Is the U.S. Investing Enough in Electricity Grid Reliability?

We had a 2-hour power outage at our house last week, together with 45,000 other customers in the East Bay. The lights flickered off just after 8PM and didn’t come back on until after 10PM. Nothing like going without something that you take for granted to make you realize just how valuable it is.

The East Bay outage was reportedly caused by a squirrel

The East Bay outage was reportedly caused by a squirrel

My son and I had fun gathering our candles and figuring out that our hand-crank radio played Mariachi music, but that only lasted for about half an hour. As the minutes ticked by without WiFi, the economist in me started thinking about just how much I would be willing to pay to get the electricity back. I had a meeting the next day to prepare for, and it was my turn to take a pass through the slide deck. I couldn’t even get good enough cell service to download the presentation to my phone, perhaps because local cell towers were also affected by the outage.

The beauty of the free market is that it allocates resources to the sectors of the economy where they are most valued. (Yes, I’m beating the economics drum, but this is econ 101 – we ALL agree on this one, even the two-handed economists.) If enough customers value a good highly and it’s inexpensive to produce, an innovative entrepreneur can make money by figuring out how to sell that good to consumers.

So, most goods and services that people value more highly than it costs to provide them exist, and things that aren’t valued don’t exist. The market supplies frozen pizzas and smart phones, but not condos in space, because they’re super expensive and not, currently, in high demand.

frozen pizzaThings are different with electricity. Given that the majority of the world’s citizens get electricity from some kind of regulated or state-owned monopoly, we’ve basically given up on using the market to figure out how much people value electricity reliability. So, regulators and the regulated companies are left guessing how much customers are willing to endure higher prices to cover a more robust system.

My personal hypothesis is that we have gotten this wrong in the U.S. I suspect we’re underproviding reliability and spending too little on making the grid more secure.

Even in areas of the U.S. that have restructured (or, what we used to call “deregulated”) their electricity industries, the distribution system remains regulated. Most outages are caused by failures at the distribution system level. Further, in most restructured wholesale markets, generation reliability is impacted by regulatory decisions on things like reserve margins.

Yes, there are many parts of the developing world where (only!) 2 hours without power is not a good day but an extraordinary day. But, there’s another side to the spectrum. Germany and other parts of Europe have much more reliable electricity systems than the U.S.

I first heard this anecdotally from a friend who grew up in Germany and said he could remember one outage throughout his entire childhood. The table below shows that his anecdote is true generally.

GT

Source: Galvin Electricity Initiative report, Table 1.

Being on top of this list isn’t good. Larger values of SAIDI (System Average Interruption Duration Index) and SAIFI (System Average Interruption Frequency Index) indicate less reliable power. Roughly, SAIDI reflects the average number of minutes per year that customers are without electricity and SAIFI reflects the average number of outages customers experience per year. Americans endure 10 times as many minutes of outages compared to Germans.

stormRecent work from Lawrence Berkeley National Labs (LBNL) suggests that, if anything, reliability has been getting worse in the U.S. over time.

If the regulators in both Germany and the U.S. were doing a good job approximating market outcomes, these vast differences in the amount of reliability would suggest that either the German utilities can provide reliability at a much lower cost or that German customers have much higher demands for reliability. My guess is that neither of these things is true. The electricity systems are very similar, so I don’t think Germans are using a radically different technology to drive their costs down. Maybe Americans live in areas that are more exposed to storms, but 10 times more exposed seems implausible.

Why do I think the U.S. is spending too little on reliability and not that Germany is spending too much? At a very macro level, estimates of the annual economic losses from electricity outages are very high, ranging from $20 billion to $150 billion annually. This seems like a lot of lost productivity and I would hope there are relatively inexpensive investments we can make in the grid to avoid these losses. Also, as I have blogged about earlier, to the extent we can back out how much regulators think customers value reliability, the estimates seem low.

Is Elon Musk going to solve this for us? In the post-Powerwall world, people who value reliability highly can vote with their pocketbooks and spend $3,500 to get a battery backup that will deliver 10 kWh each time there’s an outage. From what I’ve read, they’ll spend another $3,500 on installation and the ancillary equipment, like a smart inverter. Someone I spoke to recently who didn’t like outages was looking forward to installing a Powerwall, although he is a senior employee of a large tech company and probably thinks about $7,000 investments the way most of us think about spending $50.

Let’s run some quick numbers on the Powerwall. Let’s say it costs $7,000 for a 10kWh battery, which I assume you use for four 2-hour outages per year. According to the table above, the U.S. average is 240 minutes of outages across 1.5 events, but let’s think about people who are experiencing many more outages than average. The Powerwall is supposed to last for 15 years, so at a 5% real interest rate, the rental cost of capital is about $675 per year to get 10 kWh 4 times per year. This amounts to almost $17 per kWh. Given that average U.S. customer pays 12 cents per kWh, that’s a SUPER expensive backup.

powerwallFinally, it’s not clear to me that having a Powerwall at your house will deliver the kind of reliability we really want. In our highly networked world, it’s possible the outage will disable other services. If the battery backups on the local cell towers run out, it could be hard to make calls.

