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Power Play

How to prevent a blackout

From the September 2008 magazine

On August 14, 2003, my lawnmower died. It was 4:10 pm and the perfect weather for gardening. Suspecting a simple neighbourhood brownout, I resigned myself to reading in the afternoon sun. Power failure wasn’t uncommon during the steamy, air-conditioned months of summer, but as I discovered hours later, this outage was anything but common. At its height, the blackout of 2003 plunged nearly 50 million people into darkness, and it would be days before power returned to the furthest reaches of the grid. Subways and office towers were evacuated, streetlights pulsed hypnotically as pedestrians guided traffic, hospitals and prisons switched to backup diesel generators, and beer and melting ice cream were shared with eager passers by. The world, it appeared, could survive without power, but certainly not for long.

Early estimates of the damage were pegged at between $4 and 10 billion, and whispers began to surface of a $50 to 100 billion upgrade to the entire continental grid. Not since Doris Day saw the lights go out back in 1965 had electricity captured our collective imagination, and almost forty years later, people were still left scratching their heads. How could such a thing happen, we all wondered, in this age of iPods and widescreen TVs? When even our toothbrushes are fueled by nickel metal hydride, how can the power so catastrophically fail?

In the 250 years since Ben Franklin’s earliest experiments, electricity has become an essential part of our daily lives, but most of us don’t have a clue how it all works. Terms like “battery,” “charge,” and “conductor” are now as common as “plastic” and “the Internet,” but we still know more about using Franklin’s energetic inventions than how they’re actually made. In fact, were it not for all these blackouts, we’d hardly give electricity a second thought.

Like oil and its kid sister gasoline, electricity’s effortless consumption has made it the cocaine of our industrial age: fiercely addictive, wickedly volatile and plagued by high, inelastic demand. Unlike oil, however, you can’t drill it, refine it and bury it under a mountain for a balmy summer day. Because of its physical properties, and the tremendous cost of storage, electricity markets are forced to clear in real time (that is, power is produced at the same time it is consumed), and when air conditioners are blasting away on a warm afternoon, that balance becomes costly to preserve. Even the smallest surge in demand can force responsible governments to their knees, grovelling for expensive “peaking” power from neighbouring provinces and states (where prices are cleared at roughly ten times the average rate).

By the mid-1990s, a dangerous trend was starting to form. Computer use was growing, the Internet was emerging as a tool for research and commerce, and rising stock portfolios left consumers with plenty of money to spend. A good share of that discretionary income went toward bigger and better consumer electronics, and the resulting surge in electrical demand, coupled with an aging and mismanaged network of public supply, began to cripple public utilities all across the continent.

Part of the problem is a lack of consumer awareness. For our part, we simply plug in our phones and switch on our screens and they instantly jump to life. But the process is much more complicated—and costly—than you might expect. Deep in the countryside, far away from prying eyes, networks of aging industrial turbines are working around the clock, spinning through dense magnetic fields and whipping billions of tiny electrons into action. These particles are then shot out along a web of derelict hydro lines more than half a century old, spanning almost 30,000 kilometers in Ontario alone. Racing toward their end users—industrial manufacturers, office towers and techno-addicts alike—they energize everything from digital home theatres to international airports, and the list of commercial uses is growing daily. It all happens so quickly that when the sound comes on and the movie starts to play, a safe and reliable power grid is often the last thing on your mind. But with billions of dollars in infrastructure, security and commerce on the line, the consequences of a system-wide failure can be staggering.

Here in Canada’s industrial heartland, the late 1990s were looking particularly bleak. Mike Harris’s incumbent Tories, perhaps more conscious of finance than industry, were finally taking notice. “It is simply not acceptable,” proclaimed Jim Wilson, Ontario’s incumbent Minister of Energy, “that [Ontario] Hydro’s business performance has faltered so significantly over the past decade, that power costs have increased by 30 percent in the early 1990s, and that Hydro’s debt now exceeds $30 billion.” Like its peers around the globe, Ontario’s bureaucracy was better suited to generating taxes than it was to generating power.

