. 2017. Pacific Gas and Electric Company 2017 joint annual report to shareholders. San Francisco: Pacific Gas and Electric Company.
Pacific Gas and Electric Company. 2019. Pacific Gas and Electric Company 2019 joint annual report to shareholders. San Francisco: Pacific Gas and Electric Company.
Pappas, S. S., L. Ekonomou, D. C. Karamousantas, G. E. Chatzarakis, S. K. Katsikas, and P. Liatsis. 2008. “Electricity demand loads modeling using AutoRegressive Moving Average (ARMA) models.” Energy 33 (9): 1353–1360. https://doi.org/10.1016/j.energy.2008.05.008.
Sautter, J. A., and K. Twaite. 2009. “A fractured climate? The political economy of public utility commissions in an age of climate change.” Electricity J. 22 (6): 68–76. https://doi.org/10.1016/j.tej.2009.05.010.
Schulten, A., A. Bertolotti, P. Hayes, and A. Madaan. 2019. “Getting physical: Scenario analysis for assessing climate-related risks.” In World Scientific Encyclopedia of Climate Change: Case Studies of Climate Risk, Action, and Opportunity Volume 3, edited by J. W. Dash. 211–217. New York: BlackRock.
Stanger, J., I. Finney, A. Weisheimer, and T. Palmer. 2019. “Optimising the use of ensemble information in numerical weather forecasts of wind power generation.” Environ. Res. Lett. 14 (12): 124086. https://doi.org/10.1088/1748-9326/ab5e54.
St. John, J. 2017. “As California mulls retail electricity choice, utilities are losing customers in droves.” GreenTech Media. Accessed May 17, 2017. https://www.greentechmedia.com/articles/read/california-utilities-are-losing-customers-in-droves.
Su, Y., J. D. Kern, and G. W. Characklis. 2017. “The impact of wind power growth and hydrological uncertainty on financial losses from oversupply events in hydropower-dominated systems.” Appl. Energy 194 (May): 172–183. https://doi.org/10.1016/j.apenergy.2017.02.067.
Su, Y., J. D. Kern, S. Denaro, J. Hill, P. Reed, Y. Sun, J. Cohen, and G. W. Characklis. 2020a. “An open source model for quantifying risks in bulk electric power systems from spatially and temporally correlated hydrometerological processes.” Environ. Modell. Software 126 (Apr): 104667. https://doi.org/10.1016/j.envsoft.2020.104667.
Su, Y., J. D. Kern, P. M. Reed, and G. W. Characklis. 2020b. “Compound hydrometeorological extremes across multiple timescales drive volatility in California electricity market prices and emissions.” Appl. Energy 276 (Oct): 115541. https://doi.org/10.1016/j.apenergy.2020.115541.
Taminiau, J., J. P. Banks, D. Bleviss, and J. Byrne. 2019. “Advancing transformative sustainability: A comparative analysis of electricity service and supply innovators in the United States.” Wiley Interdiscip. Rev.: Energy Environ. 8 (4): 1–16. https://doi.org/10.1002/wene.337.
Tobin, I., W. Greuell, S. Jerez, F. Ludwig, R. Vautard, M. T. H. van Vliet, and F. M. Bréon. 2018. “Vulnerabilities and resilience of European power generation to 1.5°C, 2°C and 3°C warming.” Environ. Res. Lett. 13 (4): 044024. https://doi.org/10.1088/1748-9326/aab211.
Turner, S. W. D., N. Voisin, J. Fazio, D. Hua, and M. Jourabchi. 2019. “Compound climate events transform electrical power shortfall risk in the Pacific Northwest.” Nat. Commun. 10 (1): 1–8. https://doi.org/10.1038/s41467-018-07894-4.
van Vliet, M. T. H., J. Sheffield, D. Wiberg, and E. F. Wood. 2016. “Impacts of recent drought and warm years on water resources and electricity supply worldwide.” Environ. Res. Lett. 11 (12): 124021. https://doi.org/10.1088/1748-9326/11/12/124021.
Woetzel, J., D. Pinner, H. Samandari, H. Engel, M. Krishnan, M. Boland, and C. Powis. 2020. Climate Risk and response. Chicago: McKinsey Global Institute.
Zhou, T., N. Voisin, and T. Fu. 2018. “Non-stationary hydropower generation projections constrained by environmental and electricity grid operations over the western United States.” Environ. Res. Lett. 13 (7): 074035. https://doi.org/10.1088/1748-9326/aad19f.
Information & Authors
Information
Published In
Journal of Water Resources Planning and Management
Volume 148 • Issue 3 • March 2022
Copyright
© 2021 American Society of Civil Engineers.
History
Received: Mar 26, 2021
Accepted: Nov 19, 2021
Published online: Dec 28, 2021
Published in print: Mar 1, 2022
Discussion open until: May 28, 2022
ASCE Technical Topics:
- Air temperature
- Business management
- Continuum mechanics
- Contracts and subcontracts
- Design (by type)
- Dynamics (solid mechanics)
- Electric power
- Energy engineering
- Energy sources (by type)
- Engineering fundamentals
- Engineering mechanics
- Financial management
- Hydro power
- Infrastructure
- Lifeline systems
- Load factors
- Motion (dynamics)
- Practice and Profession
- Pricing
- Renewable energy
- Solid mechanics
- Structural design
- Temperature (by type)
- Thermal properties
- Thermodynamics
- Uncertainty principles
- Utilities
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.