In short, while the Powerwall might satisfy the demand for reliability for a handful of very wealthy or very outage averse U.S. customers, I suspect it will leave a lot of unmet demand. Plus, if we’re just talking about backup electricity, it’s not even clear that the Powerwall fills a niche that a diesel generator didn’t already fill, though it does look sleek.

We have a lot more to learn about reliability. This post makes some assertions that I would love to see substantiated with hard evidence! But, as the LBNL folks point out, we currently don’t even collect very good data.

The good news is that new technologies seem poised to deliver better information on reliability and to give us new ways to enhance the electric grid. But, whether utility companies and regulators have the right incentives to use this information to ensure that systems are delivering the correct amount of reliability is an open question.

About Catherine Wolfram

Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, Co-Director of the Energy Institute at Haas, and a Faculty Director of The E2e Project. Her research analyzes the impact of environmental regulation on energy markets and the effects of electricity industry privatization and restructuring around the world. She is currently implementing several randomized control trials to evaluate energy efficiency programs.
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39 Responses to Is the U.S. Investing Enough in Electricity Grid Reliability?

  1. It’s critically important to understand that most utility outages happen because of failures of equipment in the distribution system, not because the power system is unable to generate enough electricity. Most of the production costing literature discusses system outages related to the latter, but the former are often ignored.

    You wrote: “I don’t think Germans are using a radically different technology to drive their costs down”. But they are! Undergrounding wires, which is expensive, is the single most effective way to improve distribution reliability. Most German distribution wires are already underground, while ours aren’t. That explains the big difference in outages.

    • I am generally in agreement.

      Distribution is generally the source of outages. An alternative for critical facilities such as aluminum smelters is to locate auxiliary generation at the site to provide power at milliseconds of interruptions. The same rational is applicable to the home provided we are ready to pay for the required dedicated on-site backup generation or lines to a separate substation.

      Germans are paying dearly for a good number of items impacting power services they receive: subsidies of solar power, higher gas prices, elimination of nuclear power, not to mention the cost of underground wires and socialized interconnection costs.

  2. Mark Cooper says:

    Jon’s point is telling, if population density is the key driver of the cost of wires. The population density in the U.S. is one seventh that of Germany. Even urban densities in the U.S, tend to be one-quarter of Europe.

    So, we get back to the cost benefit question and we need to constantly adjust our analysis. As electricity becomes more central to all aspects of daily life, the cost of outages rises, so the old standard can become obsolete.
    At some point, we also need to start thinking about entirely different approaches to reliability (e.g. microgrids, community and self supply, etc.

  3. dzetland says:

    Great post! Don’t forget the high cost that people pay now (via diesel backups) as well as the MUCH higher cost that “we” experience from unexpected, occasional outages. The power outage in Amsterdam a month ago made national news (it’s a small country, but still), mostly because there were no backups!

    I don’t mind paying for reliability when the downside (adverse selection) is so bad.

  4. This is a very interesting read! Long response here (not a rant!). Thanks for sharing, Prof. Wolfram! Here are a few thoughts on measures of reliability, a comparison of Germany, and the question of reliability risk as it plays out within rate structures.

    Of note, one may want to consider a cautious comparison, especially in regard to reliability stats, especially with how those measures may inform investment decisions. With overall measures like SAIDI and CAIFI, the system looks pretty good. The denominator is an overall customer base. With measures such as the Customer Average Interruption Duration Index (CAIDI), the denominator becomes the number of customers interrupted. If in the future, areas of the grid are communicating more accurate outage information, it is possible that outages would be “quarantined” more easily- this is to say that the area of outage may be appropriately shrunken. Thus, SAIDI and CAIFI may improve. However, in a smarter outage management system, with quarantined outages, the denominator of CAIDI becomes much smaller, thus making CAIDI increase dramatically. Do regulators want to base investments on such a measure? It is common practice for large events, such as storms, to be removed from the reliability calculations, as those events are out of an electricity provider’s control. Some jurisdictions allow for a certain number of events to be removed, others may have standards for what classifies a ‘large’ event. Thus, the commentary on storms may (or may not) be moot.

    Germany may be a tough comparison group. The table from the Gavin Electricity report may be taken with a bit of caution. The table is in the Gavin report is taken/adapted from the 4th Benchmarking Report on the Quality of Electricity Supply (EU study). Germany is about 85% the size of California. Outage management processes for a territory of that size of service territories may differ greatly from the wide spread of electricity delivery system designs in the U.S.

    Next, the question of risk and rates comes into play. Disproportionately costly outages may occur in certain sectors. If that sector faces a particular risk, regulators and policy makers face a question of whether that risk may be spread across rate bases and classes, or just within a specific rate base (e.g. industrial). If a base faces risk, perhaps (or perhaps not) that base should face higher rates associated with the investment needed to prepare for such a risk. Rates continue to be a combination of economic and social policy. Economically, the true cost of reliability is not often bore out very well in rates. On the social side, regulators must make decisions on whether the impact of disproportionate risk is to be embedded across rate classes, or within.