As a result, most power plants across the country are now past their operating prime, important investment decisions about the future of the industry have been put off in favour of legislative inertia, and utilities are more than happy to pad their earnings with more lucrative, unregulated profits, like renting water heaters, selling long-distance phone calls and trading wholesale power. Had legislators addressed the root of the problem—a prolonged imbalance of demand and supply—many of our most devastating blackouts would have been almost entirely avoidable.

These failures were political, not technical. After years of misguided regulation, many public utilities hadn’t upgraded their decaying networks because they simply couldn’t afford to. Here in Ontario, one of the largest jurisdictions affected by 2003’s outage, the industry had floundered for decades, burdened by millions of dollars in interest and a shameful record of monopolistic rule. Electrical failure was merely a symptom of that greater regulatory infirmity, one that continues to threaten our networks every hazy afternoon.

Even more alarming still may be the road that lies ahead. As suburbia continues to sprawl and consumption continues to grow, two dangerous realities have emerged: 1) demand for power is quickly outpacing supply, and 2) the cost of power is quickly outpacing its subsidized price. On the one hand, we’re running out of power. On the other, we’re running out of money. And unclear legislation is only making matters worse.

During the aftermath of the 2003 failure, José Delgado, president and CEO of the American Transmission Company, tried to describe the origins of this electrical stalemate. “The [traditional] regulatory compact,” he explains, “worked in the following manner: the utilities, as regulated monopolies, assumed the obligation to build as necessary to meet the needs of their customers in a rational, cost-effective fashion. In turn, they had monopoly rights within their territories, and regulators let them earn an adequate return on their investments. As a result of the compact, customers were to get reliable service at prices that reflected the benefits of scale.” That arrangement worked well when economic growth was more moderate and demand for power more modest, but the theory quickly broke down when the cost to add new supply began to skyrocket, and governments were forced to run huge deficits just to keep their systems afloat. Salvation, it turned out, lay in the open markets, and with governments eager to keep the lights on, utilities were given a new lease on life.

Margaret Thatcher set the pace in the early 1980s, as National Grid rescued England from the doorstep of the International Monetary Fund. Thatcher was convinced that free market operators were better financed and staffed to shepherd these aging industrial giants through an increasingly globalized world, and the early evidence certainly supported her massive privatization campaign. Unfortunately, these same utility executives were more concerned with healthy finances than healthy operations, and expensive upgrades and maintenance were frequently delayed in favour of short-term, open-market gains. This addiction to unregulated profits endured while generators and powerlines decayed, and over the next two decades, what seemed like an ideal solution to the cash flow “squeeze” quickly spiraled out of control.

As John Wilson cautioned in Sinister Synergies: How Competition for Unregulated Profit Causes Blackouts, “regulated companies are much less likely than deregulated ones to take large, inappropriate risks because regulated companies are striving to make reasonable returns rather than rolling the dice for big profits.” Sitting on the board of Hydro One and speaking on behalf on the Ontario Electrical Coalition, Wilson was convinced that deregulation was at fault for all of our current power woes. But despite his objections and the clarity of his voice, the lure of unregulated profit is still only half of a broken equation. Regulated or not, regional governments still need to clamp down on swelling demand and somehow prioritize new supply if they ever hope to rescue the industry from collapse.

A perfect example of the dangers of economic asymmetry is California, the reigning poster child of failed energy policy. Throughout the 1990s, Pacific Gas & Electric—the state’s $10 billion private operator—had been reluctant to build new capacity. At the time, Governor Gray Davis was moving forward with an ill-fated deregulatory experiment, which forced the government to buy power from Enron and others in unregulated markets and then sell it back to consumers at a regulated price. The state would come out ahead if competition lowered prices, as economic theory might suggest. In reality, corruption and opportunism drove wholesale prices up on some occasions to more than thirty times the fixed consumer rate. The rise of power-hungry markets like Silicon Valley, paired with a crippling supply crunch, left PG&E with little other choice than to stop providing power to hundreds of thousands of its paying customers.

