A recent Bloomberg / Businessweek article on Pakistan provided a pithy summary of a possible energy future for the US in an article titled “Convoys and Patdowns: A day in the office in Pakistan”. The article describes the robberies, violence and general chaos that a business manager faces daily in that country. However, this part might be surprising to readers that would think the Taliban would be a managers’ top concern:
Political violence is not National Foods’ worst problem. “The biggest problem by far is energy”… Demand for electricity in Pakistan is three times supply. President Asif Ali Zardari is trying to attract independent power producers to Pakistan and has big plans to build hydroelectric plants. Companies cannot wait. “We have created a mix of power we get from the grid, and what we can generate using our gas and diesel generators.” Many factory floor, office and bathroom lights are kept off to compensate. Ali often visits the powerhouse, a room at the plant that contains huge German-made diesel generators. Scarcity of fuel is a frequent worry. Bigger companies like Lucky Cement don’t rely on the national grid at all. It started generating its own power in 1996 and can produce 150 megawatts from its plants.
Karachi’s residents have taken to the streets this summer… to protest outages lasting days at a time. “In the morning I assess my workers”… “If I find someone is stressed out because he hasn’t slept all night without electricity… I have to change his shift and give him easier work”.
Electricity is something that most Americans took for granted as reliable and available for a reasonable price for many years. After California’s disastrous “de-regulation” experiments in 2000-1 (check wikipedia where they have a pretty good summary under “California Electricity Crisis“), the citizens of that state at least woke up to the fact that the machinery that delivered reliable and reasonably priced electricity was falling to pieces.
The core of the issue is that to meet future DEMAND for electricity, you have to procure appropriate SUPPLY, and then BRING it to the customer. Given our “NIMBY” culture, and difficult regulatory regime, there has been little incentive to develop new “baseload” generating capacity to procure supplies for the future. In addition, a lack of investment in new transmission lines, which are needed to bring supply to the customer, limits our ability to tap new sources of electrical generation and there is little financial incentive to devise a solution to this issue. As a result, we have a long-simmering problem that will come to a head in various guises over the next 20 or so years.
One more subtle issue, that is little discussed, is that electricity started as a public monopoly, meaning that one company provided you generation, transmission and distribution of power and you paid that company a single payment for doing all those services. While there are many problems with this model (inefficiency and lack of innovation), there were positive elements, mainly that it worked and provided a reliable service to everyone for a reasonable price.
There are few public monopolies remaining. Public schools used to provide services to all in major cities; now they mainly serve those that have no other options (fleeing, private schools, or perhaps some walled-off sub-component of the area). Authorities used to provide security to all areas (in theory); now many use their own security guards (they were ubiquitous when I used to live in Texas, even in grocery stores) and gated communities; the areas solely governed by authorities such as inner cities have little security at all. For public health, feel free to show up at your local community facility without insurance and get in line.
Many elements of electricity in the US are moving in this direction; after the recent set of storms here in Chicago I noted a burst of interest for local generators (gasoline powered) to run your home for days when the power goes out. Businesses routinely plan for backup generation in the costs of their facilities; these backups allow them to either mitigate the spikes and poor quality electricity that they receive from the grid (the “dirty” power) or to prepare for the grid to be unavailable entirely. Note that this is a significant cost and one that is poorly recognized; businesses and residents used to NOT have to plan for life without reliable electricity service, and now they MUST. This is a major drain on total productivity because these sorts of investments have little return and just add to the cost of doing business; they are more like a necessary evil than anything else. I haven’t seen a formal study or analysis on the cost of unreliable electricity across all sectors (household, commercial, government and industrial) but it would be an eye-opening survey, I believe.
The gradual shift is that electricity is being viewed as a “typical” public service, meaning one that you might or might not want to rely on, depending on where you live and what your ability is to avoid the vagaries or inadequacies of that service. This is happening over many years and varies based on your local situation; in Wisconsin, for instance, where Dan lives, the state did not (foolishly) de-regulate; so businesses and residents there are mostly shielded from this situation. If you live in California, on the other hand, you were exposed to it a decade ago for the first time.
When you compare this to other losses of monopolies, such as the end of the fixed-line monopoly under AT&T for telephone (which fell to wireless service), it is important to note that the end of the typical large scale generation, transmission, and distribution system of energy there will not be significant improvements to the end customer when this monopoly collapses (or becomes unreliable enough that affluent customers begin to escape). It is VASTLY more efficient overall to generate power using technologies such as coal or nuclear power than to do it in a little generator running gasoline attached to your house, even when you factor in transmission and distribution costs.
It is likely that the decline in value and reliablity of the public monopoly on electricity will be accompanied by some innovation, mainly in technologies that use less power at the retail or commercial level (such as when you go to a European hotel and you put your key card in the slot to turn on the power; this means that when you leave the room with your card everything is always shut off) or that consume less power at this level (such as televisions), and these will be favorable, although in no way covering for the value of the loss of the large scale generation and transmission model. There will also be innovations in control and monitoring of power since the power quality will also decline in tandem with the unraveling of the local monopoly.
The other element of this is that the public electricity sector will get caught in a “death spiral” similar to what happens to public schools in large cities when all of the affluent citizens either physically leave or send their children elsewhere to school. Businesses may wall themselves off entirely from the grid to ensure reliable power and housing or condominiums may be established with their own power sources, which in turn will limit the amount of money available to support the public model. These types of changes will take decades to fully play out, and the various steps won’t be immediately visible to most people that aren’t attuned to the electricity industry, but it is happening nonetheless.
Pakistan is an extreme example but in these few paragraphs you can see it all:
- businesses that are under competitive pressure have to put their top managers focusing on procuring energy rather than being more productive
- staff that are inefficient due to poor quality and unreliable service
- costs 2-3 times higher for their own generation relative to the grid
- larger businesses “opting out” entirely to gain a competitive advantage, reducing funds available to solve the core problems
- the government with grandiose long-term plans (like new hydroelectric) that won’t materialize in the near term
- the fact that the government did nothing while demand moved to 3x supply
Cross posted at LITGM