Infrastructure in focus: The burning infrastructure issue from wildfires

Wildfires are becoming a material investment risk for infrastructure assets because they can damage physical networks, increase operating costs and expose utilities to uncertain liabilities.

• Electricity utilities, transmission and distribution companies, and water utilities are particularly exposed because their assets have large physical footprints.
• Power and grid damage can be widespread and expensive, while household affordability pressures may make regulators reluctant to approve higher compensation for new capital expenditure.
• Drought conditions linked to heightened wildfire activity can create operational problems, damage water infrastructure and complicate the repricing of water use.
• In California, inverse condemnation can make utilities liable for wildfire losses if their power lines contributed to a fire, even without negligence; proposed reforms would limit insurers' recovery from utilities and cap their household payments, while potentially requiring annual direct payments to households.
• Wildfire smoke reduces solar radiation reaching panels, increasing the need for storage to maintain grid and service reliability.

Takeaway: Infrastructure investors should assess both physical wildfire exposure and changing liability rules, with grid hardening, early-warning systems and storage becoming increasingly important, although the investment outlook depends materially on future regulatory decisions.