At the height of the crisis, California was forced to buy nearly $300 million in power from its neighbours every month just to meet its normal seasonal demand, and with massive lead times on new generation capacity, there was no real end in sight. A reactive Department of Energy finally called for up to 1,900 new power plants to be built across America over the following two decades, but the Sunshine State’s power-starved and tax-strapped consumers took very little notice.

PG&E was eventually forced to seek protection from its creditors in one of the largest utility bankruptcies of all time. Rolling brownouts and a massive federal bailout were eventually required to rescue the region from electrical collapse. Once praised as the great hope for public power, competitive prices and free-market privatization failed to restore any balance to the world’s fifth largest economy, and with the dot-com bust sweeping billions from the State’s already diminishing coffers, the timing couldn’t have been worse.

North of the border, Ontario’s power users were racing toward a similar fate. Despite an expansive geography and scattered population, the province’s residents continue to pay two thirds less for power than any of their stateside neighbours—and a fraction of the cost almost anywhere else in the world. Oddly enough, producing cheap power is not one of our core provincial competencies. For years, retail electricity prices have been artificially (i.e., legislatively) capped, and over time, that ceiling has cost the locals dearly. On its surface, lower hydro bills might seem like a consumer-friendly policy, but when the cost of consumption is set below the cost of production for an extended period of time, governments are forced to cover the difference, putting their credit ratings at risk and drawing billions of tax dollars away from social spending. Fully 40 percent of a typical Ontario hydro bill still goes to servicing the interest on that spiraling mountain of debt, and with prices still capped below their natural economic equilibrium, Ontario’s consumers are actually funding their grid’s collapse.

The disconnect is obvious, though difficult to overcome. When affordable power is valued over network reliability, the absolute cost to consumers is the same, but the mechanism is entirely different. Consumers pay higher taxes when they should be paying higher bills, and that distortion plays a large role in fueling runaway demand. Despite Wilson’s objections, free-market pricing actually solves this important issue because it punishes excessive consumption at the source. Simply put, increased taxes don’t reduce electricity demand because they’re a blended expense. Paired with roads, schools, and health care, subsidizing an inefficient power grid is easily lost among the vast ledgers of public care. If we ever hope to reclaim sovereignty over our power markets and reign in profligate demand, this relationship needs to change.

For years, legislators have buried the disconnect in our annual tax bill, rather than absorb the cost directly through our hydro bill. As consumers, we may feel entitled to cheap power because we’ve always had cheap power. But the feeling is entirely synthetic, and only now are legislators starting to educate their constituents on the true cost of power, and the lesson is one of restraint. Notice the recent summer propaganda on buses and billboards around the Greater Toronto Area, begging us to reduce unnecessary power consumption by exposing common areas of abuse—not because the power isn’t there, but because it costs a lot of money to buy what we can’t produce ourselves. Ontario is also experimenting with the concept of variable cost—charging a base price for average use and a premium price for heavy use, and tying excessive demand to consumers’ wallets for the first time in provincial history.

At the same time, the province needs to better focus its efforts on supply, particularly of the renewable variety. With clear environmental, economic and political benefits, it’s surprising that wind and solar power haven’t been more enthusiastically embraced. Other than a few token power farms and solar powered signs, Western governments have been mostly reluctant to push either of these established technologies forward, passing on the torch to a host of enviro-entrepreneurs and PR-hungry energy giants until voters ask for more. Residential solar offerings in particular, when aggregated across a province, can provide a substantial lift to overall supply and a meaningful reduction in demand, but governments are still dragging their feet. Ethanol and hydrogen are quickly becoming reasonable alternatives to natural gas, but face a stiff uphill battle against incumbent petrochemicals. Wind, biomass, and refined waste are also coming into their own, but without broad legislative support and competitive financial incentives, none of these initiatives will attract enough capital to have any meaningful impact on supply.

