November/ December 2012 How We Could Blow the Energy Boom

America’s vast new surplus of natural gas could lead to great prosperity and a cleaner environment. But if we don’t fix our decrepit, blackout -prone electric grid, we could wind up sitting in the dark.

By Jeffrey Leonard

Our supply of natural gas currently outstrips demand and will continue to in the immediate future. While the best long-term outcome for the country is to maximize the amount of gas available to natural gas power plants for electricity generation, the natural gas industry is at the moment looking for ways to expand into new markets—perhaps analogous to the aluminum industry’s invention of the need for aluminum siding on brick houses in the 1950s. Congress and the administration should be wary of proposals to subsidize potentially large diversions of natural gas to stimulate demand. For example, a bipartisan bill Congress considered this year would provide billions of dollars in tax credits to boost deployment of natural gas-powered cars and trucks, and to subsidize a program to build out natural gas fueling infrastructure across the nation. While there is a place for feet and certain heavy-duty trucking vehicles powered by compressed natural gas, the relative inefficiency of natural gas engines—and the federal government’s long history of failed energy boondoggles—would argue against making natural gas the government-backed fuel of choice for passenger vehicles.

The important point is this: the opportunity for the electricity industry to lock in maximum amounts of long-term gas supply at a time of low prices is like the opportunity for American consumers to refinance their thirty-year mortgages when interest rates are low. Policymakers should favor this outcome, because it will benefit American electricity consumers with lower prices for decades to come.

Policymakers should also make sure that our existing regulatory apparatus is updated to reflect the growing interdependence of the natural gas and electricity industries. Currently, the Federal Energy Regulatory Commission (FERC) regulates both industries separately. Congress should direct FERC to develop a long-term integrated resource plan for the two industries together. The plan should be updated every five years and include a twenty-year outlook for supply and regulatory issues, to ensure that no natural gas supply shocks disrupt the American bulk electricity system due to a lack of foresight. FERC must be empowered, for instance, to ensure that both the gas and electricity industries take precautions to prevent short-term pipeline service interruptions resulting from severe storms, terrorist attacks, or other events. With an increasing dependence on natural gas for electricity, such pipeline disruptions could mean blackouts and power shortages for an entire region for days on end.

This brings us to the second, and much more menacing, precondition for capturing the full potential benefits of the current natural gas supply boom: we must fix our decrepit, vulnerable, and long-neglected electrical grid. Today, the average substation transformer in the U.S. is forty-two years old—two years older than its expected life span. A recent Department of Energy report warned that 70 percent of the largest high-voltage power transformers—each weighing up to 800,000 pounds—are more than twenty-five years old, and subject to an increased risk of failure. As of now, replacing one of these enormous transformers, should it be attacked, or simply break down, can take twenty months or longer. Even without any major attacks or breakages, most of the equipment on the grid is already so antiquated that roughly 500,000 Americans lose electricity for at least two hours every single day.

And, of course, the disruptions are often far worse than that. Many readers no doubt suffered through the latest major system failure: the blackout this past June, catalyzed by a freak “derecho” storm, left a million Americans from Indiana though central Appalachia to the toniest suburbs of D.C. without power during 100-plus degree weather. In the immediate aftermath of such storms, the press and angry customers see downed wires and (sometimes rightly) blame utilities for failing to respond quickly enough. But the culprit that causes such blackouts to linger for days is often a system-wide problem—the poorly maintained and overstrained local electric grid. In many places, the local grid is in such bad shape that even a minor disruption—a single downed power line, for example—can create a domino effect well beyond the damaged area. For example, in the aftermath of the derecho, several areas of suburban Maryland remained dark for days longer than other areas, not because they were hit harder, but because the storm damaged antiquated equipment in many substations, including hundreds of transformers, which triggered multiple failures down the line.

Similar problems extend into the bulk transmission segment of the grid. For example, in August 2003, a series of line failures in northeastern Ohio set off a cascade of power outages across the United States and Canada. The lack of adequate redundancy in transmission lines meant that those initial failures rippled through the system, knocking a total of 265 power plants offline, darkening an area of more than 9,000 square miles, contributing to almost 100 deaths, costing an estimated $6 billion, and leaving roughly fifty million people in the dark for up to four days. It was the largest blackout in North American history. Although utilities and regulators have since added new “fail-safe” procedures to reduce the domino effect of such outages across wide geographies, the root causes—grid congestion, old transformers, poor interconnections—remain an endemic problem throughout the entire U.S. electrical supply chain, from bulk transmission centers to local distribution lines.

Even beyond basic maintenance, the grid has also become increasingly vulnerable to software viruses and cyber attacks. A new unit within the National Security Agency, the U.S. Cyber Command, found that cyber attacks on the electric grid and other strategic infrastructure increased by a factor of 17 from 2009 to 2011. Terry Boston, president and chief executive officer of PJM Interconnection, a regional energy transmission consortium covering the mid-Atlantic and mid-western areas, wrote recently that while a calamitous cyber attack on the grid is not inevitable, we should never “trust the security of our energy infrastructure to luck.” A Homeland Security official said the department had constructed a scenario under which a successful terrorist attack on just six critical substations could cause blackouts in most of the country east of the Mississippi River. In September of this year, Congress also held hearings to determine the degree to which the entire national electricity grid is vulnerable to electromagnetic pulses from high-altitude thermonuclear devices and from the sun.

Mass power outages don’t just disrupt our day-to-day lives. Blackouts are estimated to cost the American economy about $150 billion each year in interrupted production, destroyed or lost products (like computers fried during power surges), and other costs—an average of more than $500 per person. The increasing dependence of the economy on high-quality, uninterrupted electricity is underscored by the fact that fully 40 percent of all electricity used in the U.S. now goes to power computer chips and automated manufacturing, and applications ranging from personal computers and “Cloud” storage to so-called mission-critical machines, which are used in manufacturing, health care, and air traffic control. Experts predict that by 2015, nearly 60 percent of our electricity will go to such uses.

