COVID-19 Reminds Us How Important it is to Plan for Downside Scenarios
As the coronavirus spreads across the United States and many other parts of the world, consumer demand has plummeted across a range of industries once perceived as core to the fabric of our society, including transportation, dining, arts and entertainment, and many others. In speaking with our customers, one common theme we observe is that organizations with the thoughtful foresight to invest in resilient systems, tools, and contingency plans end up being best equipped to respond to adversity.
The reality is, events like a global pandemic are quite challenging for most people – particularly lay people not in the relevant discipline – to predict. Similar to the events leading into the 2007-08 financial crisis, a select group of specialists and contrarians identified leading indicators and foresaw an upcoming crisis, with an accompanying economic fallout; however, the overwhelming majority of individuals and leaders did not. When it comes to predicting the future, some events are simply too unusual or novel in nature for traditional, statistical models – often relying on historical data – to adequately account for the downside risks.
Downside Scenarios and Resource Planning
While almost every planner – to one degree or another – considers downside scenarios, some individuals and organizations care more about negative future outcomes than others, since the risks are higher (severe, unpredictable scenarios are often called “black swan” events). Take, for example, energy grid operators, such as the Independent System Operator of New England (ISO-NE). ISO-NE is responsible for designing and overseeing New England’s wholesale electricity markets, including a market called the Forward Capacity Market (FCM), which compensates power plants and demand response participants for committing to providing power to the grid three years in advance of their delivery period.
In order to predict New England’s capacity requirement three years out, ISO-NE forecasts what the peak electricity demand will be in three years. Then, on top of that peak demand level, ISO-NE adds a “reserve margin” – essentially a buffer of additional capacity, typically around 15% – just in case peak load is higher than expected. ISO-NE calls this new target number the Installed Capacity Requirement (ICR). This forecasting approach, which utilizes very sophisticated statistical models, at its core is actually quite intuitive: predict a range of future outcomes, and prepare against downside scenarios.
The Grid During a Pandemic
Resource planning is critical to preparedness; under a pandemic, though, the main concern across all organizations involved in grid operations isn’t whether the grid will have enough generating capacity and demand response participants to power the system, but rather whether enough essential personnel will be healthy and available to perform their critical functions. According to ABC News, New York’s Independent System Operator (NYISO) is taking very admirable and extreme steps to ensure the power stays on by sequestering essential employees on-site in RVs and trailers.
Utility personnel, power plant operators, and other market participants must also perform their essential functions in order to prevent grid disruption, such as conducting routine maintenance and repairs of infrastructure. These individuals are risking their health and safety under extreme circumstances, and deserve supreme appreciation. Just as severe weather, like hurricanes and snow storms, can threaten the continuity of the grid, so too can non-weather related events, like cyber-attacks or – under truly extreme circumstances – pandemics. In addition, these scenarios could even overlap in timing, as Maine recently experienced when a powerful spring snowstorm cut power to 260,000 electricity customers during the pandemic, causing many businesses and residents to desperately await power restoration for days.
Resilient Organizations Prosper
What the coronavirus reminds us is that across all arenas and in many aspects of life – whether it’s at the individual, institutional, or societal level – we need to appreciate the real possibility of downside events. Since many of these scenarios are simply too unusual or improbable to foresee, organizations that focus on building resilient systems capable of withstanding downside events and thriving during upside events – rather than trying to predict the exact nature and timing of each possible downside event – are most likely to prosper.
In the context of energy management, this means thinking through backup plans for powering facilities when the grid goes down due to unforeseeable circumstances. Certain solutions, such as energy storage, solar-plus-storage, and microgrids, offer added resiliency in the event of downside scenarios, and additional revenue streams during normal grid operations. Ultimately, risk planning serves a critical function in modern businesses, and ironically one of the most vital and yet overlooked areas of business operations that deserves careful consideration is one that we often take most for granted: electricity.