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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Spike In Grid Failures: The Next Big Headache For Utilities

Power Plant

Reliability of the electrical grid is a big piece of the "package" that franchise-owning electric companies sell their customers. Just trust the local utility. No need to worry about your own costly, high maintenance generator, solar panels or battery. The utility has all the repair crews, backup generators and can get even help from neighboring power companies when necessary. It's all included in the price.

But a little over fifty years ago, the 1965 Northeast Blackout made people wonder about reliability but the industry got to work fixing the problem. This episode began with a faulty relay on the Ontario side of Niagara Falls but the resulting power surge quickly overwhelmed transmission lines throughout New York, New Jersey and New England affecting 30 million people in all.

For sheer impact and inconvenience, little compares with the August 14-15, 2003 blackout affecting the northeastern U.S. and southeastern Canada. The cause was overgrown trees brushing up against high voltage lines in FirstEnergy's system in northern Ohio. This resulted in a cascade of transmission line failures ultimately affecting 50 million people and was the biggest blackout in North American history.

Since 1965 the electricity industry in the U.S. has kept track of service problems. Interestingly, for all the incremental transmission and related investment, the records do not show improvement (Figure 1). Similar incidents occur all over the world. Although Australia and New Zealand seem to account for a disproportionate number of outages (the wonders of letting the market do its work?).

So North America is not unique in this regard. The causes behind these events vary: equipment failure, inadequate vegetation management, hurricanes, cyber attacks and even coronal mass ejections from the sun. However, the U.S. has been collecting power outage data longer than most and probably has more reliable and consistent numbers. Here is the pattern that emerges.

Figure 1: Number of Outages as Defined by Five Year Periods

Note: Events are not of equal size. Major events, defined as unplanned, affecting at least one million people for one hour, and causing dislocation for one million person hours. Source: Wikipedia.

The Energy Information Administration collects reports of “Electric Disturbance Events” and those reports show a similar pattern (Figure 2).

Figure 2. Electric Disturbance Events by Year

Source: EIA, “Electric Disturbance Events.” 2016 estimated, based on seven months actual.

Related: The Biggest Wildcard For Oil Prices Right Now

These events are of different magnitude and cause, but to electricity customers, “Lights out” means just that, no matter the reason. Storms occur regularly and big, impactful ones now occur more frequently. The weather has become hotter, placing additional strain on utility systems especially during peak summer air conditioning season which in some places will probably soon extend through Thanksgiving. A phenomenon, by the way, first predicted when Lyndon Johnson occupied the Oval Office. And if hackers can now penetrate the NSA, they can sure hack into your local utility. In response the hapless electricity consumer might justifiably ask, “What’s the excuse?”

Back in the "good old days" when customers were truly "captive", utilities sought to provide reliable service as part of their mandate--it was what they were supposed to do in providing an acknowledged public service. In fact many of the companies incorporated that very phrase in their names. What is unfortunate for the long-term competitive position of the industry is that the seeming increase in adverse reliability events comes as customers begin to have genuine choices about who and how their electricity is provided. Many already own backup generators and solar panels.

Sooner or later, Tesla or somebody else will develop an even cheaper storage battery. Utility managements claim batteries do not make economic sense at present. But for those individuals and businesses who want to be first movers, battery cost is of secondary importance. Perhaps they will adopt this technology to make a statement. Regardless of customer motivation, if enough of them do it the economics will ultimately become more favorable. Related: Venezuela’s Oil Output Set To Collapse As 1 Million Take To The Streets

An increase in power outages (both in number and duration) and related reliability "events" will inevitably affect the business prospects of incumbent utilities. How could it not? Electricity customers of all types (residential, commercial and industrial) expect reliable service. Despite burgeoning alternatives, most will stick with the local utility because they will worry either about the reliability or cost of these new, mostly renewable energy sources.

But if the lights go out enough times, customers typically install small generators. No one likes sitting in a dark, hot room in the summer with food spoiling in their fridge. Is the next move to solar panels and battery storage (whenever that becomes economically practical)? Some neighborhoods are contemplating microgrids to provide for electric reliability primarily or exclusively from local sources.

Note again, these reliability measures may not yet be economic in the conventional sense. But inconvenienced customers, especially sophisticated ones with access to capital, might pursue the self-generation and storage route anyway. And they might start the ball rolling.

Leonard Hyman and William Tilles For Oilprice.com

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  • Oilracle on September 05 2016 said:
    My observation suggests that quality of electricity went south after the Big Utilities were bullied into taxing their customer on behalf of local governments to subsidies “green energy,” “clean energy,” “efficient equipment rebates.” After getting going with this money transfers and kickbacks, local authorities became very lenient to them.

    Only furious customers left in winter cold with no heat for weeks jolted this unholy alliance back to their responsibilities. Never discount that most utilities are monopolies and negotiate their rates with the local authorities.

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