    Great work by LBNL here. The LBNL report is perhaps an important step. As mentioned in the Abstract, there is little standardization of reporting reliability data, nor quantifying the cost (which will inherently differ by customer base in a specific area). As the authors note, we still have a long way to go! And again, an interesting post Prof. Wolfram!

  5. Barbara Alexander says:

    The author ignores the most obvious and cheapest method to respond to frequent outages or infrequent lengthy outages: buy a generator! That is what most folks do where there have been lengthy winter storms or hurricane related outages. This might not be the appropriate approach for urban settings or condominiums, but it sure is the common investment in suburban and rural areas. Also, the reply above reflects a notation that I was also going to provide relating to the prominence of underground wires in many European countries. Perhaps you recall WWII and the need to rebuilt? Well, they did it (some with US dollars) to rebuild their infrastructure. The costs to significantly improve reliability for most U.S. utilities is very high, relating to underground service, extensive tree trimming and redoing some of the layout of the circuits. Not to mention the “distribution automation” or “smart grid” investments being promoted at much millions to achieve improved reliability. Believe me, this is a big issue in many rate cases and utilities are depending surcharges and riders to undertake these investments.

  6. David Jacobowitz says:

    Thanks for the interesting article. Because I completely lack data, I am free to theorize an alternative conclusion.

    It could be that we in the developed world are getting too much reliability, and paying too much for it. Let’s ignore some practical considerations about how reliable service is built today. I think we can all agree that the value of lost load is heterogeneous by customer. In fact, it probably varies a lot, as a semiconductor fab looking at a 20 minute outage might have to scrap millions of dollars in wafers in progress, whereas a residential ratepayer may only have to deal with delaying screening Game of Thrones. But the heterogeneity doesn’t stop at the meter. Even within one bill, uses have wildly different values. You would have been willing to pay to work on your deck for work, but your fridge can coast for hours with no negative effect at all, and there are probably a bunch of devices in your house that you would not miss for a day. Maybe you’ll make oatmeal for breakfast rather than toast.

    The first case of heterogeneity I find interesting because it represents the ever-present cross subsidies in this industry. Whether that is a feature or a bug is an exercise in ideology. The latter case is interesting, because rather than requiring a multiple kWh “Powerwall” it could perhaps be met more economically by judicious application of smaller amounts of energy storage, maybe in the devices themselves.

    The technology of the last century necessarily forced us into a “one size fits all” electric power delivery policy. The technology of today is perhaps still like that, but one can at least imagine a future with a la carte pricing that includes reliability options. (I know this already exists to a degree for large customers.) My retail bill is ~40% distribution. I might be happy to take lower reliability service for a discount. I’ll plug my router into a UPS and my Internet service would be good to go — assuming my network provider backs up their system, of course.

    • mcubedecon says:

      Ah, but since most outages are localized on distribution systems, and our customers who demand the highest reliability tend to be clustered on individual circuits, we can provide different levels of reliability by customer with our current technology. It means moving to area-based rates, a concept floated by PG&E in the late ’90s but interrupted by restructuring. Time to bring the idea back–it solves many problems.

      • Joe Far says:

        When I was a sub-transmission planner in St. Louis, customers were offered and sometimes paid for an additional circuit and or transformer to bolster their reliability.

      • David Jacobowitz says:

        It is one thing for a utility to offer enhanced reliability for an enhanced price, quite another to offer reduced reliability for a cheaper price. I think politics will block the latter as long as the utility model is in place, and, as I implied, whether that’s for the best is a normative judgement.

        However, as studies seem to indicate that US grid reliability appears to be in decline, perhaps this transition is already afoot, in a subtler form.

        I merely suggest that the reliability standards did not come from the Lord Almighty. They were chosen for reasons, and different ones could be chosen for other reasons. The notion that more is better is only universally true if more is free, or at least the cost can be foisted on someone else.

        (By the way, I do not live far from Catherine, and I did not experience the outage last week. In fact, in my 10+ years in Berkeley, I cannot recall a single outage in excess of 15 seconds — better than anywhere else I have ever lived, and certainly good enough for me.)

    • Paco D'Exponere says:

      “Because I completely lack data, I am free to theorize an alternative conclusion.”

      That is tremendous, thank you! Although your statement was clearly made with tongue firmly in cheek, you have likely provided the most accurate assessment ever provided herein!

  7. Philip Hanser says:

    I agree with Jonathan that the source of most outages is the distribution system (the last estimate I remember is well over 90%) and that in other parts of the world the distribution system is often undergrounded. In many new suburbs, the lines are undergrounded not for reliability, but aesthetics; residential customers generally find above ground lines unseemly. The difficulty for older, established communities is the extreme expense of replacing the current distribution facilities with new underground ones. It has been a while, but the last time I looked at this, the cost was approximately 10-15x that of above ground. Undergrounding higher voltage facilities, such as subtransmission lines, have an even higher factor. A study which looked at raising the reliability of the Washington, D.C. area by undergrounding put the cost in the billions. Few utility customers are willing to accept the implied rate increases required to do so. It is a shame that for the most part the distribution system isn’t underground, but it seems unlikely it ever will be.

