Grid Reliability

Recent events relating to power shortages in Texas have raised additional concerns over the reliability of the nation’s electricity grid.  Similar problems last summer in California, triggered by an historic heat wave, have given way to widespread finger pointing and debates over the efficacy and reliability of various generating sources.  It is unlikely that there will be any near-term resolution of these issues.

What is clear, both in Texas and California, is the question of how such an essential component of a functioning society could be left so unprepared.  The most likely answer is money.

Preparedness costs money.  Those responsible for the grid have to weigh the risks and costs involved in supporting a grid that has enough redundancy and reserve capacity to maintain service during weather events.  The differences in approach may depend, in part, on the regulatory structure.

In a deregulated market, there is considerable pressure to keep rates as low as possible, which leads to a reluctance to invest in preparedness due to the associated problem of recovering these costs.  Regulated utilities, with support from regulators (typically public service commissions), can generally put negotiated, appropriate capital costs in the rate base and recover the investment, over time, through higher rates.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®