It’s no great secret that America’s critical infrastructure is aging.

The U.S. power grid is in a precarious state, creating a plethora of risks for insurers and stakeholders alike, due to years of chronic underinvestment.

The American Society of Civil Engineers (ASCE) awarded the nation’s energy system a C- grade in its latest Report Card for America’s Infrastructure, a slight improvement from the previous D+ rating. According to the ASCE, several challenges plague the system: aging infrastructure requiring repair or replacement, growing electricity demand outpacing supply, the threat of cyberattacks disrupting power for millions, and damage from extreme weather events like hurricanes and wildfires.

The consequences of grid failure can be severe. Texas’s winter storm Uri in February 2021 is a stark example. Nearly 250 people died in subfreezing temperatures as the Electric Reliability Council of Texas conducted “customer load-shedding,” leaving many without power for nearly 100 hours, according to a report from the International Association for Energy Economics.

Grid operators face additional challenges, including unpredictable electricity demand, the transition from fossil fuels, and the rapid rise of renewable but intermittent power sources. These factors underscore the urgent need to enhance energy systems’ resilience, which the U.S. Department of Energy (DOE) defines as the grid’s ability to handle and quickly recover from outages. Flexibility, reliability, and security are equally critical for the 21st-century grid.

An outdated electrical system

Meeting future electricity needs in an orderly, responsible, and cost-effective manner is a significant challenge. The consensus is clear: the current U.S. grid is not equipped for the task. “The grid, as it currently sits, is not equipped to handle all the new demand,” Energy Secretary Jennifer Granholm stated in October 2023, according to The Associated Press. “We need it to be bigger, stronger, and smarter.”

Providing electricity to customers involves a complex network of generation, transmission, and distribution. The U.S. is divided into three regional grids—the eastern, western, and Texas grids—powered by natural gas, coal, nuclear, and renewables from thousands of commercial generators, transmitted through hundreds of thousands of miles of transmission lines and over 5 million miles of local distribution lines.

Since the 1950s, the bulk transmission system has developed based on the location of generation resources and demand centers. Between 1980 and 1990, there was significant growth in high-voltage transmission lines, driven by increased demand, technological advances, policy initiatives, and the integration of renewable energy resources.

However, investment has lagged in subsequent decades. Nearly 70 percent of the national grid is over 25 years old, with some parts exceeding 100 years, well past their 50-year life expectancy, according to the ASCE. While spending on transmission increased from $15.6 billion in 2012 to $21.9 billion five years later, the investment gap for the full grid could reach $179 billion by 2029, according to the ASCE Infrastructure Report Card.

From 2012 to 2022, the U.S. added nearly 15 million electricity customers, and in 2022, power customers nationwide used an average of 11 million megawatt hours daily, according to the DOE’s Energy Information Administration (EIA). During a summer 2023 heat wave, electricity consumption spiked to nearly 15 million megawatt hours, Vox reported in September 2023. This increased demand is expected to become the norm going forward.

A Princeton University study forecasts U.S. electricity demand could grow by as much as 49 percent by 2035, driven primarily by electric vehicle deployment. Such a surge requires major grid upgrades, including more high-voltage transmission and distribution lines, electrical equipment, and electric vehicle charging stations.

Economic and population growth, the adoption of electric vehicles and electric heating systems, and the increased use of electrical appliances and devices have all contributed to rising electricity demand. These changes far outpace the speed at which utilities have historically planned and invested in grid additions and modifications. “These dramatic changes in the shape and level of demand far outpace the speed at which utilities have historically planned for and invested in grid additions and modifications,” says Paul Hibbard, a principal with economic consultancy the Analysis Group.

In response, the White House announced $13 billion in funding to augment and update the grid, with independent analyses projecting a need for a 60 percent expansion of transmission by 2030 and a threefold increase in electricity capacity by 2050.

Various research studies and reports detail the necessary upgrades to prepare the grid for rising demand. These include investments in new or improved transmission lines, generation facilities, and interregional transmission capacity. The DOE’s National Transmission Needs Study, published in October 2023, projects a 20 to 128 percent increase in intraregional transmission deployment by 2035, with cross-region transfer capacity growth needed from 25 to 412 percent.