    • Bill Henry says:

      Even for areas that may be unlikely to switch from overhead to underground distribution, there’s still plenty that can be done to reduce outage risk, or reduce the number of customers that lose service in a storm by adding switching and controls to keep more of the system up and running and maybe even allow DG to provide emergency supply. This may mean more differentiation depending on where you are however – the automation investment would benefit urban (denser network) more than rural (completely radial with no opportunity to mesh circuits), perhaps another reason to have a conversation about rates that are somehow more related to actual reliability.

  8. Bill Gray says:

    A great point about underground lines!

    Germany also has a significantly denser population than the US. This means that the electrical system in Germany requires many fewer miles (or kilometers) of line than the US system to serve the same number of users. This density also makes the cost of buried lines lower per user.

    It is also interesting to analyze the situation from a system “robustness” perspective as well as the “reliability” perspective. The two concepts are similar, but robustness is also about how the system reacts when outages do occur. The way that the US electrical system is currently organized is very vulnerable to chain-reactions where a small hick-up in one location is rapidly magnified into a regional outage.

    Germany’s lawmakers have been driving its grid to become much more decentralized. This radically improves system robustness by not letting these chain reactions happen and keeping small local problems small and local.

    To do this, Germany has been installing energy storage, like Tesla’ s Powerwall, like crazy… and faster and faster!

    The politics of energy in Germany are far different than here in the US. We’ve got a lot of old rules in place that make it very hard and expensive for our system to decentralize. Things are getting better, but once again, Germany is far ahead in this effort… and the gap continues to widen.

    • Joe Far says:

      I am curious, are the distribution systems in the EU networked?

      Downtown St. Louis, where the load is most dense, is on a distribution network. Under such a system, the effect of a single line outage is much less than on a radial system.

      In the county, much of the sub-transmission system had automatic switching to reduce outages to the customer. Yet there were many long 12 kV lines where if there is an outage, many customers are out of service.

      • Bas Gresnigt says:

        In the Netherlands almost all of the medium voltage grid is networked.
        The low voltage part of the grid far less.

  9. Carl Silsbee says:

    There’s a large body of work addressing customer value of service that identifies what people indicate they are willing to pay for reliability. Joe Eto has done some meta study work for Lawrence Berkeley, and Michael Sullivan has performed quite a few studies for utilities around the country, for instance. It’s hard to boil down the value of an avoided outage to a customer into a simple metric since seaon, time of day, notice, and duration are all important attributes, but figure $5 to $10 per residential outage.

    Because distribution systems are radial, the number of customers impacted by an outage tends to be limited. This means that the costs of improving reliability acrross a broad area becomes fairly high. At $10 per customer, the value of avoiding the outage described in the blog is less than $0.5 million, which doesn’t go very far towards improving reliability in a geographical area that is large enough for 45,000 customers to reside in.

  10. Paul D. Brooks says:

    According to the web site http://shrinkthatfootprint.com/average-electricity-prices-kwh Germany has one of the highest electricity prices in the world at 35 cents/Kwh, or over twice what California pays. So they may well have a more reliable system but pay a huge amount for this reliability.

    • Bas Gresnigt says:

      Still, average German households spend a lower percentage of their income for electricity than the av. US household.
      Seems to me the picture is more complicated.

  11. Joe Far says:

    I have to chuckle a bit. I used to live in St Louis. There were overhead lines, trees and many windy and icy days. Needless to say, as a customer, we experienced outages.

    In the Central Valley of CA, there are no storms. My service is mostly underground. I do not experience outages.

    There is a lot to say about local.

    As somebody mentioned already, undergrounding the distribution system is probably not worth the money.

  12. Alan Krupnick says:

    Great post, Catherine. Two points. Germany’s electricity prices are much higher than ours, in part, reflecting debt service on their high cost of underground wires. Second, it is not really fair to cost out only the electricity generated by the Powerwall. The piece of mind that would give to a homeowner plagued by outages is worth a lot. I don’t know if it would come out to $17 kWh. But many people buy generators for protection that provide less electricity and cost $600-$800 — worth at least one year of the Powerwall cost by your calculation.

  13. Paco D'Exponere says:

    Simply measuring the cost of outages does not provide enough information to allow one to determine the optimal rate of investment to improve reliability. (Although having a reasonably accurate estimate of cost is important.) Like all other decisions, if economics tells us anything, it tells us to evaluate potential decisions based on a marginal cost/marginal benefit criteria. This is among the most simple and straightforward lessons that is taught in every principles level micro course.

    Only a slightly more advanced concept is understanding the shape of the typical cost curve. The reliability “cost curve” undoubtedly looks fairly typical, that being it increases at an increasing rate with reliability. (First and second derivatives of the cost curve are positive).

