Is the power failure really a market failure?
Why we need to invest in the electric grid in the US now
To those that still had any doubts about the unreliability of the US North-Eastern electric grid after the 2003 blackouts, Hurricane Sandy has given an unquestionable answer: With hundreds of thousands still without power — including myself — close to 2 weeks after the disaster, it goes without saying the US electric grid is broken.
While one could not have expected zero disruption after such a strong storm, one can easily argue …
that the spread of the blackout could have been minimized and outages could have been fixed much faster with a more resilient and modernized grid.
In his book “The Black Swan”, Nicholas Nissim Taleb advises us not to try to predict rare and improbable events — which he calls “black swans” — but rather to build robustness to face them. I’m not sure how improbable is the hurricane that NY and NJ have just faced, but societies need to be prepared for highly unlikely events. The cost of the blackout resulting from Sandy has not yet been fully estimated, but it is certainly astronomical. Combine this with the (shorter) power outages due to Irene last year and the blackout of 2003 and you quickly realize this is not a one-time event, but rather a pattern that is likely to intensify with the climatic changes and the increasingly aging infrastructure.
According to Paula Scalingi, an expert on critical infrastructure protection, “The North American energy grid is aging, increasingly fragile, buffeted by deregulation and market forces, stressed by relentlessly increasing demand, operating at near capacity with decreasing staffs and reliant on electronic components,”
So why is it that investments that are a clear benefit to the economy as a whole have not been made? Why is the society bearing a much higher cost than the required investment to modernize the grid and make it more reliable?
Some history may shed some light here: deregulation of electric utilities has been advocated by the Energy Policy Act (EPAct) of 1992. Deregulation has been inspired by the previous successful deregulations of airlines and telecommunications. With deregulation, Infrastructure additions which were long-term planning now became an investment analysis. This is to be compared with the with the passage of the Public Utility Holding Company Act (USA) in1934, when electric utilities were recognized as public goods of importance along with gas, water.
But this particular deregulation, unlike others, has not worked in society’s favor. Indeed while the cost of extended blackouts to society clearly outweighs the investments required to avoid them or minimize their impact, the problem is that these investments would need to be carried out by the utility, and cannot easily be passed over to customers in a competitive environment. Markets provide regional utilities and grids incentives to compete with each other, optimize costs and drain the existing infrastructure — not to invest in modernizing the grid , making it more resilient, and engaging in long term planning and risk management strategies.
This is a perfect example of market failures, where markets simply do not fulfill their duty of maximizing societal welfare. The unquestionable faith that markets will auto-regulate clearly did not materialize in this case and a stronger government intervention is required.
Consider this, “from 1995–2000, the electricity sector put less than ⅓ of 1% of net sales into research and development and in the following 6 years that number dropped to less than 2/10 of 1%! We are harvesting the existing infrastructure more and investing less and less in the future.” (Amin Massoud.). Electric grids are not unlike road networks, where “private market” economics, such as direct return on investment analyses for infrastructure can lead to flawed outcomes.
Modernizing the grid, making it more resilient and investing in smart-grid technology is not a nice to have, it’s a necessity no matter what the cost is, and it’s important to understand how much of a priority this is. Societies need to be prepared for the Black Swans of the modern era and the electric grid today in the US simply isn’t.
Originally published at https://www.tumblr.com.