In a continuation of previous form, the BBC’s article on the ‘Counting the Cost’ report by the Royal Academy of Engineering has leapt upon the assertion that the cost of blackouts could be in the billions. However, the report points out that this would only happen in the event of a UK-wide blackout (including all the major cities) for more than around 12 hours; a situation which is incredibly unlikely. The BBC report focuses on the idea that the costs could be very high; but somewhat misses the point that the costs could also be lower than we currently expect them to be. The main conclusion of the Counting the Cost report was that, at the moment, we simply don’t have enough information to place a price on blackouts.

The report by the Royal Academy of Engineering used information from modelling work, interviews with experts and case studies from around the world to estimate the social and economic costs of electricity shortages in the UK. One of the key findings of the report is that the current methods used to estimate the cost of electricity outages is fraught with uncertainty, and often returns estimates which differ almost by an order of magnitude.

The method of accounting – called Value of Lost Load, or VoLL – uses questionnaires to establish how much people would be willing to pay to avoid a power cut, or how much they would be willing to accept as compensation for experiencing a power cut. Rather unsurprisingly, people are generally up for receiving far more money than they are willing to pay! This leaves significant error margins in the estimates.[i] The worrying thing is that Ofgem and DECC then pick one of these many estimates, and extrapolate it out to identify the value of measures to mitigate power shortages.[ii] This figure feeds directly into government Cost-Benefit Analyses, including those which inform the upcoming Capacity Market.[iii]

The end result is that big, expensive decisions, such as how many power stations to subsidise, are based on numerical estimates with a highly dubious history. The Counting the Cost report seeks to emphasise the fact that errors in these kinds of decisions could end up costing the UK prohibitively large amounts of money.

More research is required, in order to refine these methods of accounting. In some parts of the US, consumers are offered interruptible contracts in which they are compensated a certain amount in order to experience blackouts. Customers therefore have to make a real-world decision, which includes far more robust economic data. If DECC insists on carrying out a cost-benefit analysis for the Capacity Mechanism by comparing the cost of power stations to the economic costs of blackouts, then at the very least this is the sort of robust data we would require. Basing these sorts of high-cost decisions on current UK estimates of VoLL is extremely risky.

This winter, the UK will experience tighter capacity margins than it has previously been used to.  Simultaneously, the National Grid will use its Supplemental Balancing Reserve mechanism to balance the system on both the supply side and the demand side. This will at least give us an idea of how well the system copes with a low capacity margin, especially if we endure another cold spring. It would seem to make far more sense to run the Capacity Mechanism procurement process after the winter, when we at least have a better idea of how much capacity will be required. Unfortunately, this would coincide with a general election, and the Tories are determined to get their Mechanism in place well before the spring campaigning begins. Therefore, political game-playing could end up costing the UK far more than we should be paying for backup capacity.

One of the main conclusions of the Counting the Cost report was that this issue needs highlighting, and that more research needs to be done into VoLL and into increasing the robustness of economic modelling on the cost of blackouts, before these kinds of estimates are used for high-risk cost-benefit decisions.

Emily Cox was the author of the Counting the Cost report, along with Alan Walker (RAEng), John Loughhead (then at UKERC) and Dr John Roberts CBE. She is also researching a PhD in energy security with the Sussex Energy Group, and is currently also a research intern at the University of Oxford. Emily teaches an MSc in Energy Policy for Sustainability at the University of Sussex.

[i] London Economics (2013) The Value of Lost Load (VoLL) for electricity in Great Britain: Final report for Ofgem and DECC. London Economics, London

[ii] Ofgem (2013) National Grid’s proposed new balancing services: draft impact assessment. Ofgem, London

[iii] Newbery, D. and Grubb, M. (2014) The Final Hurdle?: Security of supply, the Capacity Mechanism and the role of  interconnectors. EPRG Working Paper 1412 / Cambridge Working Paper in Economics 1433