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.
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.
Things 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.
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.
Recent 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.
Finally, 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.
Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. During Academic year 2018-19, she will serve as the Acting Associate Dean for Academic Affairs at Berkeley Haas. She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.
Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.
She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.