Why is a newsletter focused on alcoholic (and alcohol-removed) beverages reporting this? Because paying 5,000% more than the regular spot price is what happens when utilities — I mean the folks responsible for power generation, distribution and regulation — fail to build, upgrade and maintain a region’s electric network.
We saw something similar in Texas a couple of years ago during February 2021’s Big Freeze when the state racked up an astounding $52.6 billion in incremental electric system costs — and still left residents short 1.6 million megawatts of electricity. You will recall that Texas power plants weren’t winterized and most didn’t have dual-fuel capability, able to store and burn oil when natural gas wasn’t available.
Also: Europe, and especially Germany, is grappling with the reality that it’s supply of electricity is essentially subject to the whims of Valdimir Putin since the German economy is built on cheap gas imports from Russia.
There were lots of theories advanced 50 or 60 years ago about why it was a good idea to replace a single electric utility with several different entities — one to produce the electricity, one to distribute it, a separate one in some cases to retail it, a regular coordinator to monitor demand and shift production from one area to another. London and Texas demonstrate the risks of that approach.
Just as Covid forced packaged goods suppliers and others to recognize that Mother was right — “don’t put all your eggs in one basket” — and it’s unwise not to maintain inventories of 30, 60, or 90 day (or longer) from suppliers in multiple regions, so climate change may force electric utilities to rethink their business model. It would make more sense, we think, for a utility to have contracted for an assured supply at a fixed price over a period of years than to rely upon the spot market.
That may in fact be the main lesson of the 2020s — that there always needs to be redundancy built in. Redundancy is expensive, yes. But so is $11,700 per megawatt hour extra, or $52.6 billion in incremental electric system costs when the normal power needs of a region can’t be met, or having goods retailers counted on for Christmas finally delivered in July.