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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.


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.



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.

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

  1. 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.

  2. 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.

  3. 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.

  4. 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!

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