    What does this mean?
    As natural as it is to dislike a power outage, there comes a point where further investments in reliability would come at a price that would be too high for just about anyone.

    Now, once we accept this, then we can start to have more reasonable conversations about regional vs local reliability challenges and more specific substitutes for system reliability for those users that demand absolute uninterrupted service (hospitals, etc.)

  14. Rob Gramlich says:

    Great discussion. It is worth noting the Facebook thanksgiving survey of what people are most thankful for. Michigan residents, who had recently experienced a power outage, said “electricity”!
    http://www.businessinsider.com/map-of-what-we-are-thankful-for-by-state-2014-11?utm_content=buffer50f66&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer

    Californians said “youtube” and my fellow Marylanders said “a sound mind.”

  15. Golbon Zakeri says:

    Thank you Catherine, very interesting post. One point however is that the Powerwall is not merely a back up, rather a utility to shift cheap production (e.g. solar power) to periods when it is expensive to generate (evening peaks after sun set).

    The other point is that I grew up in Iran and shortly after the revolution, there were scheduled power outages. I suspect that if you knew in advance you’d be without electricity for a couple of hours, you’d have made provisions for this (charge the laptop battery and made sure your presentation is downloaded. So if one is risk averse enough, perhaps they’d plan around such things, making the value of lost load less.

  16. Yipes! Catherine, you and everyone have given me a lot of ground to cover.

    First, the Galvin data appears to be apples and oranges. Galvin cites to a European study which does not include the U.S. So Galvin’s U.S. data came from somewhere else. I suspect from a data source that includes “major” (weather) events. The European data generally does not include the rough equivalent called “exceptional” events. http://www.autorita.energia.it/allegati/pubblicazioni/C08-EQS-24-04_4th_Benchmarking_Report_EQS_10-Dec-2008_re.pdf. As I understand it if you take out the “major” events from U.S. data you are at 126 minutes of SAIDI and 1.08 of SAIFI — per slide 7 under “IEEE” columns here, http://grouper.ieee.org/groups/td/dist/sd/doc/2013-07%20IEEE%20Benchmarking%20Results%20for%202012%20Data.pdf. This is in line with the European results. Whatever difference remains after that could perhaps be chalked up to other weather and population density. So I don’t think our electric system is necessarily inferior in terms of reliability.

    Second, is reliability getting worse? The LBNL study is from 2003. I don’t know what current data would show.

    Third, commenters are right that there are lots of studies out there on the value of lost load (VOLL). And it makes common sense to relate the incremental cost of a potential reliability improvement to the incremental benefit of reduced outage measured in terms of VOLL. This is almost tautological. I wrote an article in Fortnightly on the subject of whether the NERC reliability standards for the Bulk Power System have improved reliability, and a sub-theme was the importance of measuring the cost of a new reliability standard (and any reliability improvement) against the expected benefit. http://www.fortnightly.com/fortnightly/2015/01/have-mandatory-standards-improved-reliability. We simply don’t do that.

    Fourth, the economics of Elon Musk’s Powerwall are ridiculous. It’s a fashion statement. Coincidentally I wrote another piece for Fortnightly on that subject. http://www.fortnightly.com/fortnightly/old-musk-magic. I agree with everything you’ve written here but would also note that the Powerwall’s output of 2 kw could handle the average hair dryer. Good luck with that in the average American home. Bottom line, if you want more reliability than your utility is providing get a Generac generator.

    Thanks again for your blog.

    Best wishes,

    Steve Huntoon

    • Catherine Wolfram says:

      Hi Steve-

      One quick correction. I had linked the wrong LBNL study. I’ve updated the link to a 2012 study.

      Thanks for catching that.
      Catherine

      • Catherine,

        Thanks for the new link. The data in the LBNL study are interesting — key charts are on pdf pages 36-37, SAIDI and SAIFI with and without major events I would suggest the most meaningful would be the “customer weighted” data because that would appear to reflect system growth over time (more customers equals more outages all else equal). The customer weighted data is inconclusive: SAIDI is up a little and SAIFI is down a little.

        A comment about “major events.” It appears that this term includes extreme weather outages such as hurricanes as well as what might be called avoidable outages such as the Northeast Blackout of 2003. This would seem to muddle the question of reliability trends and what can/should be done.

        Again, thanks for launching the discussion.

        Best wishes,

        Steve Huntoon

    • mcubedecon says:

      Those who owned an Apple II, the earliest Motorola cell phone for $4,000 (http://mashable.com/2014/03/13/first-cellphone-on-sale/), or even early solar panels might also have been “making a fashion statement.” Or they might have been on the leading edge of a new technology could be transformative and eventually cost-effective. Early adopters almost always pay a premium, and it is foolish to look at the economics of an early product and dismiss it based on that initial cost.

  17. Stephen Littlechild says:

    Thanks for splendid article Catherine, and excellent subsequent discussion. Two anecdotal remarks here.