To be sure, power-hungry Ontario is aware of the cracks in its fragile electrical façade and is making progress toward avoiding a repeat of 2003—though it’s recent efforts have focused on more traditional technologies. Exhibit One: the brand new $730 million Portlands Energy Center on Unwin Avenue in downtown Toronto, supplying on-demand, (relatively) carbon-friendly, natural gas–fired peaking power into Toronto’s less-than-self-sufficient grid. Though the plant will only run at 40 percent capacity, it can move from zero to 550 megawatts in about twenty minutes to satisfy short-term, grid-busting summer demand. To put the plant’s scale in perspective, 550 megawatts is enough to power up to 500,000 homes on a typical day. The generator will also receive an upgrade during the winter of 2008 to make it even more energy efficient and environmentally friendly by up-converting from a single-cycle process to so-called combined-cycle technology (i.e., using the heat produced by burning natural gas more efficiently). In order to meet projected demand in the years ahead, the province is also exploring an expansion of its aging nuclear fleet, with environmental assessments already underway at Clarington and Tiverton to build the province’s first new nuclear facility since 1993, and heavy interest by the local community in Nanticoke to replace their so-to-be-decommissioned coal plant with a next-generation fission-based system.

Skeptics have questioned the value of such investments, given Toronto’s recent ambitions at reducing aggregate power consumption by 300 megawatts using traditional conservation along with voluntary demand-response technologies (which pay commercial and industrial customers to curb energy use when the grid is nearing capacity). But engineers, economists, and policymakers all agree that any solution will require a portfolio-based approach—including considerable new supply—in order to sidestep another round of regional electrical collapse.

Clearly a new paradigm must be found, one that incorporates private funds, public priorities, and some semblance of economic balance. This time around, enlightened social partnership may be our only way out. With projects as diverse as Central Park, the Royal Ottawa Hospital, and the London Underground, collaborations between public and private industry have a unique strategic advantage: they’re predicated on everyone getting exactly what they want. The government gets uninterrupted power supply and relief from its stranded hydro debt. Private industry gets uninterrupted power demand and a reasonable return on investment.

What makes Public-Private Partnerships (PPPs) so successful is the introduction of three key improvements to the public-only model: 1) top-tier labour, 2) coordinated strategic and financial planning, and 3) diversified operational risk. They also promote two key improvements to the private-only model: stable regulatory environments, and protected consumer interests. The only two conditions for success are that private enterprise must not be allowed to prioritize profit over service, and public administrators must not be allowed to prioritize control over financial solvency. Other than that, PPPs virtually run themselves, and as power companies, highways and sports arenas join the growing roster of public financial orphans, the world’s biggest investors are more than eager to adopt.

In June of 2002, Ontario Power Generation became the first Canadian utility to experiment with the benefits of PPPs. They signied on British Energy to revitalize its aging Bruce nuclear station: out of its eight units, two were not even functioning, and two others required upgrades. Over the course of an eighteen-year lease, BE agreed to pay the government roughly $3.1 billion to upgrade the derelict CANDU reactors, and then sell off any new power into a deregulated Ontario marketplace. Like enlightened travelers from a not-too-distant future, the braintrust at British Energy are both nuclear and operational specialists, sporting a twenty-year history of financial and managerial excellence. Originally owned by the Crown in the asset-rich United Kingdom, the company was spun off by Thatcher during the dawn of infrastructure privatization in the early 1980s, and with time, it learned to thrive in Britain’s increasingly competitive marketplace. Within two short years, Bruce Power (the joint venture formed to run the power plant) already had two of the four units up and running and was supplying nearly 20 per cent of the province’s energy needs. With another $4.25 billion slated for the other two reactors, the experiment was paying off a sizeable social dividend.

But stable open markets and effective government partnership are only the first of many steps toward securing our energy future. Massive continental blackouts may only happen once every few decades, but at a time when the country is producing close to $3 billion a day in goods and services, they are interruptions we can no longer afford. Every time the lights go out, millions of lives and livelihoods are put at risk. Since the blackout of 2003, people are certainly more aware, but without decision-makers focused on reliability, utilities focused on investment and consumers focused on conservation, “power failure” is likely to remain the only outcome of the electrical process that we all truly understand.

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