As in zero, nada, zip, zilch, nothing.
Do you think that the very high level, high profile U.S-Canada power system outage task force could have spent all that time and money investigating the blackout, and then come to the recommendation that nothing needed to change? No way.
But on the face of it, why not “no change”? We may not need more reliability, or at least not more of a mandatory, uniform level of reliability. As the blackout report points out, big blackouts are not very common. The electric power system is already highly reliable, but every ten years or so a significant blackout comes along. Seems to be a pretty good record.
Big blackouts are costly, and “never again” is a fine sentiment, but do we really want more reliability? Consumers already pay a lot for reliability, and whether we want to buy more depends upon how much will it cost us. The task force report has given us a long shopping list of top-down recommendations, but it didn’t include a price tag.
There is an even deeper problem. Does anyone have a good idea whether the typical electricity consumer in the United States or Canada would rather have more reliability at higher power prices or less reliability and lower power prices? Some consumers would probably be willing to pay more to have more reliable service, and others would pick lower prices even if service quality went down a little. The existing top-down system offers no way for operators and policymakers to gather information on how different customers value reliability. Nor does it offer much in the way of buying different levels of reliability, instead treating reliability as a “one size fits all” characteristic. Note how this approach reflects the supply focus we discussed on Friday.
Both of us have in effect chosen some of what reliability choice is available, having purchased battery-backup power supplies to keep our computers up and running even if the local distribution company is having problems: paying a little more to have more reliable service for a select appliance or two, and needing a little less average reliability from the local wires company. Businesses do the same thing on a larger scale, with companies that have special needs for highly reliable electric power spending millions of dollars to secure their supplies. This is a focused demand side approach that provides very targeted system reliability, which we’ll discuss on Tuesday.
What ability do consumers have to get the qualities of supply-side power system reliability for which they are willing to pay? Are there other ways to provide reliability that don’t have the pitfalls of the uniform top-down system?
Hung-po Chao and Robert Wilson suggested one approach, called “Priority Insurance,” in a 1987 American Economic Review article. The essence of the idea is to have the electric company pay consumers when the lights go out. A simple idea, but they add a twist: the electric company offers different qualities of service. For a higher price, you get a lower probability of being cut off when the system is short of power (and a higher payment from the electric company when the lights go out); pay a lower price, get a higher probability of being cut off (and a lower payment). Customers would actually be able to choose between price and reliability, based on the individual tradeoff they perceive between them.
Charles Nossair and Dave Porter tested a version of this idea against a simple system of proportional rationing of shortages, and found that their version of Priority Insurance was more efficient. Nossair and Porter added another twist in that in their version the number of levels of service and price levels were endogenous to the customer evaluations – it sounds more complicated, but it is easier than having the electric company try to figure out the ideal set of offerings, and more adaptable, too. (1992, Journal of Economic Behavior and Organization)
While one benefit of Priority Insurance approach is that it allows the electric company to allocate a shortage efficiently by having customers prioritize their own use, a bigger payoff comes from the information created through consumer actions. The Chao and Wilson approach enables consumers to express values separately for energy and for service reliability, allowing the company to target investments where the can provide the most value to consumers. Companies could distinguish what customers are willing to pay for power from what they are willing to pay for reliability.
We already have a pretty reliable grid – maybe even too reliable in that some consumers would rather have lower prices and a little less reliability. How much more do consumers need to spend? The answer may be a big, fat zero.
What we need zero of is top down change, and what we need more of is bottom up consumer choices producing information and incentives to make the system better able to provide the diversity of reliability that consumers need. More bottom-up consumer-driven influence over the provision of system reliability would make the electric power system move toward a dynamic, robust, self-adapting organic network that is the most reliable system humanly possible.
If you think that “no change” had better than the proverbial snowball’s chance in the media spotlight, then you don’t know nothing about politics, regulatory policy, or very high level, high profile international task forces.
It is in the nature of the process that something had to be recommended. Yet sometimes wisdom lies in know what not to say. It would have been a very wise 0.