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The Changing Economics of Electricity Supply Reliability

What happens when Californians take reliability investments into their own hands?

(Today’s post is co-authored with Duncan Callaway)

It’s easy to take your power supply for granted … until it’s gone. Here in Northern California, recent power outages have demonstrated just how disruptive it can be when the grid goes down for an extended period of time. 

cellphone
Not again!

So far this year, millions have had their power supply interrupted, many for days at a time. As of now, there are no more public safety power shutoffs (PSPSs) planned. But we’re not out of the proverbial woods. Warming temperatures, drought, and millions of dead trees have drastically increased wildfire risk in California. Keeping power flowing during wildfire season is becoming an increasingly risky business.  

It’s estimated that it will take a decade or more to make the investments needed to provide grid power safely and reliably through wildfire season. As our household comes to terms with this new normal, we’re weighing our options. Everyone’s talking about solar plus storage. Home-generator manufacturers’ stocks are soaring. This week’s blog digs into the changing economics of electricity supply reliability.

tesla
A sleek and not-so-sleek backup solution

Reliability for Sale

Before we dive into the details, keep in mind that these calculations depend a lot on how much electricity a customer uses and how much of that consumption they want to maintain in an outage. We’re going to use our household as an example, but your mileage may vary.  

As for us, we are below average consumers. Our most important appliances include: Our espresso shrine, our internet and laptops, our refrigerator. Add some lights and the occasional laundry and we’re at just under 4 kWh per day for these important loads. What would it cost to keep these services running when the grid goes dark? We’ve looked into two options:

Option 1: The Shiny Object

tesla
The Tesla PowerWall + Solar PV

As a lot of people learned during the recent California blackouts, a solar photovoltaic (PV) system without storage won’t supply your loads during an outage. Folks that have PV on their roofs do it because they want to reduce their environmental impact and because net metering is a really good deal (for them), but not for reliability. 

This is where storage comes in. Storage inverters can “island” a house, so the lights stay on during an outage. If you couple that storage with solar, the PV can replenish the energy you draw from the battery. In our analysis, we just considered the incremental cost of a storage system because the private economics of PV pencil out on their own for many households.  

There are a number of home energy storage systems out there. But we couldn’t resist using the sleek Tesla Powerwall for our test case. Here in California, Tesla is offering a $700 battery discount to anyone affected by wildfire outages. Given our electricity usage, one Powerwall battery (13.5 kWh capacity) would be more than enough. Tesla only sells the Powerwall direct to customers with PV, so to get our system quoted we also priced out the smallest PV system Tesla offers – 3.8 kW – which is all we’d need. 

The Powerwall battery would cost us about $6,700 out of pocket. To maximize the returns on this investment, we’d make sure to fill the battery with sunshine during off-peak hours and sell back to the grid at peak prices. Assuming a round-trip battery efficiency of 90%, this arbitrage play would earn us almost $400 per year on our current E-6 rate. However, we’ll be pushed onto the E-TOU rate in 2022 which will reduce the arbitrage earnings to only about $60/year. What a difference a rate makes!  

Once we’ve netted out the arbitrage value of storage (over a 10-year horizon on the new rate), we are left with an annualized storage investment cost of about $725 (using a 4% discount rate). That works out to $150 per day – if we assume the grid will be down 5 days a year – to stay caffeinated, refrigerated, illuminated, and charged. This feels like a lot to us. To put this in some perspective, we’d need a value of lost load (VOLL) of around $40/kWh to rationalize this cost. That’s over a hundred times the retail rate, and several hundred times more than the marginal cost of grid electricity.  

Option 2: The Workhorse 

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Honda generator

The second alternative we considered is a gas-powered generator. No clever arbitrage plays. No sleek storage gizmo in the garage. But $1,200 gets you a 2,200W generator. Add a $500 transfer switch and you’re good to go.

Using numbers from the Honda website, we worked out that the generator is about 6% efficient. (Ouch!) Assuming a gasoline price of $4/gallon, it would cost us just under $2 to generate one kWh. Feeling conscientious, we add $0.80 per gallon to account for the pollution impacts.

Taken together, this workhorse option works out to less than $50/day (assuming 5 outage days/year). We can rationalize this with a VOLL of $13/kWh. That’s much lower than the battery, but still much higher than retail prices.

What’s an Energy-Geek Family to do?

At $50/day, the gas generator looks like the winner. But here’s where the behavioral economics in our household get interesting. 

Having worked through these calculations, one of us is inclined to keep it simple with flashlights and some extra ice in the freezer. There are mounting concerns about the air quality implications and fire risk of a growing number of backup generators firing up when the grid goes down. up. Given the financial costs, hassle costs, and the idea that we’d be contributing even incrementally to local air pollution, a generator doesn’t seem to be worth it.  

The other remains enamored with that sleek Tesla Powerwall. Energy storage is the future. And when we finally replace our beat-up Prius with an electric car, we’ll be willing to pay more for reliability. Plus, wouldn’t it be fun to host the neighborhood Powerwall Potluck when the grid goes dark?

One of our takeaways, then, is that valuing reliability is a tricky thing when customers take matters into their own hands. The technology we use to keep the lights on has other attributes that could affect the path we privately choose. 

The Changing Economics of Reliability Investments

Setting aside our intra-household deliberations, these calculations also have us thinking more about the big picture. For larger consumers, or a commercial business, these back-up solutions could make more sense. Our back-of-the-envelope calculations suggest that if the generator is used to its full capacity 5 days a year, it pays for itself at a VOLL of well under $5/kWh. That’s half of what others have used to value the electricity consumption lost in an outage (see Catherine’s excellent blog on this topic).  

If lots of customers start to make these investments, some thorny concerns could arise. The going-forward social cost of power outages could be significantly reduced if the most valued load has been backed up behind the meter. Would that make utilities less inclined to invest in costly grid upgrades? If the answer is yes, this could leave customers that don’t have the capacity to invest in backup power in the lurch. Put differently, increased private investments in reliability could have equity and justice implications. 

On the efficiency side, it’s interesting to compare the potential costs of proposed grid reliability investments against our back-of-the-envelope backup calculations for decentralized solutions. Investments in grid-level improvements are measured in terms of many billions of dollars per year. It seems possible – even likely – that some of these investments could be cost-effectively postponed or avoided with targeted investments in behind-the-meter storage and back-up generation. 

Should private consumers be relied on to make the most socially beneficial behind-the-meter investments? Should the deployment of these decentralized assets be coordinated in a centralized way? We’re starting to see a mix of both as retail suppliers launch programs to steer these investments in ways that can help meet reliability requirements and address equity concerns. We’ll be following these investments with interest, even if we don’t end up investing ourselves, because they have implications for everyone.

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

Suggested citation: Callaway, Duncan; Fowlie, Meredith. “The Changing Economics of Electricity Supply Reliability” Energy Institute Blog, UC Berkeley, November 18, 2019, https://energyathaas.wordpress.com/2019/11/18/the-changing-economics-of-electricity-supply-reliability/

 

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