The Impact of the Electric Grid "Investment Gap" on the Nation's Competitiveness

Every four years, the American Society of Civil Engineers (ASCE) publishes "The Report Card for America's Infrastructure," which grades the current state of the nation's infrastructure segments on a scale of A through F. The average grade for all infrastructures in the most recent report (2013), according to the ASCE, is about a D. The next edition will be published in 2017.

In addition to the report card, the ASCE also publishes a series of "Failure to Act" reports, which are designed to answer questions in light of the grades that the infrastructure segments receive.

The most recent report, published in 2016, titled "Failure to Act: Closing the Infrastructure Investment Gap for America's Economic Future," was prepared by the Economic Development Research Group and attempts to answer the question: How does the nation's failure to act to improve the condition of U.S. infrastructure systems affect the nation's economic performance?

Specifically, the report addresses the current infrastructure gaps between today's needs and investment, and how these gaps will affect industries’ future productivity, national competitiveness and future costs to households. The report addresses these issues for five infrastructure categories: surface transportation, water and wastewater, airports, inland waterways and marine ports infrastructure, and electricity.

In the electricity category, the report explains that the nation's current electric grid is "a complex patchwork system of regional and local power plants, lines and transformers that have widely varying ages, conditions, and capacities.” Adding to the challenge is the fact that, "regulations and policy are complicated and inefficient, leading to uncertainty from infrastructure owners in where and when to invest."

Assuming that current investment trends continue, the funding gaps in electric generation, transmission and distribution are projected to accumulate over time to a total of $177 billion by 2025.

There is a projected gap of 22 percent for generation, 24 percent for transmission and 54 percent for distribution.

Reasons for the lower gap for generation include recent improvements in generating capacity in the short-term, as well as decreases in the rate of demand growth predicted by the North American Electric Reliability Corporation. (That is, demand for additional power generation is not expected to increase at the same levels as it has in the past.)

Transmission has a slightly higher projected investment gap than generation. "This is due to an increasingly decentralized generation network, which requires additional transmission capacity for load balancing and resiliency," according to the report. In some cases, generation is moving closer to consumers. In other cases, power is now required to travel much larger distances to endpoints from renewable sources (such as large solar and wind farms located in remote areas).

The distribution investment gap is the highest of all, more than double the transmission investment gap. One reason is that more distribution investments are becoming necessary in order to maintain or replace the aging infrastructure. In addition, it is becoming necessary to make new investments in what is called the "smart grid," which provides utilities with the necessary electronic information to balance loads, identify failures, and optimize power flows, allowing the utilities to use their resources more efficiently, in lieu of making expensive new generation investments.

What will happen if these investment gaps are not closed? According to the report, "The projected investment gap [in generation, transmission and distribution] will lead to a greater incidence of electricity interruptions if aging equipment is not addressed, capacity bottlenecks are not resolved, and increased demands are not accounted for."

The frequency and duration of these anticipated interruptions can be unpredictable, but the end result, according to the report, will be a loss of reliability in electricity supply, which imposes direct costs to households and businesses.

The report predicts, "As costs to households and businesses associated with service interruptions rise, GDP will fall by a total of $819 billion by 2025 and $1.9 trillion by 2040. In addition, the U.S. economy will end up with an average of 102,000 fewer jobs than it would otherwise have by 2025, and 242,000 fewer jobs in 2040."

In terms of the effects of service interruptions on business in specific, the report states, "Unreliable electric service carries significant costs associated with power outages, which vary by the duration of the outage and the sector being affected." The average outage cost for industrial firms is estimated to be in the range of $2,600 to $6,600 per average short-duration power interruption while the average outage cost for commercial firms is estimated to be in the range of $900 to $1,700. In the manufacturing sector, particularly energy-intensive industries such as metals, non-metal mineral manufacturing, and paper manufacturing, impacts of power outages cause higher production costs, which affect the competitiveness of these U.S. industries in global markets.

In order to adjust to more frequent outages, the report suggests, manufacturers will need to invest in more expensive industrial processes. If they opt not to make investments in their internal processes, they will need to invest in costly locally-based sources of generation and distribution in order to ensure more stable power supplies.

The impact on households will be less dramatic, of course. "Households will also be affected by outages, but at a far lower scale," says the report. "The average household cost is minimal per interruption, which mostly is due to spoilage of refrigerated foods." Higher utility costs, however, according to the report, will decrease discretionary spending, which will have its own impact on the economy.

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