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Profiting from Transmission Investment

A holistic, new approach to cost/benefit analysis.
Fortnightly Magazine - October 2004
  • a period of time.
  • Regardless of the sector, the economy virtually shuts down when the power goes out unexpectedly. Unless the outage is short-term, the shopping malls close, the fast-food establishments cannot make food, the computers stop working, and offices send their workers home (if they are not stuck in the elevator). Manufacturing comes to a halt (including some businesses that lose entire production lines), and homeowners lose perishables in their freezers and refrigerators within a few hours. Some costs may be recoverable once the outage ends, but the vast majority of the value is simply lost. The state of our economy and the supply of electric power are inextricably linked.

    To estimate the VoLL, we used EIA data on TROs.5 We believe this data provides a conservative estimate of TROs, since it is not clear that all such outages are reported, particularly those of short duration, which can still have significant economic impacts. Our assessment of this historical record showed that over the past five years, TROs averaged about 2,150 GWh per year, or about 0.06 percent of average annual retail sales in the United States of more than 3.4 million GWh. Nevertheless, as shown below, the cost of these outages is significant in an $11 trillion economy. The worst years for TROs in this period were 1999 and 2003 (the year of the major blackout), with approximately 7,290 GWh lost to TROs in 2003, while the lowest year was 2001.

    We then divided the total annual TROs into four sectors to determine the worth of power to each. Though utilities have very different mixes of customers (, FPL sells more than 90 percent of its power to residential customers), we used the national sales averages. Nationwide, 35.6 percent of electricity sales is to residential customers, 31.6 percent to commercial accounts, 29.6 percent to industrial customers, and 3.2 percent to other (, street lighting, etc.) on average in the past five years.

    The next key step was to determine the value of power to each sector. Previous studies used detailed surveys to measure this value, so we did not "reinvent the wheel." Those studies are dated, but current figures would almost certainly be higher, since the economy has become more power-dependent in recent years, with higher computerization and automation levels. Those studies provided the following VoLL multiples, as a multiple of the retail price of power:

    SECTOR "VoLL Multiple" of the Retail Price

    Residential........................................................................ 54 Commercial.......................................................................82 Industrial..........................................................................119 Other...............................................................................100

    We used these values, multiplied by the average nationwide retail cost of power for each sector, and derived the value of power to each sector for each kilowatt-hour lost, as shown in Figure 5.

    As expected, because of its high dependence on power, the commercial sector has the highest per kilowatt-hour value, while the residential sector has the lowest value. Using the outage share for each sector and the VoLL multiples for today's retail electricity price, we calculated the economic value of lost load for 1999 to 2003. This gives us a baseline measure of the cost to the economy of transmission-related outages