Jeffrey Leonard is the CEO of the Global Environment Fund, a growth capital-oriented investment firm, and the chairman of the Washington Monthly board of directors. He is the author of five books and numerous articles on issues relating to energy, the environment, and economics.


  • A.Oscar Antonio Oscar on November 12, 2012 10:56 AM:

    The way we have the world with the Earth real sick; donít going to the first, not even the last one. And worse ones will be around again soon; Iím not to the point be negative, just the reality in the account to my studdingís. A.Oscar

  • Eric on November 12, 2012 1:18 PM:

    When burning gas at a plant to generate electricity, a large amount of energy from the gas is emitted as heat and wasted. When burning gas in my furnace to heat my home, the heat given off is actually used. I'm skeptical that electricity generation is the "optimal use" for natural gas (despite some justifications given in the article).

  • Dave on November 12, 2012 1:56 PM:

    Eric, heat is one of the lowest forms of energy, so although the efficiency of a gas furnace can be very high, the use of natural gas in a modern gas combined cycle generator produces high quality energy in the form of electricity, a much more flexible and powerful tool than the low level heat you get from burning gas. An additional factor is that modern heat pumps powered by electricity can be more efficient than gas furnaces while also providing air conditioning. The bigger picture here is that any long term thinking about national energy use will have to pay attention to issues like the one you raised while also thinking about the impact of a major effort to retrofit buildings to be more efficient overall. Energy not-used is just as valuable as finding more.

  • Ed on November 13, 2012 6:29 PM:

    We could blow the energy boom by paying any attention at all to editorials from manipulative con artists from crooked hedge funds.

  • M. Report on November 13, 2012 6:57 PM:

    Backup generators are popular in areas hit by Frankenstorm.
    Standby generators, their big brothers, are also being
    ordered at a good clip.

    Downsize, standardize, modularize, modernize;
    Build a bullet-proof Grid !

  • Corky Boyd on November 13, 2012 8:58 PM:

    The availabilty of inexpensive gas will have profound effects, well beyond its substition for coal in electric power generation.

    The largest item in our balance of payments defecit is energy. The world gas price outside of the US is $10 to 12 compared to under $4 in the US. The fact shale formation gas is generally profitable at around $2 gives the US a tremendous advantage in the world market. Russia, which has a near monopoly in Europe, has proven to be an unreliable source. And it pegs its price to the btu content of oil. This supply and priceing monoply can be broken, but only if the US can build a liquifaction and port facilities to market it. And do it quickly. Regulatory hurdles could make us miss this golden moment.

  • Fred Z on November 13, 2012 11:22 PM:

    Obama's gonna prevent it from being produced and what is produced he's gonna steal to pay for Sandra Fluke's condoms and Obama-phones for pond-scum.

    You Americans are so screwed.

  • Sam Hall on November 14, 2012 6:38 AM:

    Ed, you got it.

    I have never heard that transformers had a lifetime. With proper maintenance and protection, they should last hundreds of years.

    A "smart Grid" is all about control of your energy use - no thanks.

    More government is the last thing we need. Look at what is happening on Long Island with a government run power system.

  • Michael on November 15, 2012 7:41 PM:

    If the administration hadn't squandered the bulk of that $90B stimulus fund marked for energy efficiency on failed solar companies linked to his campaign contributors, we could have some of that smart grid technology.

    But that would have been marked for other campaign contributors and probably squandered as well.

    Why don't we create real competition, unfreeze electrical rates and reduce regulation in the utility industry? If the smart grid has all the advantages claimed, smart utilities will tap capital markets and build it. Nah...government and all you "experts" know best.

  • Andrew on November 16, 2012 7:33 PM:

    If we are going to stick with the problematic concept of heavily regulated utilities, said utilities won't have much interest in investing in smart grids and infrastructure (read: capital) if prices can't be manipulated to produce the returns necessary to justify the upfront expense. We'd be better off with unregulated utilities that actually have to compete with each other for customers. Broadband and cable customers suffer the same problem of a highly regulated industry leaving multiple providers, but conveniently usually just one to choose from where they live.

  • N.Wells on November 18, 2012 6:06 PM:

    Not only has humanity has never failed to screw up an energy boom, but it has also never avoided screwing up the environment at the same time, whether we are talking about firewood, charcoal, whale oil, coal, nuclear, or petroleum, so the chance of getting this one right is infinitesimally small. What will happen is that we will collectively rush to produce, therefore ensuring overproduction combined with deleterious environmental effects, a temporary glut with cheap prices that leads to a crunch with high prices later, rapid depletion of an invaluable but finite resource, and abandonment of research into sustainable alternatives. The Republicans controlling my state (Ohio) are pushing to produce as much as possible as soon as possible lest we miss out on the boom, and with minimal regulation of and payments from energy companies (lest they pursue their part of the boom somewhere else), all without thinking that whatever we don't produce in the next decade is no less usable and valuable in subsequent decades. We really aren't thinking long-term. There's no reason we couldn't exploit the resource slowly, expanding drilling areas over the next 100 years to ensure a slow and steady boost to the economy, but our capitalist system doesn't readily allow that degree of planning and control. Hydrocarbons actually have many more valuable uses than cheap fuel (fertilizer, plastics), so humanity will be much worse off once it starts getting scarce. Quite clearly, our view toward far-distant generations is, screw 'em.

    There used to be a story about a prayer in Texas: Dear God, just give us one more boom, and we promise not to piss it away like all the others.