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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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Florida’s Power Grid Desperately Needs An Overhaul

  • From the perspective of the transmission system, every category 4 hurricane is basically a grid killer
  • In terms of hurricane Ian, Florida’s utilities have publicly pledged to build their grid system back even better than before
  • Distributed energy options like solar and battery storage could offer solutions to rural communities.

Ben Franklin, one of the honorary founders of the electricity business, said that an ounce of prevention is worth a pound of cure. With that in mind, consider power outages caused by hurricanes, a severe adverse weather phenomenon that appears to be both increasingly common and increasingly severe. Sort of a metaphor for the climate in general. Less than two weeks ago, due to hurricane Fiona, Puerto Rico suffered its second total power system collapse in five years. After the last major hurricane, Maria, the authorities promised to rebuild. Obviously either what was promised never got constructed or what was built didn’t withstand the huge volumes of water from Fiona. This time around, we heard an emergency administrator say that getting power back on was difficult because so many customers lived in the relatively remote countryside. And that returning electrical service to all these relatively isolated customers will be a difficult task given tiny, narrow, debris-strewn country roads in mountainous areas versus large utility bucket trucks. Well, this is all true but maybe we should ask a different question. Is frequent systemic collapse of the grid acceptable and something we should expect? Said differently, will the fate of electricity customers in Puerto Rico (and probably Florida) - very lengthy outages for rural customers-become our new normal?

And finally, would rural customers be served better with distributed resources, like rooftop solar plus batteries, rather than reconnecting them to the grid since there is a constant rebuilding process anyway? The utility transmission system, which was up until recently considered a very low risk asset, is now seen in a severe hurricane context as the primary source of system vulnerability. The same is true in fire prone areas. From the perspective of the transmission system, every category 4 hurricane is basically a grid killer and there have been about 14 of them in the Atlantic over the past decade. At a comprehensive level, it seems we need a little better planning. Remember that old joke: Q. How do you get out of a hole? A: First, stop digging. 

Related: Trading Giants Expect Robust Oil Demand Despite Recession Fears

Emergency aid and mutual assistance, which utility companies are rather good at in these extreme circumstances is like a tourniquet on a wound. It addresses the immediate problem, getting electrical service back on. Once that happens, and popular attention wanes, will resources become available for a permanent fix? That brings up another issue. Utility customers, some in less well off rural areas, frequently lack the financial resources to finance costly distributed energy options. And their local utility may also lack the incentives to even enter the distributed resource business at scale. Nevertheless even restoring power on a status quo basis will take weeks if not longer. 

There’s another old saying, this one about history not repeating but instead rhyming. Our present situation rhymes with a problem facing government electricity planners during the New Deal during the 1930s in a way. The government was facing the intransigence of investor owned utilities reluctant to invest adequate capital in the face of meager returns offered by sparse, rural customers. The government responded aggressively by establishing competing entities like the Rural Electrification Administration and the TVA. For rural utilities the pre-New Deal era was capital constrained, lacking scale, and facing ideological opposition from the investor-owned utilities ( IOUs). We’re not sure how much has changed in 90 years.

In terms of hurricane Ian, Florida’s utilities have publicly pledged to build their grid system back even better than before. But the question we keep asking ourselves is, “Is that the best (or correct) answer as far as customer reliability is concerned?” Said differently, the utility’s preferred solution, rapid system rebuild, appears somewhat in conflict with the customers desire for reliable service and minimal interruptions. Transmission towers that don’t disintegrate in category four storms, is that the new, ultimate goal? As an alternative would more distributed power reduce reliance on the grid and thereby improve reliability? We don’t know, but we do suspect that existing incentives would not point in that direction. The utilities will get to charge off their storm expenses to customers spread over a few years. They will replace old, depreciated plants with new, more expensive plants and thereby raise the rate base. Customers investing in their own distributed resources would not add to the utility rate base. 

Utilities will claim that they build a system that provides reliable energy, and they show the reserve margins to demonstrate the spare capacity they keep on hand to meet high loads and outages. In its 2022 Summer Reliability Assessment, the North American Electric Reliability Corporation (NERC) rated the reserve margins for 21 regional assessment areas. Keep in mind that in the good old days, the electricity industry aimed for a 20% reserve margin.  

Figure 1. Number of NERC regions within summer reserve margin range 

Reserve margin (%)

Anticipated reserve margin

Anticipated reserve margin  with typical outages

Anticipated reserve margin with higher than expected outages and demand conditions

    

0% and under

0

0

7

    

1-10 %

0

3

6

    

11-20

5

9

7

    

21-30

9

2

0

    

Over 30%

7

7

1


Consumers, though, want the system to operate under adverse conditions and one third of the regions assessed probably could not do that. If customers don’t get protection, then they want a quick return of service, which is what “resilience”, a favorite word in the industry, means. But again, back to incentives. Consumers and the economy suffer economic losses during an outage, but not the utility. All the extraordinary labor and capital expenses as well as the loss of revenues from disconnected customers—all of this is fully recovered by utilities via the regulatory process. 

In a different context, we saw that Senator Booker of New Jersey was discussing food in the context of the US health situation. He pointed out the contradiction in our economy where we pay huge sums on medication and treatment for food-related illnesses like diabetes while the government also subsidizes the production of unhealthy foods. It seems obvious that a better policy would be to stop encouraging production of unhealthy foods and label foods so consumers see the risks rather than continue the present policy.

We feel the same way about the state of the electric industry. It needs better risk labels, and more preventative efforts in lieu of footing the bill for damages after the facts.

Ninety years ago the investor-owned utility industry just said no to rural customers and let the government provide all capital and resources for rural electrification. Utilities today are probably far less capital constrained than those of nine decades ago but the problem is somewhat similar. The old utility manager’s problem with rural customers was having to invest considerable capital on a per-customer basis while earning a very skimpy return on investment. Even in a regulated rate regime the economics here are or were considered problematic. Nowadays distributed energy options like solar and battery, where energy is produced and consumed locally or on-site, are completely antithetical to the prevailing regulated utility business model. A distributed energy system views a legacy utility spoke and hub grid as a large, obsolescent, stranded asset. It should thus be no surprise if utility executives appear slow to embrace these distributed energy alternatives. The real question is who or what will emerge to challenge the incumbent utilities as new technologies offer better service under increasingly harsh operating conditions.

By Leonard Hyman and William Tilles for Oilprice.com

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