Building tomorrow’s grid: managing extreme heat risk in a warming world

Extreme heat from climate change is increasingly threatening U.S. energy supply and reliability – forcing energy companies to take steps to safeguard operations and meet rising demand.

Key Takeaways

1. Extreme heat from climate change is increasingly threatening U.S. energy supply and reliability, especially for fossil-fuel power plants, as electricity demand rises.
2. By 2050, billions of dollars in economic value and up to 18% of U.S. generating capacity could be exposed to heat risk.
3. Energy companies should diversify sources, strengthen infrastructure, and factor climate risk into planning to safeguard operations and meet rising demand.

Rapid growth and investment in Artificial Intelligence (AI) and its power-hungry data centers is driving one of the greatest expansions of the U.S. energy grid since its inception in the late 1800s. As new generation facilities come online, energy companies, and the businesses that rely on them, need to understand how climate change will impact these critical resources.

By 2050, about $228B of economic value from the utilities sector in the U.S. will be generated in areas highly exposed to extreme heat, compared to only $16B today1, according to new insight from Aon’s Climate Risk Monitor. The climate analytics tool combines sector-specific vulnerability with forward-looking climate projections to estimate how much power generation is expected to be at risk to various extreme weather events. Fossil-fuel thermoelectric plants are the most at risk, with up to 243 GW or 18% of total generating capacity expected to be at high risk from heat by 2050 (Fig. 1). That is enough electricity to power more than 40 cities the size of New York City during peak demand.

Given the high risk it poses, and the scientific certainty of increasing extreme heat in the future, we take a deeper look at its impact on thermoelectric power generation.

Why is Extreme Heat So Important?

Heat impacts both the supply and demand sides of electricity. It reduces generator capacity and transmission efficiency, while simultaneously stressing the demand side as air conditioning use surges. As a result, forced outages and rolling blackouts rise significantly during extreme heat events, compounding health risks to vulnerable populations, and causing a cascade of negative socio-economic impacts. It’s estimated that weather-driven power outages cost the U.S. $20-50 billion annually2.

Thermoelectric power plants that rely on steam to spin a turbine—including both fossil fuel and nuclear sources— account for over 70 percent of total U.S. power generation3 and are especially vulnerable to increasing heat for three key reasons:

1. Reduced efficiency and capacity – As ambient temperatures climb, turbines lose efficiency, producing less electricity for the same fuel input. It’s estimated that climate change could reduce the average capacity of U.S. thermoelectric plants around 5-15% by 2050.
2. Increased water needs, reduced supply - Heavy reliance on water for cooling and hotter conditions mean more water is required to prevent overheating, leading to increased costs and lost capacity, which can be further compounded by reduced water supply from the co-occurrence of extreme heat and drought in a warmer climate.
3. Curtailments and shutdowns - During periods of extreme heat, some plants are forced to dial back production or shut down altogether to avoid equipment damage or environmental violations tied to water discharge temperatures. Between 2000-2015 in the U.S.6, 43 such instances occurred7, and more than 30 European plants were forced to shut down during the 2003 heatwave alone.

Measure What Matters

Heat has sweeping impacts, not just across the energy sector, but also across health, agriculture, and construction, among others. Tailoring climate data to sector-specific needs is critical to ensure that risk managers, planners, and regulators can properly assess the relevant impacts of climate change.

Cooling degree days (CDD) is a heat metric of specific relevance to the energy sector. By measuring how much temperatures are above a specific threshold likely needed for air conditioning (usually 65°F), they’re directly proportional to the amount of electricity needed to cool a building. CDD thus serve as a valuable predictor of weather-driven changes in energy demand, with historical fluctuations in summer electricity highly correlated with changes in CDD.

Rising Demand in a Warming World

By combining historical CDD data with forward looking projections from Aon’s Climate Risk Monitor, we can estimate climate-driven trends in energy demand across different regions of the U.S. Figure 3 shows the changes in the average CDD per year for each census region, where CDD data is weighted by population for a more accurate measure of how warming temperatures will affect cooling demand.

Rising temperatures will increase air conditioning usage nationwide, extending cooling needs in already hot regions like the West South-Central region, and creating new demand in areas that previously needed little or none, like New England. Increases of 20-50% can be expected by year 2050 under a “moderate” future climate scenario where global warming reaches about 2.0°C by mid-century.

The negative impacts of extreme heat on thermoelectric power supply and efficiency come just as electricity demand is set to accelerate. At the same time, the exponential growth of AI and data centers is creating a new source of additional demand9. The result is a widening gap: climate change makes it harder for existing plants to produce electricity at levels they previously could, while the nation’s need for electricity is only growing.

Preparing for What’s Next

The U.S. will need to expand energy capacity significantly in the coming decades to meet rising demand. It is critical that climate is considered in this expansion to ensure that the grid can be resilient amid increasing risk from climate change.

The stakes are high. Without planning for extreme heat impacts, the U.S. risks building additional capacity on a shaky foundation – expanding power generation while not accounting for mounting climate risks. However, with proper risk identification, quantification, informed adaptation and strategic investments, the energy sector can navigate climate risk while meeting rising demand.

1. Diversification is essential – Different energy sources have different vulnerabilities to climate risk. A healthy mix of renewable sources along with thermoelectric generation can help increase grid reliability by reducing the risk to extreme heat.
2. Increase infrastructure resilience – Infrastructure upgrades are effective measures to adapt to heat events. For thermoelectric power plants, this means investing in advanced cooling technologies and improved water management strategies to maintain reliable output and avoid curtailments.
3. Integrate climate risk in investments - Integrating climate risk into the investment strategy of large-scale commercial facilities like data centers and power plants can help ensure operational continuity and financial protection, by identifying climate resilient site selection and technologies, and helping to secure more favorable insurance coverage.