Movers and SHAKERS
Are Planned Power Outages Worth the Cost?
(Note: companies that could be impacted by the content of this article are listed at the base of the story [desktop version]. This article uses third-party references to provide a bullish, bearish, and balanced point of view; sources are listed after the Balanced section.)
Pacific Gas & Electric cut power to more than one million customers in the San Francisco Bay Area this week as a precaution against sparking wildfires. The utility took this unusual step in response to high-wind and drought conditions. The planned blackout comes after northern California rebounds from two of the most damaging wildfires in history: the winery wildfire of 2017 and the Paradise wildfire of 2018. The outage is creating an extreme hardship for customers without power. Are the utility’s actions prudent given recent wildfire issues (bull case) or is the company overreacting to concerns that it should have addressed long before now (bear case)?
The Cost of a Wildfire Can Be Large. Estimating the full damage from a wildfire can be difficult, but the number is no doubt staggering. NBC News reports that the 2017 winery fires led to insurance claims of $12 billion. Accuweather claims that California may have suffered $400 billion in total economic damages from the Paradise wildfire and other fires in 2018.
Wildfires Cost Lives, Not Just Money. The Paradise wildfire resulted in 86 deaths and the winery wildfire caused 22 deaths. California Governor Gavin Newsom defended the utility’s planned outage, stating “The reality is that we want to protect people. We want to make sure people are safe.”
Wildfires Pushed PG&E into Bankruptcy and Management Does Not Want to Repeat That. PG&E was pushed into bankruptcy this year due to liabilities associated with last year’s fire when it faced $30 billion in potential damages. Clearly, the cost to PG&E of a few days of lost electric sales pales in comparison to the liability costs of a potential wildfire.
Regulated Utilities Don’t Have the Incentive to Take the Risks of a Wildfire. As the PG&E bankruptcy proved, the harm to a utility from accidentally starting a wildfire can be great. Critics have said that PG&E and other utilities should have done more to maintain lines and trim trees to prevent fires. Under utility regulation, rates are set to recover costs, leaving a designated profit to compensate investors. If utility costs rise from replacing wire or trimming trees, investor returns will be lower unless regulators allow recovery of those costs.
The Cost of Not Having Power is Huge. It is hard to imagine a world without electricity. Computers, phones, appliances, traffic signals all rely on electricity. Michael Wara, head of the climate and energy-policy program at the Stanford Woods Institute for the Environment, estimates that the economic impact of the outage could be $2.5 billion if it lasts for two days.
Outages Cost More than Money. Not having electricity is more than an inconvenience; it creates safety and health issues. Electricity is needed to run hospitals, traffic signals, and communication among emergency personnel. While most of these operations have backup generators and battery storage options, many individual homes do not.
There are Better Ways to Prevent Electric Line Wildfires. Critics argue that fire-prone regions should work to disconnect from the grid and rely more on local renewable generation and storage. They say that utilities should bury electric wires underground where they are less vulnerable to fire damage. Creating systems that can better detect when a line is broken would help prevent lines from starting fires.
The economic and social costs of a planned power outage are large, but the costs of a major wildfire are even larger. Much can be done to lessen the chances of a wildfire started by power lines. However, these steps are expensive and will take decades to complete. Furthermore, utilities are not properly incentivized to take on these efforts. Until utilities, regulators, and ratepayers come together to create a long-term plan to address the issue, selective planned power outages are necessary.
https://www.nytimes.com/2019/10/09/us/pge-shut-off-power-outage.html, Thomas Fuller, The New York Times, October 9, 2019.
https://www.nbcnews.com/news/us-news/california-wildfires-costs-soar-past-last-year-s-records-n946856, NBC News, December 12, 2018
https://www.technologyreview.com/s/614498/californias-shutting-off-power-to-prevent-fires-here-are-some-better-options/, James Temple, MIT Technology Review, October 8, 2019.
https://www.thebalance.com/wildfires-economic-impact-4160764, Kimberly Amadeo, the balance, July 08, 2019.
https://www.wsj.com/articles/millions-in-california-begin-losing-power-as-pg-e-tries-to-avoid-wildfire-11570632347, Alejandro Lazo and Jim Carlton, The Wall Street Journal, October 10, 2019