Grid Reliability Is Feasible, but at What Cost?

Everybody can agree that electricity grids should be more reliable. It will be much harder to agree on what price to pay for that safety.

By Jinjoo Lee of The WSJ. Excerpts:

"Can electricity grids be better prepared for extreme weather? Absolutely. The harder question is: How much are we willing to pay?"

"And then there are states with fully regulated markets where a utility owns or controls the total flow of electricity. In such a market, a utility has an incentive to invest as much as possible in the grid because it can raise the price it charges customers—as long as the state’s utilities commission approves.

Would a different market structure have prevented failures in California and Texas? It may have helped, but it would not have been 100% foolproof. Let us assume Texas had a fully regulated market. True, the state’s utility might have had more financial incentive to weatherproof its grid—but it would base those investment proposals on assumptions about future supply, demand and risk levels. Crucially, the state utilities commission would need to agree that the costs—which would ultimately be passed on to households—are justifiable."

"It would be the same kind of inconclusive answer if Texas had a capacity market, a system where some generators are paid for being on standby. In such a system, capacity price signals are based on the worst-case scenario the grid operator can imagine. Even a capacity market could be left short in the face of extraordinary weather conditions. PJM Interconnection, for example, tweaked its capacity market rules after the polar vortex of 2014 left up to 22% of power generation unavailable to customers. The rules raised the stakes for power plants, penalizing underperforming plants heavily and rewarding those that exceed expectations during emergency hours. PJM notes that these changes helped ensure enough power was available during the extended cold snap in 2018, when forced outages peaked at under 12%. 

Even these investments can cause a backlash if deemed costly. Ratepayer advocates have criticized capacity-market pricing models for adding too much onto utility bills for power that might never be used. The American Public Power Association estimates that in 2019, capacity prices in PJM added $119 a year, or $9.92 a month, to the electric bill of a homeowner on average, representing 9% of the total bill."

"The more doom and gloom the policy makers incorporate into their scenarios before setting market prices and rules, the safer the grid can be. California regulators knew since at least 2017 that the state could face a capacity shortfall before the blackouts occurred in 2020, but failed to act."

"If we want grids to be nearly 100% reliable, such a future is possible. The tricky part is that different households have different tolerance levels for risk and cost. Determining how much we are collectively willing to shell out for safety is more art than science. It could take more trials, and more costly errors, to arrive at the right balance."