Power Outage and Smart Grids

Last month the President’s Council of Economic Advisors, the U.S. Department of Energy’s Office of Electricity delivery and Energy Reliability and the White House Office of Science and Technology released a report entitled “Economic Benefits of Increasing Electric Grid Resilience to Weather Outages” (click here for a link to the full report).  The report contains an excellent calculation of the cost of electrical power outages to the U.S. economy.

The report focuses primarily on power outages caused by severe weather events, which account for 87 percent of outages affecting 50,000 or more customers.  The report estimates the average annual cost of power outages caused by severe weather to be between $18 billion and $33 billion per year, with certain years being much higher.  Significantly, the report cites studies indicating that two-thirds of the annual cost of power outages is attributable to outages lasting less than five minutes.  Since such momentary losses are rarely caused by large scale weather events, the total annual cost of all power outages to the U.S. economy would appear to be something in the range of $54 billion to $99 billion per year, a staggering sum.

The report goes on to outline a strategy for mitigating those losses by enhancing grid resilience.  It sets out six priorities for improving grid resilience:  manage risk, cost-effective strengthening of grid infrastructure, increase system flexibility and robustness (including by deployment of electricity storage), increase visualization and situational awareness, deploy advanced control capabilities, and improve the availability of critical components and software systems.  The market for electricity storage systems would be a clear beneficiary of any serious attempt to implement the strategy that the report advocates.

What the report does not discuss is the fact that despite the dire economic losses suffered on account of power outages each year, and despite the fact that a strategy for mitigating those losses exists, investment in modernizing and hardening grid infrastructure remains woefully inadequate.  Last April the American Society of Civil Engineers (ASCE) reported that $673 billion of new investment in grid infrastructure will be required by 2020 in order to ensure a reliable supply of electricity in the United States.  This comes to about $75 billion per year.  The ASCE report says that the U.S. falls about $11 billion per year short of that requirement.

So why if economic losses from power outages are now running as much as $99 billion per year is there insufficient political will to make the $11 billion of additional investments needed each year to protect electricity reliability?  On its face, that does not make sense.  Something is clearly amiss.

What seems to be amiss is that there is a disconnect between the persons who pay for the losses from power outages and those who pay for improving the electricity grid.  This disconnect is particularly apparent in large-scale weather-related emergencies, where allocations of disaster assistance have more to do with CNN coverage than with incenting intelligent behavior on the part of local authorities in preparing for future weather events.

There is also a political disconnect that makes investment in grid modernization difficult.  Raising electricity prices to pay for grid modernization is politically hazardous.  Political leaders can, and often do, make the calculation that it is easier to avoid blame for a power disaster than blame for higher electricity bills.  The result is chronic underinvestment in grid infrastructure.

Coming up with the money to finance grid infrastructure improvements should not be difficult.  Last month’s report from the President’s Council and last year’s report from the ASCE lay out a clear economic case for that investment.  The challenge is aligning the interests of those paying the bills for outages with those paying the bills for infrastructure investments.

Having quantified the problem of power outages and provided a strategy for their partial alleviation, the federal government needs to identify and create a mechanism to fund the implementation of that strategy.  Today no such mechanism exists, incentives are poorly aligned, and under investment in grid infrastructure continues to be chronic.

It is not enough to identify and quantify the problem of power outages.  It is also not enough to design a strategy to decrease the frequency and duration of those outages.  The federal government needs to come up with a plan to pay for that strategy.  That plan is missing today and until it is developed the calculations of loss and strategies for mitigation will be little more than an irrelevant intellectual policy debate.

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