From systemic financial risk to grid resilience: Embedding stress testing in electric utility investment strategies and regulatory processes

Abstract

ABSTRACT In response to major system disruptions, policymakers have prioritized enhancing the resilience of the financial services and energy sectors, with a particular focus on banking and electricity regulation. In both sectors, ‘regulating for resilience’ requires bridging system-level policy goals and institution-level policy instruments as well as tailoring institutional requirements to firms’ idiosyncratic risk profiles. Stress testing has enabled financial regulators to partially overcome these analytical and governance challenges, resulting in better capitalized and managed banks, increased attentiveness to systemic risk, and a more resilient financial system. Recognizing the opportunity for translation across sectors and disciplines, this article develops a novel methodology and an actionable policy framework for embedding stress testing in electric utility investment strategies and regulatory processes. It demonstrates how stress testing could enhance the resilience and sustainability of the U.S. electric grid and explores opportunities for regulatory coordination in multi-sector analyses of climate-related risk and resilience.