Getting regulation right

The USA and Canada were hit by a massive blackout in mid-August. This event will result in regulatory changes in the USA and possibly further afield, writes Siàƒ¢n Green.

In the last two weeks of August, power outages were experienced in London, Helsinki, and, of course, the USA. This summer has also seen blackouts in Italy, China and Argentina, while countries such as Australia warn of imminent power shortages.

The recent power outages were due mainly to failures in the transmission grids, with contributary factors such as heatwaves and low reserve margins sometimes playing a part. And while the specific causes of each are being investigated, some are being blamed on a lack of investment in transmission infrastructure.

The blackout that hit the northeast USA and Canada in mid-August was described as a wake-up call by the US government. The massive outage affected some 50m people and lasted for over 24 hours. A joint US-Canadian task force is now investigating how a fault in the transmission system could have lead to a cascading failure that saw the rapid loss of 61 000 MW of load that affected eight US states and eastern Canada.

The US government has already pointed the finger of blame squarely at a lack of investment in the USA’s transmission infrastructure. Over the past ten years, electricity demand in the US has increased by 30 per cent, but transmission capacity has only increased by 15 per cent.

This is reflected in investment levels, which have been gradually declining, according to Bo Normark, product development manager for ABB Power Systems. “Twenty years ago, transmission investment in the USA stood at around $5bn per year,” notes Nomark. “By 2000, that had fallen to just $2bn per year.”

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The reason for the decline in investment is the regulatory environment in the US. As in other countries with deregulated electricity markets, the transmission sector in the US is viewed as a natural monopoly and so remains regulated. The Federal Energy Regulatory Commission (FERC) therefore caps the allowed rate of return on investment at around 11 per cent, and utilities have therefore focused capital expenditure on other activities where rates of return are higher.

This environment means that investment in transmission infrastructure is not valued appropriately, says Nomark. “There has been very little emphasis on investments that would enhance grid security. For example, it is well known that voltage collapses could occur in the grid, but there is little incentive to install devices that could mitigate this. You are paid to increase capacity but not to enhance security.”

“There was a private investor looking to build a cable across Lake Erie, but at the end of the day they couldn’t make the economics work given the capped rate of return,” notes Nomark. “The fact that the cable would have significantly enhanced the security of the grid in that area was not given any value.”

But in spite of falling transmission investments, the USA remains the number one market for ABB’s transmission and distribution business. The country accounts for 25 per cent of ABB Power Technology’s business, and in the last five years the company has continuously improved its position there, according to Nomark. “ABB is by far the market leader in North America.”

ABB and its competitors expect to gain from the events in the USA and Canada. The US government has said that the country’s grid network requires $56bn of new investment over the next ten years to keep pace with growing electricity demand. ABB expects investments in the grid to double to $4bn by 2004.

This will only be achieved, however, if changes to the regulatory environment are made. FERC is likely to start allowing a higher level of return on investment, and planned changes to regulation could also happen more quickly than previously envisaged ” the creation of Regional Transmission Operators, (RTOs) for example. The passage of comprehensive national energy legislation such as that currently before Congress is also important, says the Edison Electric Institute.

Just two weeks after the US blackout, a fault in the transmission system of the UK’s National Grid resulted in a 40-minute blackout across central and south London. National Grid Group has come under scrutiny because it not only owns and operates the electricity network in England and Wales, but also transmission assets in northeastern USA. The UK’s energy regulator, Ofgem, is investigating the blackout that affected London but notes that “It is clear that National Grid has been able to make substantial investment in reinforcing the transmission system. Since privatization there have been high levels of investment in the grid with over à‚£3bn invested.”

National Grid’s accounts show that in the financial year ending 2003, capital investment on reinforcement and extension of the transmission network in the UK was à‚£391m, equivalent to 29 per cent of turnover for that portion of its business.

But in Europe, the focus has been on increasing transmission capacity across international borders, with EU programmes such as the Trans-European Networks (TEN) helping to identify and fund priority projects. While such projects will enhance the security of Europe’s transmission system and speed up development of the single market, the importance of investment in national networks should not be underestimated.

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