    When Michael Beesley and I were considering how to privatise the UK electricity industry in the mid-1980s I asked him what he thought the main benefit would be. “More blackouts and brownouts” he said. Meaning that state ownership had provided an incentive to provide higher reliability (and over-capitalise) relative to what customers would be willing to pay for. In the event, reliability in the privatised industry has increased not decreased, driven not least by regulatory pressure. Which may have reflected a more London-centric approach – my regulatory colleagues from London who had never experienced an outage in their life (the network there is underground) found when they moved to Birmingham that a few outages a year was normal and indeed in the rest of the country too. The higher reliability came initially from greater investment, later from better diagnosis and faster response. Some companies began to suggest offering higher reliability at higher price, but one could see the political difficulties and it has not happened. Though there are lots of studies on VOLL the reality is that we have little idea of what most customers would pay for reliability, and it may well be changing over time, but there has been no market discovery process. With smart meters and distributed generation let’s hope that changes.

    Faced with a choice, customers may not respond in the way one expects. One Caribbean country that I visited a few years ago had long had a problem with reliability of supply (mainly insufficient generation). Daily power cuts, often of some hours, were the norm in the capital city, albeit uncertain in occurrence, timing and duration. There was also a long-standing problem of electricity bills not being paid. The Electricity Company was loss-making with no funds to improve service. It then asked itself why customers who did pay should get the same poor service as customers who did not, and devised a plan to encourage better payment. It drew up and published a rota of power cuts by area, specifying for the week ahead which areas of the city would suffer power cuts and when, with the number and duration of power cuts in each area varying inversely with the proportion of customers there that paid their bills. It hoped this would encourage customers in the poor-paying areas to put pressure on their neighbours so they would get more reliable service. After a period of time the company asked customers what they thought, and whether they would put pressure on their neighbours in this way. “Certainly not”, they said. “The present arrangements are better because we can plan ahead, we can visit friends in other areas when our electricity is off. And we wouldn’t want fewer power cuts because then we would spend more on electricity, which we can’t afford. The present arrangements suit us just fine.”

  18. Bas Gresnigt says:

    Thanks for the nice story. Two remarks:

    1.The German SAIDI figure improved since the report to which you refer.
    It’s now below below 16 minutes (15.4minutes in 2013).

    Some say that the;
    – more distributed generation (thousands of wind turbines, solar, etc. dispersed over the country);
    – more near the customers or at customers locations;
    are the prime cause. As those imply less load for the (back bone) grid.

    2. Outages due to extreme weather events are not included in the USA SAIDI figure.

  19. Bas Gresnigt says:

    Here in the Netherlands customers get compensation for the damage if an outage is somewhat longer. Those compensation amounts may ‘help’ the grid operators to take the right decisions here.

    So a law or agreement, which arranges substantial compensation payments to customers for each electricity interruption may be effective to improve the situation.

  20. James Roumasset says:

    Catherine’s statement that “most outages are caused by failures at the distribution system level” is surely correct, but do we know that reliability problems in the U.S. have more to do with distribution than transmission? (Transmission failures happen less but affect more people and may last longer.) Investments in improved reliability should be informed by a good metric of reliability. One could start with the number of customer hours lost, but (as one of Catherine’s references notes) we should also account for the losses from momentary interruptions and losses in power quality such as “voltage dips and swells, harmonic distortions, phase imbalance, and dropped phases” (whatever those are). As the same source notes, we would also need to record damages from disruptions, especially deaths and injuries.

  21. Bas Gresnigt says:

    EDF published an interesting article at its site about the differences in reliability (SAIDI) of the different grids (W-European countries + USA) and how Germany increased the reliability of its grid.

    It also contains a link to: the 2014 CEER report (CEER = Council of European Energy Regulators. Those control the utilities and the grid operators) with information about the length (overhead and underground) of low and medium voltage circuits as well as the networks. The report contains links to the older reports.

    Reading the CEER report and comparing, I didn’t see support for the assumptions that:
    – that the length of (medium or low voltage) transmission lines are important.
    – underground vs overhead make the difference (e.g. NL has all underground, Germany ~20% overhead, still Germany’s SAIDI is two times better. etc).

    But, in the Annex you can find that in Germany grid operators are rewarded according to a quite detailed scheme for reliability improvements!

  22. A wonderful initial article and subsequent contribution, thank you to all.

    A few additional comments if I may. The value of electricity to a consumer is so much greater than its cost. This seems to have lead to very significant investment and consequently remarkably high quality of supply in almost all developed economies. But as Stephen Littlechild noted, its not clear that consumers value this as the industry often suggests they do. The experience of my relatives in South Africa, where power outages have become routine, aligns with Stephen’s observations. Laptops and mobile phones are charged in advance and as long as the freezer is not full, for residential customers losses are not severe. Few outages occur at night (when system demands are much lower). With increasing penetration of device-level storage, the loss of utility can be greatly reduced.

