Once the power was restored to everyone, U.S. and Canadian authorities quickly commissioned a Power System Outage Task Force, whose April 2004 report conclusively identified the root causes of the outage: a sequence of generation and transmission outages on a hot summer day at facilities owned and operated by First Energy (NYSE: FE) in Northeast Ohio.
At the time, pundits decried that the electric utility industry must make major changes -- technologically and institutionally -- to bring it from an early 20th Century analog design to the requirements of the 21st Century digital economy. Installed in an era without computers and before demands for inter-regional shipments of large quantities of power, the grid had not kept pace and was showing signs of inadequacy.
Calls became increasingly vocal for the adoption of a "smart grid" that would both improve power quality and increase the economic efficiency of the grid, by facilitating the widespread adoption of faster electric transmission and distribution switching and control systems, distributed generation devices (such as fuel cells and solar photovoltaics) and demand-reduction approaches (such as demand-response programs ).
Five years on, there has been some progress -- but not nearly enough. RTOs now pretty much cover the country, but by and large they remain untested under crisis conditions, so it is unclear how effective they will operate in a crunch. Distributed generation remains a rarity, as the vast majority of power supplied to the grid still comes from central-station powerplants. Smart-grid technologies have not moved far off of the drawing-board -- though Xcel Energy (NYSE: XEL) has recently announced a major pilot program for Boulder, Colorado.
Why? Due to uncertainties about future fuel prices, powerplant construction costs, regulatory rules for recovering generation investments, and new environmental requirements (especially carbon legislation), suppliers are reluctant to add new generating capacity, as they doubt their ability to earn attractive returns on major capital outlays. Meanwhile, economic growth (with only weak emphasis on energy efficiency and conservation) is driving ever-rising demand levels.
From this, I derive a simple formula: shrinking generation reserve margins + a slow move to the smart grid = future outages.