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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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Finding A Real Solution To Louisiana's Energy Crisis

You may have seen the recent YouTube video of Entergy crews installing a new high voltage transmission tower near New Orleans. The new tower was supposed to withstand hurricane force winds of a category 3 - category 4 storm. That new line along with many others now lies crumpled by the recent hurricane somewhere in the Mississippi River. We cannot think of a better metaphor for climate change and the failed electric utility industry response to it if we tried.

The usual public group-think response to these recurring disasters is becoming sadly familiar. For example, last winter’s Texas freeze and subsequent electric system breakdown were seen as a clear indictment of ERCOT (the Electric Reliability Council of Texas) and supposedly showed a need for more transmission interties to neighboring utilities. Today, looking at dystopian scenes from Entergy’s hurricane pummeled service area, it may dawn on people that new transmission lines are not the salvation they were claimed to be as recently as last winter. And we think this is a good thing.

Think of an electrical grid as three LEGO blocks: one for power generation, another for transmission, and a third for power distribution and delivery. The power generation and distribution blocks fit together to form a complete grid assuming that power can be produced locally. Transmission in that example is unnecessary. The reason the transmission block is required is because electric companies, regulators, as well as all classes of consumers have historically maximized one value, cheapness, over all other competing considerations, such as resilience. We believe this single minded focus is about to change.

The trigger for this change is something we take for granted — the centrality of electricity for our modern lives. Entergy, the utility that serves much of Louisiana, has informed the public that complete restoration of its heavily damaged system may take up to four to six weeks. Even with the hundreds of trained crews pouring in from neighboring utilities to aid the restoration effort, this doesn’t sound unreasonable. However, four to six weeks without electricity renders many homes, schools, and factories uninhabitable or unusable for the outage duration, given the high temperatures of a Southern summer, unless of course their owners can afford a backup power system.

The problem is that there isn’t just one crisis, the need for rapid power restoration. But the immediacy of the need for power restoration obscures something more fundamental — that maybe there are alternative ways to arrange our power grid to either prevent lengthy outages or minimize their onerous impacts. But that’s not what we hear from the utility. They want to instead make it “good as new” as quickly as possible. The point here is that there is a tendency in every crisis to make status quo decisions, because the supposedly serious people in authority tell us “there is no alternative”. But this time feels different. Perhaps the public is beginning to realize that business as usual for electric utilities leads to power outages of unacceptable duration. 

The other crisis is that of climate crisis, seen as different regions of our country now experience unique vulnerabilities like hurricanes and wildfires. But this other bigger crisis of anthropogenic climate change is one that the U.S. utility industry, along with other fossil producing industries, has been actively denying for decades. This is problematic at a number of levels. Most critically it raises the question of trust. Why should we trust utilities if they have not been honest with us about the real source of the problem, CO2 and related pollutants. At a deeper level we wonder if managements are even being honest with themselves. Why keep doing the same thing, rebuilding systems that can’t serve the broad public adequately without lengthy gaps in service?

The key to change, as we see it, is a renewed policy focus on resilience. This means many things in this post-Ida context particularly, an increasing penetration of solar plus battery storage. But from a business standpoint, change could come with a rapid erosion of the utility’s monopoly. Any time you tell customers who vitally depend on your product to find substitutes for up to six weeks (and in addition these interruptions are likely to occur more frequently in the future) — they will, but in ever increasing numbers they will stop coming back as consumers. Why bother? Electricity made in small batches, locally, does the same thing as grid power, and might even be more reliable or resilient. Electrical service this poor will render offending utilities economically irrelevant within a decade. We expect politicians, particularly in New Orleans, to revive an old slogan with a new meaning, power to the people. 

By Leonard Hyman and Bill Tilles for Oilprice.com

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