The report says improved reliability and resilience through additional transmission infrastructure investments would benefit nearly all U.S. regions, particularly the Plains, Midwest, and Delta. The Needs Study intentionally does not address specific solutions or potential costs, leaving it to the industry and the public to determine the optimal path forward.

Until recently, critical infrastructure owners and operators, along with the U.S. government that regulates them, have been resistant to such changes. Investor-owned utilities have opposed federal or state-level mandates to spend on grid modernization. However, stakeholders are now taking action, spurred by federal pressure to develop plans to prevent grid disruptions. The Biden administration’s Infrastructure Investment and Jobs Act of 2021 and Inflation Reduction Act of 2022 provide significant federal funds for bolstering transmission infrastructure.

The White House’s $20 billion Building a Better Grid project aims to offer grants for grid resilience against extreme weather and funding for innovation, reliability, and efficiency programs. States are also making moves, with California aiming for an emission-free grid by 2045 through a mix of tax incentives, grants, contracts, loans, and laws. Despite challenges, California’s approach has influenced the Biden administration’s federal strategy to eliminate carbon pollution from the electricity sector by 2035.

Insurance providers must also consider the drivers behind rising electricity demand. Failure to address these issues could lead to a surge in claims due to grid failures. This relationship is evident in South Africa, where the state-owned insurer stated openly in May 2023 that it would not cover claims from a national electricity system collapse, Bloomberg reported.

Currently, multiple components of the grid, particularly transmission and distribution assets, are typically excluded from standard property coverages, says William Hillman, president and CEO of Associated Electric & Gas Insurance Services (Aegis). As the grid faces unprecedented demand and evolving risks, stakeholders must prioritize significant investments to ensure a reliable, resilient, and secure power infrastructure for the future.

Fossil fuels vs. renewables

As of 2022, fossil fuels continued to dominate U.S. electricity generation, making up roughly 60 percent of the total—primarily from natural gas and coal, with a small contribution from petroleum, according to the EIA. Renewable sources accounted for just over 20 percent, while nuclear energy made up slightly less than that.

However, this energy mix is poised for a dramatic shift throughout the 2020s, with a strong trend toward renewable energy. By 2050, the EIA predicts that renewables will constitute 42 percent of the electricity generation mix, nearly double their share in 2022. Yet, a significant obstacle looms the grid’s capacity to handle the intermittent power generated by solar and wind—sources that don’t produce electricity continuously.

In 2022, more than 8,100 energy projects, mainly wind, solar, and batteries, were still awaiting approval to connect to the grid, up from 5,600 the previous year, as reported by The New York Times. This backlog has put immense pressure on interconnection systems, straining operators like PJM Interconnection. These systems are currently ill-equipped to manage the influx of renewable energy, particularly from wind turbines and solar arrays. The approval process for these projects can take years; in 2022, the average project spent five years in the queue, compared to three years in 2015.

Substantial investments are required to upgrade transmission systems and expand infrastructure. “There’s a lot of execution risk around expanding those transmission lines,” says Hillman. “You need underwriting expertise to understand that risk, especially for renewable assets being developed in remote areas, which need to cover long distances to connect to the grid. Insurance coverage for these new risks will demand additional capital and specialized underwriting expertise.”

This bottleneck discourages investors and lenders who would otherwise support clean energy projects. Moreover, the transition to renewable energy comes with its own set of risks, especially with emerging technologies. Engineers need to thoroughly vet these to understand their performance and the potential impact of loss events. Hillman points out the “evolving exposure” due to changes in how carbon generation assets are used and the need for new technologies like solar, wind, battery, hydrogen, and carbon sequestration to establish long-term performance records.

