A Manufacturer's Case for Electricity Infrastructure Investment
- Apr 13, 2021 3:26 pm GMT
Over the weekend, I was talking with a friend about the Biden administration’s proposed $2.3 trillion infrastructure bill. My friend, a pragmatist with strong ‘small government’ leanings was struggling with the rationale behind the massive infrastructure plan. In particular: why invest in electricity infrastructure—Texas power outage notwithstanding? I’d love to say that I was able to spout all the facts & figures in the moment—but as usual, I came up with a much better argument after the moment had passed.
Back when we (at Flex) were dabbling in transmission & distribution I recalled an article written by Dr. Massoud Amin, the “Father of the Smart Grid” and Professor of Electrical and Computer Engineering at the University of Minnesota to help anchor my thinking. Here are the key stats from Dr. Amin’s article that I tucked away in my Evernote file back in 2014:
Average customer electricity outage per year (minutes):
- United Kingdom – 70 min
- France – 53 min
- Netherlands – 29 min
- Japan – 6 min
- Singapore – 2 min
- United States: 214 minutes. USA is #1 again! Oh, wait, wrong thing to be #1 at.
- In Japan the average customer loses power once every 20 years
- In the US, once every 9 months
Granted, his article was written in 2011, but I have yet to find another as well-researched document to refute this data that doesn’t start with: “well, when I was chairman of the National Electron Health & Welfare Commission back in ’95, I think we did a pretty darn good job…” Additionally, according to the Lawrence Berkeley National Lab, in 2018 the annual cost of outages was about $44B—a 25% increase since 2006. Prognosis: the patient is sick and getting sicker. (I welcome anyone that has more recent data or a reference to please comment below because I don’t think the situation has changed much.)
To me this is another example of a favorite adage: “pay me now or pay me later” or for the Age of Enlightenment buffs out there: “an ounce of prevention is worth a pound of cure.” The advantage of paying now is that it can be forecasted with a degree of precision; “paying later” invites uncertainty, risk, and unplanned interruptions. Payment Deferral and its mean-spirited cousin, Uncertainty, cannot be weighed equally against Investment; a dollar of planned maintenance or upgraded expense is not equal to a dollar in short term avoidance because of longer term consequences.
Let’s walk through the rationale from a small manufacturer’s perspective. Electricity outages lead to production delays. The amount of time that it takes to produce something will go up and it will be less efficient to produce the same amount of goods because of two effects: first, the time it takes to make something is directly proportional to the interval of the material arriving at the next step in the process. In other words, if it takes longer for materials to arrive at a given station/node/factory to begin work, then it will take you longer to make something and fixed costs are amortized over fewer units. Taking longer can lead to scarcity; scarcity causes prices and costs to go up. So, the consumer pays anyway in the form of higher prices.
As we all learned as kids: time is money.
Second, with increasing frequency of outages that shut down this little factory, its operations teams will begin to “under plan” or reserve capacity for “just in case” episodes. This leads to capital inefficiency, further exacerbating the problem. For example, if the factory GM needs a machine that produces 500 units an hour for $100,000 but she knows that there will be random electrical interruptions, she is going to buy the oversized machine for $190,000 that can do 1,000 units an hour even though she really only needs one that can produce 500 units an hour.
Why would she take this path? Because she will be a heroine later when the factory needs to catch up to meet its quarterly output target and she will be rewarded for her “strategic thinking” and not derided for spending almost twice as much on a piece of equipment whose full capacity is only needed twice a year.
Who pays for that machine? You do, ultimately.
Infrastructure impacts tactical decisions like: should I invest in a UPS (uninterruptable power supply)? The answer may be “yes” not only if you have sensitive processes but also very high equipment utilization. It also raises operations strategy questions, such as: “how much should I over-size my operation to deal with the impact of outages?” If you are the “Apex Predator” in the value chain, your answer to this second question is probably “not a lot” since you are likely a market maker/price maker. For the rest of the world swimming in red oceans teaming with brutal and unforgiving competitors, the answer is likely, “I’ll take the big machine please. ”
Building excess capacity creates a complex ripple effect that will create a wave of suboptimal decisions from forecasting to production. We see this play out in our daily lives, like when your laptop installs updates when you have a deadline, creating derivative anxiety; or one of the kids is late from their activity, creating a cascading effect down the entire schedule of events for the evening; or or a meeting runs late and you are "back to back" Zooming- you need to make up ground elsewhere. Unplanned interruptions are not just costly, they are frustrating.
What’s the takeaway? Infrastructure is an investment in productivity and efficiency. Money spent wisely upfront will have an outsized benefit in productivity, especially when scaled up on a national level. To me, this isn’t an “Infrastructure Spending Plan”, it’s a “National Productivity Improvement Plan.”
We can complain about $2.4 trillion price tag for this infrastructure bill, but rest assured, kicking the can down the road will only be more expensive later. I will leave it to others to opine on broadband, roads, trains, airports and bridges. I am going to guess that similar arguments will apply.
 In my argument, I went down the less fruitful and harder to argue path of the great builders like Eisenhower, Roosevelt, Octavian, and Ozymandias. Don't go there unless you want to have a master class in tu quoque fallacies.
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