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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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The $7 Trillion Cost Of Upgrading The U.S. Power Grid

We have just witnessed the damage caused by poorly designed energy grids—rolling blackouts, skyrocketing electricity prices, people sleeping in their cars and in one insulated room to keep warm. At the same time a weaponized right wing media swings into action blaming wind turbines and the green new deal for Texas’s energy woes. There is a pattern here. These are variants of stories told after California’s forest fires and resulting power outages. But we see no easy end of power outages that have plagued electricity supply in recent years while adverse weather events seem to get more frequent and impactful. (See Figure 1.)

But this is the bottom line. In a way an electric system is like maintaining a car. Spend adequately on repairs maintenance etc. and reliable performance is reasonably assured. Or one could skimp repeatedly on maintenance, save a lot of money over the years and take one's chances on vehicle reliability. The electric system in Texas was built it appears around the latter proposition. Their reserve margins are the lowest in the country (about 8%). And this is the third time the electric system failed to perform adequately in winter (1989, 2011 and 2021). Our point here is that any system that consistently fails in this manner regardless of the governance regime is designed that way— despite claims and protests to the contrary. This is a big problem for any region because an increasingly digital economy requires highly reliable electricity service. And what is being provided at present in ERCOT is anything but.

Figure 1. Major disturbances and unusual occurrences on USA electric grids

Source: Energy Information Administration

Now let’s add another ingredient to the mix. Automobile makers are in a very clear transition from internal combustion to electric vehicles. A key step we believe to decarbonize the economy. But first as a society we have to decarbonize our electricity supply, and then sell decarbonized electricity to the transportation sector (which plan, if successfully executed could reduce carbon emissions by 40% or more). Related: Russia’s Answer To The U.S. Shale Threat Is Finally Here

But how will the electricity grid handle this incremental demand from the transportation sector well as the needs of existing customers under the increasingly stressful conditions imposed by climate change? One obvious answer: upgrade and expand. If the grid does not, outsiders — including industrial consumers acting to protect their individual electric supply — will.

We have previously written that decarbonizing and modernizing the US’s existing electricity plant (whose average age is 35 years) could cost $7-8 trillion. Electricity suppliers might need 20 years to complete the job, meaning $350-400 billion per year to get into shape. Currently, they spend about $150 billion per year which means a lot of catching up to do.

Those numbers look huge, but the actual payments will stretch out over decades like a mortgage. And financings of this magnitude will make little dent in U.S. capital markets, where the electricity industry accounts for only 3-4% of total capital expenditures and financing. In order to pay for new equipment, without government subsidy, we calculate that electricity suppliers would have to raise prices by 3 - 4% per year in real terms. (Academic studies optimistically calculate no price increase under the right operating conditions.) The electric bill equals about 2% of the US’s gross domestic product and the household bill about 2% of household income. Paying for modernization and decarbonization together, spread over decades, would add about $45 each year to the average household electric bill. Not an enormous burden, and one that could be spread to mitigate financial hardship.

Admittedly, we should view long term projections with caution. Markets, technology, institutions and solutions change over time. What the numbers show, at best, is that the electric industry can finance modernization and decarbonization without placing undue burdens on consumers. That should be enough to encourage faster action.

What will encourage the industry to raise the ante? Legislation in Congress reprises Obama administration policies: a mix of emissions restrictions, generous tax handouts and regulatory incentives. The industry pushed back then and might do so again, considering that the courts have become friendlier to business. Overall, greenhouse gas emissions per kwh generated fell about 2% per year during the Obama presidency and 3% per year during Trump’s term, largely for economic reasons. Generators shifted from burning coal (high carbon content) to natural gas (lower carbon content) because gas was cheaper. In order to approach zero in 20 years, greenhouse gas emissions per kwh must fall more than 10% a year.

We believe that policy makers would accelerate decarbonization and modernization of the electricity sector by making it a business opportunity for electric companies to embrace rather than as an environmental compliance problem, using tried and true components such as securitization to pay for the most polluting regulated power stations if retired promptly, granting higher returns on assets that support decarbonization, and a bonus to electric companies for the fossil-free electricity that they produce or deliver. Add a Federal guarantee for the securitization bonds or any other deferrals designed to smooth the price impact of the capital program, and that will lower costs to consumers at practically no cost to the government.

(For details of proposed policies, see blog page, lenhyman.com.) Businesspeople do not oppose or stall policies that might raise their profits.

We can’t argue that with the notion that recent polar vortex events or summer wildfires reveal serious shortfalls in electricity regulation, governance and market structure. And this includes lack of financial accountability. But from an operating perspective we also see inadequate reserve capacity, plants in the wrong place or unable to stand up to severe weather. Combine those inadequacies with the need to decarbonize, and it all adds up to a lot of capital spending. Even if the energy market decentralizes—we would think the ERCOT disaster drives people away—some public or private corporation has to spend money for a modernized electricity grid. And needless to say energy consumers will eventually pay. However the good news is if we start this massive grid redesign and rebuilding process now at least the cost of money is very low.

By Leonard Hyman and William Tilles for Oilprice.com

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  • John Ownby on February 25 2021 said:
    The headline for this article is "The $7 Trillion Cost Of Upgrading The U.S. Power Grid" yet the article says almost nothing about the grid - the means by which the electricity is delivered and distributed to the end user. Instead it focuses on the issue to "de-carbonize" the electric grid. I see decarbonization as a whole separate issue.

    The actual grid - the powerlines, transmission lines and towers, substations and transformers, meters, etc. are deficient and on the verge of collapse. And yet no one seems to be addressing this issue. We repair the lines and equipment when it gets damaged by lightening strikes, wind, fires, etc. but the addition of capacity and redundancy is ignored.

    Apart from ensuring that there is enough generation capacity (carbon neutral or otherwise) to meet the increased demand to be expected from transitioning to electric vehicles, we must also ensure that it can be efficiently transferred from the generator to the end user. The analogy I'll use to make my point is water supplies.

    We all inherently understand that the amount of water that can be delivered to a home is related to the size of the pipe. You can only increase the flow rate (i.e. water pressure) so much before the pipes burst and the valves leak. Same thing happens with electrical power. If you put too much power into a transmission line or a step down transformer for too long of a period of time it will eventually fail.

    This problem gets more complicated when you consider that most of the carbon neutral generation options are inherently more geographically spread out and isolated. The more nodes in the system the more lines and switches you need to reliably link them all into the rest of the grid.

    You can try to minimize this complexity by putting the windmills and solar panels closer to the end user, but that tends to tie that generation capacity to just serving a smaller set of users instead of the whole grid. The same situation applies to electrical storage - batteries, fly wheels, etc. are either small and localized which limits the capability to small groups or clusters of users; or they are large and complex and more expensive to integrate into the whole grid.

    I don't have all the answers but I fear that those who are debating these things are failing to ask the right questions, or failing to ask enough questions, to understand the entire scope of the problem.
  • Zack on February 25 2021 said:
    Don’t need infrastructure with companies like SIRC taking folks off grid!
  • Steve Godenich on March 01 2021 said:
    I would add federal grants for home nanogrid upgrades and tax incentives for community microgrids to augment centralized power grids and reduce load on the current power grid, reduce overall costs and increase power resiliency across the country. This would be an opportunity for consumers to invest now and pay less on a rainy day for electricity, later.

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