This post makes a simple point which I am not sure has been made this directly elsewhere, at least in the popular press or major policy debates. Many businesses and consumers, at least in advanced economies, are set to face more inconsistent energy supply. It may not wind up being “all that inconsistent” in many cases, but that depends on the caliber of management and design, when as we have pointed out seem to be declining in a very big way across the public and private sector in the West.
The reason has nothing to do with energy independence or the virtue of various green energy sources. It has to do with network design.
The most stable networks are either centralized or extremely distributed. An electric utility providing power to a certain geographic area is centralized. Gas stations are extremely distributed. Now one can have bad implementation of a centralized network (think PG&E and its aging and decrepit line system….which even so appears to have pretty good uptime despite also managing to set large swathes of California on fire.
We have discussed network architecture in the context of trading markets, but I don’t seen this concept applied (much, at all) to future network energy design, or to the extent it has been, the concern has gotten very little traction. In fact, I don’t see much thinking about the network at all. The implicit assumption, sort of like the great unwashed public being asked to make its own Covid risk assessment, is that businesses and consumers will judge their need for redundancy, storage, or other backups and plan accordingly.
Here is an overview from a trading market perspective. Craig Heimark was a derivatives trader and later Chief Technology Officer of O’Connor & Associates, in the day when O’Connor ran the biggest computer network in the world except for DARPA’s. From a 2014 post we wrote with Heimark on high frequency trading and the flash crash:
Perversely, much of the regulation of the last twenty years has been nominally in the interest of “market efficiency” but has come at the expense of market integrity. Far too many of the arguments and studies saying the promotion of competition among exchanges (and dark pools) has led to greater efficiency look at the efficiency as measured by the bid ask spread (plus fees) only of trading in the top stocks (because if they are trade weighted so that is where all the volume is). But this greater efficiency comes at the expense of no reciprocal liquidity obligation (witness the flash crash) as well as reduced liquidity in less frequently traded stocks.
The societal benefit of trading is to reduce cost to raise capital for actual companies. Does anyone really think that narrowing the spread on Google by a penny or two makes any difference to its weighted average cost of capital? In contrast, incidents like the flash crash and the feeling the market is rigged keep many small investors away from the market. The penalty for reduced liquidity in small stocks may actually be material to small company capital formation.
And these small investors are right to be concerned. The old exchange system was a hub and spoke model, which was a stable system architecture. The internet was an outgrowth of a DARPA project to make a communication system so decentralized that it could not be taken out by a nuclear strike. Hub and spoke models are stable, but subject to an outage, say by a nuclear bomb or electrical failure. What chaos theorists have found is that highly decentralized networks are stable, as are single node networks (like exchanges), but that slightly decentralized networks are fragile. And that is what we have now thanks to the SEC’s misguided efforts to “modernize” the stock market via Regulation NMS.
So regulators have left investors with the worse possible market structure. We no longer have liquidity obligations to make orderly markets as we had with the old model.
The energy transition analogue to “market efficiency” is “greener”. There is a lot of debate on whether some hyped sources like blue and green hydrogen are even really green, or whether others that do lower carbon consumption, even when pretty fully loaded, still have high, and potentially unacceptably high, other environmental costs. Like “market efficiency” where how much we have is a choice, we also have choices as to “how green” and how pervasively to try to force the implementation of cleaner energy resources (recall there are limits and the potential for blowback, witness Poles in fall-winter 2022 making greater use of dirty coal, wood and allegedly even worse nasties in home furnaces).
However, in the current world of energy supply, crudely speaking, you have regulated power providers as the overwhelming source of homes and business establishments. The implication of more but not super distributed energy sources is more instability, which here means interruptions and outages. Recall the dead Tesla charging stations in the recent Chicago super cold snap as an example. And the failure to require a common interface so any EV can use any charging station also confirms the lack of official interest in network/availability issues. Inadequate or not well distributed charging stations were likely to be a problem but allowing supplier balkanization was guaranteed to make it worse (yes, Tesla has relented somewhat by allowing charging by CCS-enabled vehicles to charge at its stations, but this situation should never have been allowed to happen in the first place).
Another illustration: what happens to electric utilities, which in their most functional incarnation both generate and distribute power, you have erosion of their role due to more solar panels and other home/local/community generation? They will lose political support and will have less reason to invest at the level needed to assure reliable power in all but near-catastrophic conditions. And their incentives would be to skimp on line maintenance too. As far as I can tell, ad hoc responses as to how various power providers handle local solar users.
If anyone has seen an academic, engineering, or analytically rigorous think-tank treatment of the future energy supply problem from a network perspective, please provide a link in comments. Thanks!