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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.

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Catherine Wolfram View All

Catherine Wolfram is Associate Dean for Academic Affairs and the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. ​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.

39 thoughts on “Is the U.S. Investing Enough in Electricity Grid Reliability? Leave a comment

  1. 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.

  2. 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.

  3. 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.

  4. 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.”

  5. 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

    • 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

    • 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.

  6. 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.

  7. 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.)

  8. 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.

  9. 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.

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