    Secondly, I think the original post’s dismissal of residential storage is a little hasty. If the economics of a battery is to be assessed per kWh it produces, then the use of the battery becomes a significant variable in the calculation. If it is purely used as a standby device then certainly per kWh supplied it will be much more expensive than grid-supplied electricity, but modern lithion ion devices – such as Tesla’s 7 kWh unit and even their Tesla’s 10 kWh unit – are not designed to operate only as an infrequently used standby device.

    Many are now working over these calculations and they seem to be coming to the conclusion that large scale grid-defection is not far off in many areas. My calculation is that in my own (very typical) home in Melbourne (Australia) it has become financially attractive to disconnection from the grid.

  23. Pingback: How much is an attack on Clash of Clans or a nice cup of espresso worth to you? | Mikko Tuovinen

  24. Jack Ellis, Tahoe City, CA says:

    A couple of points. First, putting distribution underground is not an ironclad guarantee against outages. I lived in a neighborhood with underground utilities for 22 years and suffered at least three lengthy outages, two of which were due to local, storm-related damage(I asked the repair crews). Second, putting distribution lines underground is worse than useless if the infrastructure is installed incorrectly or is poorly maintained (I was a PG&E customer at the time, enough said!).

    Finally, it may be economically viable to go off-grid in Melbourne but it doesn’t make economic sense in California, at least not yet. The amount of rooftop PV and storage required to carry a typical household through a couple of days of winter weather and short winter days is substantial. Going off-grid makes better economic sense for islands and remote village systems that rely on oil-fired generation, but it also requires some potentially significant lifestyle changes that many consumers will find unduly burdensome as I recently found out from some first hand experience while staying at a lodge in Southern Africa.

  25. Chris Marnay says:

    Thanks Catherine for starting this discussion. If I understand your reliability argument correctly, I half agree with you. The part we agree on is upstream of the substation in the high voltage meshed grid, which I’ll call the megagrid. I think local distribution is a more complex story; more specifically, ongoing technological change is going to have a much bigger effect on reliability there making the relevant question somewhat different from your formulation. I think David’s responses are heading in the right direction, i.e. responding to the highly heterogeneous requirements of loads is the key. Furthermore, since I’m a well-known microgrid partisan, it should also be no surprise that I see the role of microgrids as the disruptive technology at work in the distribution network, and below.

    Your discussion is focused on reliability, and the metrics discussed are probabilistic ones related to power availability. Nowadays though, much of the microgrid debate is more about resilience, so let’s digress for a moment to explore the difference.

    “Resilience” has emerged as the major driver for microgrids in the U.S. and Japan. This focus comes in the wake of severe natural disasters the two countries have experienced and growing concern about the extreme weather events climate change will spawn. The current interest in microgrids is in no small measure motivated by the promise (and actually the proof in a few instances, such as the Sendai example below) that they have a better chance than the megagrid of delivering power during a disaster, and/or they can recover faster. Measuring resilience and evaluating its benefits is a tricky undertaking, and I won’t try it here, but for better or worse, this is driving much of the debate nowadays.

    “Reliability” by contrast focuses on the statistical expectation of power availability, and extreme events are often excluded from the calculation. Unlike resilience, reliability has been a paramount concern for power systems since their inception.
    Several widely used reliability metrics have been applied to power systems, but the two shown in your table are the most used.

    I put together a somewhat different version of your reliability table. As you note, the U.S. generally has poor reliability performance compared to other developed countries, although there is a wider range within the European Union than one might think. Japan was once viewed as having the most reliable electricity service in the industrialized world. Before the 2011 earthquake and tsunami, reliability in Japan had been consistently excellent for two decades, interrupted only by a couple of major typhoons. Reliability in Japan has now returned to tsunami levels. I believe that currently the best claimed performance in the world is Singapore. It reports a SAIDI of less than a minute per annum since 2008, and at such a high SAIFI, an average Singapore resident should experience an outage only once every 100 years! Nonetheless, some commentators propose pushing towards even higher levels of reliability, say 30 milliseconds of outage per year (see Galvin and Yaeger, Perfect Power, 2009, for example). I haven’t tried to look in detail, but at first blush it does look like the more reliable grids provide more expensive electricity.

    Reliability Indices for Selected Countries, 2012
    (including exceptional events)
    Country unplanned SAIDI unplanned SAIFI
    (annual mins. of outage ) (annual number of occurances)

    U.S.A. 157a 1.4 a
    Poland 254 3.4
    U.K. 68 0.7
    France 63 0.9
    Germany 17 0.3
    Denmark 15 0.4
    Luxembourg 10 0.2

    Japan 14b 0.1b
    514c 0.9 c
    16d 0.2 d

    Singapore 0.4 0.01

    a 2009
    b, c, d Japanese fiscal years (Apr-Mar), 2009-10, 2010-11, & 2013-14, respectively
    There are variations in the way these indices are estimated, hence data may not be fully comparable, e.g., the exclusion of short outages, typically less than 5 minutes, is a notable source of inconsistency.
    Sources: Eto, et al, 2012, CEER 2014, FEPC, 2014, and K.T. Yoon, 2015.

