under the Current Trajectory scenario, with additional energy transition investments under the Achieved Commitments scenario, customer costs are likely to rise in the coming years. The Pacific region experienced significant rate increases of about 5 percent a year from 2018 to 2021. 8 McKinsey modeling found that if energy providers and policy makers don’t act to optimize affordability, bills could increase by as much as 30 to 40 percent in real terms by 2050 for a fully electrified single-family home in the Northeast. Such increases would likely be hardest on low-income households, whose energy bills account for a disproportionate share of income. Costs that aren’t managed appropriately could cause setbacks to the energy transition from customers, regulators, or both. Customer backlash against rising bills has driven notable challenges to the energy transition in Germany and the United Kingdom. In these cases, when energy expenditure rose to 5 percent of household income, prices were capped for customers and green-electricity surcharges were reduced. Similarly, utility regulators have often cited affordability when denying funding requests. In recent years, US utilities have been asking regulators for more increases—from 12 requests in 2000 to 90 in 2018—yet gaining approval for much lower amounts. In 2000, utilities received a total of $1.2 billion less than they requested; in 2018, this shortfall more than tripled to $4 billion. 9
parity with an internal combustion engine vehicle after five years of operation. 3 And in many climates, air source heat pumps could cost up to 40 percent less over their lifetime than gas furnaces. 3. Reliability and resilience could drive significantly more spending in the near term As seen in Exhibit 1, the power sector could require significant investment even on the current trajectory. One example: about 75 to 90 percent of expenditures through 2030 In the distribution system—the fastest-growing area of spending in the electric value chain—would be focused on reliability and resilience. Only 10 to 25 percent would be spent directly on the energy transition. The principal cost drivers in this area have been traditional reliability investments, particularly to replace assets that are significantly older than their planned or useful lives. More than 70 percent of transmission lines and transformers are more than 25 years old, “creating vulnerability,” according to the Department of Energy (DOE). 4 One utility estimated that to maintain the current age of the grid and avoid further deterioration, it would need to increase spending to 52 percent above current forecasts through 2030. 5 Reliability investments are likely to be accompanied by a rapidly increasing category of resilience investments as customers become increasingly concerned about the performance of the grid during disaster events and in storms. 6 Climate
change is exacerbating the problem as extreme weather events become more frequent and intense. 7 Furthermore, if the electric grid increasingly powers vehicles and heating, customers would be ever more reliant upon a resilient system. These projected reliability and resilience investments would increase customer bills regardless of additional energy transition investments. However, to enable a more orderly energy transition, those investments could also be accounted for and managed cost-effectively, or customers could push back as they face increasing energy bills. Such public discontent would pose a challenge to the energy transition because those reliability and resilience investments are effectively being made to avert future crises through actions such as undergrounding of distribution lines to mitigate wildfire risk and hardening electric poles so that fewer come down during intensifying windstorms. These efforts at crisis avoidance might not be understood by customers who otherwise won’t experience much difference in service. There is a risk, therefore, that customers could attribute rising energy costs to more-visible solar farms and windmills rather than to reliability and resilience measures that are less visible and feature less often in public discourse. 4. Management of costs is critical for customers and utilities to support the energy transition Because investments in grid reliability and resilience would grow significantly even
3 Zhe Liu et al., “Comparing total cost of ownership of battery electric vehicles and internal combustion engine vehicles,” Energy Policy , November 2021, Volume 158. 4 “DOE launches new initiative from President Biden’s Bipartisan Infrastructure Law to modernize national grid,” US Department of Energy, Office of Electricity, January 12, 2022. 5 Utility executive testimony, FERC. 6 Pacific Gas & Electric has announced $15 billion to $30 billion of spending on undergrounding through 2030. 7 Sarah Brody, Matt Rogers, and Giulia Siccardo, “Why, and how, utilities should start to manage climate-change risk,” McKinsey, April 24, 2019. 8 US Energy Information Administration (EIA) data for average electricity prices across all sectors from 2018 to 2022. 9 Dan Lowrey, “Inflation rearing its head in electric, gas general rate cases nationwide,” S&P Global Market Intelligence, October 4, 2022.
Accelerating the journey to net zero
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