Renewable energy projects also face several liability concerns, such as technological failures, malfunctions, accidents, or fires that could cause property damage, revenue losses, and safety hazards. The complexity of these projects, involving multiple stakeholders, technologies, and regulations, increases the risk of errors, delays, disputes, and quality issues, leading to cost overruns, legal liabilities, and reputational damage. Contractual liabilities in maintenance contracts and operational risks, including personnel and equipment risks, cancellation costs, and testing challenges, further complicate the landscape.

Insufficient insurance coverage for physical damage or business interruption can leave energy companies facing significant costs for repairs or lost business due to incidents like fires or storm-related damage. Effective “loss control engineering” is crucial, Hillman says, requiring a quantified risk assessment and responsive coverage that is financially sustainable for both the insured and insurer.

Cyber threats

The grid, like all critical infrastructure, is a high-risk target for cyberattacks. This threat is no longer theoretical. In May 2021, a ransomware attack on Colonial Pipeline caused a network disruption, halting operations for several days. “Any disruption to our energy operations can quickly lead to panic and sow doubt among the public,” says Sara Sendek, managing director at FTI Consulting’s Cybersecurity & Data Privacy Communications practice.

The electric grid is the backbone of almost every critical infrastructure sector in the economy. Utilities managing the grid remain highly vulnerable to physical and digital attacks. “Ransomware attacks routinely target energy companies because of the known need for rapid response and recovery,” says Brian Boetig, senior managing director in FTI Consulting’s Cybersecurity practice.

The U.S. government acknowledges that various actors, including nation-states like China and criminal organizations, could launch cyberattacks to disrupt the grid. An effective cyberattack could result in “catastrophic, widespread, lengthy blackouts,” says Derek Kilmer, associate managing director of professional liability at Burns & Wilcox.

Due to its physical and digital design, protecting the power grid is a massive challenge. Current grid technology, built around industrial control systems from firms like Siemens and ABB, relies heavily on the Internet, creating potential entry points for hackers. The integration of consumer Internet-of-Things devices and reliance on GPS for monitoring and control further heighten cybersecurity risks.

Cyberattacks on industrial control systems have become more frequent, exploiting outdated network components and insufficient cybersecurity measures. Comprehensive cybersecurity risk evaluations and credentialed vulnerability scans are essential strategies to address this threat.

The Department of Energy is actively working to strengthen grid protection through cyber preparedness, incident response, recovery, and resilient technology deployment. The Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC) have both set security standards and offered incentives for advanced cybersecurity investments.

Kilmer emphasizes the need for improved coordination, updated laws and regulations, and simplified controls to reduce entry points for hackers. The private sector, which owns and operates critical infrastructure, also has a duty to implement cybersecurity best practices.

Expertise and capital requirements

The demand for cyber insurance has surged, but coverage has become harder to obtain due to stricter requirements. There is ongoing debate about whether the federal government should provide a backstop for private cyber insurance, but no formal measures have been taken.

In its March 2023 National Cybersecurity Strategy, the White House committed to exploring how the government can stabilize insurance markets against catastrophic risks, drive better cybersecurity practices, and provide market certainty during catastrophic events. A government backstop could make cyber insurance more viable by transferring the catastrophic risks that private insurers cannot bear alone.

The strategy also connects cybersecurity with the transition to clean energy, noting that new, interconnected technologies will bring higher risks. The DOE is collaborating with national laboratories and other stakeholders to secure the clean energy grid of the future and generate security best practices for other critical infrastructure sectors.

Insurers must encourage utilities to adopt cyber-resilient technologies that enable them to withstand, adapt to, and recover from cyber incidents while maintaining operations. Hillman believes that new insurance products will emerge to meet the demands of the distributed generation grid, but warns that if these risks are bundled into standard commercial property insurance policies without energy expertise, it could lead to misunderstandings and mismanagement of the peril.

The distributed generation grid presents a challenging exposure due to its correlated nature. A catastrophic event can cause power outages and property damage, leading to additional losses. Hillman cautions that while there may be insurance capital willing to cover these risks, it will come at an additional cost. The challenge is balancing the desire to transfer risk with insurers’ premium demands.

This article was originally posted in Institutional Real Estate.