    Returning to the main thread, let’s start with the upstream part of the problem. What level of reliability should the megagrid provide there, assuming it’s to be some sort of universal regional standard at the substation, as we have now at the customer meter?

    Catherine, you allude to the key question, which of course is can the costs of providing a German level of service, or even better like Singapore, be economically justified? The quality level of service is largely a societal choice, although other factors do intervene. Singapore has a compact system, all underground for aesthetic reasons, a benign climate, and low seismic hazard. It’s illustrative that the best in Europe is Luxembourg.

    Our policy obsession is to lower the total outage cost, i.e. move towards perfection. This is our reliability treadmill. There is however, an entire range of possible reliabilities of service at the substation. The cost of providing reliability actually has two components, one physical/direct/visible and one market/indirect/invisible. The physical part consists of undergrounding power lines, better quality equipment, more generation redundancy, etc. We have a reasonable understanding of these costs. But the indirect part may well be more significant, coming from the conservatism with which the megagrid is run, driven by fear of service interruption. It comes primarily in the form of lost trade opportunities precluded by overly tight standards. Nowadays, there is also carbon cost from resistance to accepting high penetrations of grid-hostile renewables into the mix. The sum of these two components, concrete and conservative, forms the cost of reliability curve. For sure, perfection is hard so we already high up on this asymptotic curve. Remember reliability at the substation is far to the right of the customer meter level.

    The cost of reliability plus the cost of unreliability (outage cost) forms the societal cost of reliability curve. The optimal level lies at its minimum. The optimal level may be far below the five nines or so the U.S. megagrid achieves at the substation today.

    Microgrids or other local reliability resources that serve sensitive loads (like your neighborhood cell tower) locally effectively lower the social cost of poor reliability, and let us assume there is some increase in the cost of providing reliability. This results in a shift of the optimal point to even lower levels of reliability.

    This exercise leads to a surprising conclusion. If microgrids exist in the distribution system and provide for sensitive loads locally, the reliability burden on the megagrid is lightened. In other words, the megagrid and its customers benefit as well as the members of the microgrid. Further, the megagrid can more easily pursue other goals, such as high renewable penetration, societally, the megagrid may capture a benefit far larger than the microgrid does from its higher service quality. In other words, rather than being a gated community luxury, microgrids might deliver across-the-board power sector benefits.

    The argument above has become much more compelling because of the drive towards grid decarbonization. Much hand wringing results from the specter of a megagrid dominated by variable, non-dispatchable sources. Similarly, volatile electricity markets are counter to a tightly controlled highly reliable grid. Add to this effect concerns about constraints on expansion of grid capacity because of costly rights of way, nimbyism, etc., and it’s clear the traditional high megagrid reliability paradigm needs some rethinking. To the extent that high reliability can be provided local to loads, these problems are mitigated.

    Turning to the downstream part. Here, I think you’ve drawn your boundary way too tightly. There are many ways delivering energy service can be made more reliable other than using batteries, which while falling rapidly in cost, are for now still toys for Silicon Valley moguls. Let’s pose the question differently. How can microgrids provide heterogeneous levels of service reliability to different loads to match their highly heterogeneous requirements? For example, thermal storage, which is way cheaper than electricity storage, can provide reliable space conditioning. Even purely on the electrical side, there are multiple possible levels of service differentiation, at the substation, at the meter, at the building subpanels, at the socket, or even within the device. We now have technology that can control reliability (and power quality) at all these levels.

    Microgrid thinking says only a small fraction of loads really demand the level of service currently delivered at the substation. Sensitive end uses are better served in other ways, such as securing backup power supplies, storage, or a self-managed microgrid. It makes no sense to serve more demanding loads by establishing a commensurately high universal service level. Most loads would not benefit from it. We tend to think that because reliability is clearly a normal good, i.e. the more of we get the happier we should be, a rising tide will raise all boats. True, but many of the passengers would rather take their chances with their low-cost life vests. Economics has many ways to teach this lesson. Give a load the level of reliability it wants at a price it finds reasonable, and it’ll be happier than if expensive gourmet power is rammed down its throat.

    One of the tsunami’s hero microgrids, at Tohuku Fukushi University in Sendai, was indeed one with multiple service qualities provided on various campus circuits. Because its control, data acquisition, and other services were on a DC circuit backed up by batteries and with local PV, CHP generators could be restarted a day into the blackout. These engines provided heat and power to a teaching hospital and a senior home for a further two days.

    To summarize, I agree we need to think of reliability more in economic terms, rather than relying on rigid engineering standards that effectively rest on shaky rules of thumb. But while this is a good way to think about reliability of the megagrid, technology in the distribution network is moving it away from the paradigm of universal service quality to all loads, in all places, at all times. Rather the ability is emerging to provide heterogeneous service that matches the requirements of the energy services being provided. Most importantly, the two are connected. Managing reliability locally changes expectations of the megagrid, with potentially huge benefits, both economic and environmental.

    I have a book chapter that makes this argument with some helpful graphics. It won’t be published for quite a while, but I’m happy to share a copy to anyone who requests one.

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