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This seems incredible in developed and wealthy countries!
In Europe too, Italy experienced blackouts in June and recently, French authorities warned of possible lack of electricity production due to the heat wave, although the latter did not happen, as nuclear power plants were authorized to operate at full power despite higher river water temperatures.
In Japan, the largest utility (Tepco) had to close 17 nuclear plants after it was caught falsifying safety documents to hide cracks at some plants. It was feared that production would fall short of expected electricity demand during the summer. Fortunately, the summer was cooler than usual in Japan and some nuclear plants were able to be restarted. So no blackout happened!
All these different events have created some concern on electricity availability for the coming months. However, there is a need to better understand the root causes of these different problems, to see what is needed to solve them and how this could impact the present deregulation plans. Finally, will these events and their consequences, generate business for us?
This overall "dark" picture of the electricity landscape is due to an aggregation of different causes:
- It is thought that breaks in the high voltage grid near Cleveland sparked a chain reaction affecting up to 50 million people in the Northeast of the U.S. and Canada. The electricity cuts lasted over 30 hours in some areas
The root causes of this big grid collapse are not only technical but relate also to the confusing business and regulatory environment that the US Utility industry has been made to work within in the last five years.
As President George W. Bush has said, the blackout was a "wake up call to modernize an antiquated system" and the August 14, 2003 events may serve to finally focus the public, legislators, regulators and the media on the investments "in physical infrastructure and management strategy" that are needed to ensure North American power reliability in the future.
- We thus expect capital investment to flow to improve the electricity infrastructure in the US. The question is how to set up the right economic incentives, including high enough transmission tariffs, to get a good enough return on investment for the transmission operators. Regulators will probably have to lift their cost reduction pressure on these operators in order to take into account the longer-term interests of the industry and customers. Also, politicians need to invest their political capital to make constructive legislation move forward. Moreover, there is a need for public education as the building of new powerlines usually encounters strong opposition from local communities.
- The Italian blackout that happened in June had different root causes, which were linked to an imbalance between supply and demand during a heat wave that pushed electricity demand to peak levels. Italy relies heavily on electricity importation and has obviously started much too late to invest in generation capacity. Following this incident, Enel, the Italian Utility, has approved an emergency plan to boost reserve capacity by reactivating eight older, less efficient generating stations.
Status of European electricity deregulation "summer 2003 update"
Source: CGE&Y
- In other European countries, there are also signals of possible electricity shortages:
- Last winter the threat of shortages hung over the Norwegian electricity sector, which is highly dependent on hydro generation. Low rainfall, unusually cold weather and heavy exports resulted in power prices spiking upwards.
- In June, the UK National grid said that Britain could face power cuts next winter as electricity supplies tighten after slumping prices, linked to the New Electricity Trading Arrangements (NETA), forced closures of loss-making generation plants. Current information indicates the margin of spare generating capacity in the UK will drop next winter to its lowest level in 13 years.
- Moreover, end of August, the London area experienced a 30 minutes blackout due to defaults in two transformers belonging to National Grid Transco. It happened during rush hour and caused significant trouble for up to 250,000 people. This points out again the need for more investment in the electricity transmission systems.
- In October 2002, in the second edition of our European Electricity Market Deregulation Observatory, we highlighted the difference between capacity margins based on the theoretical total of plant availability compared to peak demand, and the actual situation, allowing for plant outages due to maintenance, commercial decisions or technical reasons. The data for the winter 2001/2002 showed that for a number of European countries (including France, Germany, Spain, and Italy), the actual margins available were below 5% which is a worrying situation.
Source: CGE&Y European Energy Markets Deregulation Observatory "Edition 2" Winter 2001/2002 data set
- In "Trends in Energy 2003", CGE&Y warned that a lack of Dutch domestic production is a major threat to security of supply. The lack of consistency in government energy policy has resulted in energy companies putting investment on hold and mothballing existing units and from 2005, the Netherlands would be dependent on imports from Belgium and Germany at peak times.
In many European countries, there is a renewed debate about energy savings and demand side management and the governments and regulators are soliciting the industrial consumers to participate.
Does this mean that Europe is switching from a perceived oversupply to an undersupply situation?
These last months, events showed that in exceptional climatic situations (this summer's heat wave in Europe was the worst in more than 50 years), the risks for shortfalls are real, and materialized in some countries.
Even in France, which is exporting up to 15% of its generation output, the present forecasts show that there is a need to add at least 3000 MW of generating capacity by 2010.
Thus, it seems to be the right time to think about greater investment in generation plants, in Europe, and in transmission grids on the other side of the Atlantic. Considering the time needed to choose the technology, the sites, get the technical and administrative approvals and build the plants, it is not too early to start the planning process.
Other questions that we need to answer are: do the new market rules linked to deregulation enable these decisions? and will deregulation decisions be affected by what happened recently?
On the first point, let me recall that our first survey title in 2001 was "Making De-regulation work; have the basics been forgotten?"
We concluded this study by saying that there is a sense of "so far, so good", but will it work when the market or systems are under stress? One participant commented "we have practically forgotten what a real cold winter looks like", he was right except that we experienced a real hot summer!
We acknowledged in our work that the market rules are thought to signal short term prices well, however they are less effective at signaling longer term prices.
These mechanisms work well to allocate capacity but are less effective at deciding capacity needs.
Source: CGE&Y Global Utilities Survey 2001/2002 "Making Deregulation Work; Have the Basics Been Forgotten?"
To summarize this, we said that deregulation is not enough to define an energy policy meaning that, in addition to competitive market rules, there is a need for planning and incentives to enable the operators to make the right decisions in the long term.
It is difficult to say today if these recent events will stop the implementation of the new deregulated market rules.
I personally don't think so, because in a free and competitive market, the operators are better positioned to react quicker to events and to put in place innovative solutions.
Moreover, in a fully deregulated European market, the fluidity of the inter-country electricity exchanges should be boosted, not only through interconnection investment but also by the establishment of European rules on common transmission tarification principles (already agreed), common technical language and operating rules and business solutions to manage the grid bottlenecks. It is clear that with improved interconnection, the generation capacity margin issues that I underlined previously will be better managed and that the need for new generation investments could be, in certain cases, deferred.
However, new market restructuring rules could appear in North America. In addition, incentives to take into account a longer term view should be introduced in the present deregulation framework in all regions i.e.:
- Regulators should not only set cost cutting objectives for the transmission/distribution companies but also investment objectives to enhance the quality and capacity of the grid.
- Incentives should also exist to build new generation capacity and I am not only referring to economic incentives (wholesale/retail electricity prices levels) but also measures to decrease the risks encountered in building such plants.
Also, education of the public is paramount in order to improve the acceptance of these new assets. It needs to understand that "behind the switch" there is a vast and complex industrial infrastructure and that electricity is not a natural element like the air we breathe.
