Blog post

Single point of failure – lessons from the Ever Given

Energy Blog, 19 April 2021

The grounding of the giant container vessel Ever Given across the Suez Canal has rightfully generated a lot of headlines, triggered both by the spectacular pictures of the skyscraper-sized vessel stuck in the sand and by the impact on global supply chains. For a lot of “just in time” businesses, the interruption of a vital route used by more than 10% of global seafaring traffic has had a direct impact on their production lines (and indeed we have learnt that one of our clients had their solar panels on that very vessel). This comes at a time when we have seen that shortages in microchips, manufactured by a tiny number of huge producers like TSMC, are causing havoc across critical industries like car manufacturing

There is an underlying theme here: in the quest for efficiency and cost-effectiveness, there has been a rush towards economies of scale and concentration. Safety margins have increasingly been abandoned as an unnecessary cost in normal times. But the risks to just-in-time manufacturing processes caused by unexpected events and single points of failure may become much more expensive than the savings they made possible.

Resiliency is critical

As this is a blog about energy and the energy transition, you may wonder what the link is with our usual topics. Well, we saw recently in Texas that a few days of hard weather can cause severe brownouts and completely upend average power price assumptions, so unexpected events also strike in the power sector and can have massive impact on both reliability and cost. Given how essential electricity is to our modern life, the structural inability to store electricity on any large scale, and the lack of flexibility on the demand side, resiliency is even more critical in the power sector. The good thing is that the industry is generally aware of this, but in recent decades it has tended to delegate the issue to the grid operators. 

In the past, the industry used to be fully vertically integrated (with generation, transmission and distribution all within the same company). The newly-autonomous TSOs (transmission system operators) that have come out of the “unbundling” process of the past 30+ years still tended to have their roots in the old power system, centralised around large power plants connected to large demand centres (big cities). Resiliency planning was typically focused on the unexpected loss of one large plant or transmission line as the worst-case incident.

The liberalisation of electricity generation led to a first wave of decentralisation, with slightly smaller – but more numerous – gas-fired plants often owned and run by new players, the IPPs (independent power producers) being the main novelty. Some argue this actually led to reduced risk, as gas-fired plants are generally smaller than coal or nuclear plants, and also tend to be flexible, allowing for better responsiveness to events on the supply side. Against that, we saw a tendency to under-invest in the grid, because it had become a cost that nobody wanted to bear anymore (an external cost for generators, imposed by regulation), and because transmission lines are even more subject to NIMBY obstacles than generation projects.

Growth of the renewable industry

The more recent growth of the renewable industry has changed things further. On the one hand, it has continued to reduce concentration risk, reinforcing the trend of production capacity moving towards much smaller, more decentralised units (to keep it simple: 50 MW wind farms rather than 400 MW gas-fired plants or GW-scale coal-fired plants) with much wider geographic dispersion. Likewise, ownership of assets has become even more of a mosaic, with multiple new players and substantial investment by a myriad of financial players. Being so dispersed limits the consequences of any individual plant going down (even the larger offshore wind farms are composed of multiple independent generators rather than a single large unit), and it provides generation capacity which is typically closer to where demand is located and, as a result, can often offer more flexibility in dispatch within a wider system.

On the other hand, it has brought about very different generation patterns which are driven to an increasing extent by weather conditions – and, as a result, are more irregular (even if not less predictable). So the system must cope with new constraints as regards its day-to-day management while evolving quite rapidly to absorb multiple seemingly randomly-located generators.

Large wind projects (whether onshore in countries where there is room for GW-scale projects, or offshore like in the North Sea) bring back some level of concentration risk in that they depend on their dedicated cable connection to the rest of the grid. Several cables and substations are often built to mitigate this risk (and Europeans are now actively talking about connecting large new offshore wind projects to several countries simultaneously) but this underlines again that the grid itself is the critical infrastructure to provide redundancy and resiliency, even as it needs to adapt to new generation patterns.

Coping with the new risks

The risks coming from the continued increase in renewables penetration are different and require dedicated responses by grid operators, but are certainly not worse than the concentration risk of the past. Amongst those often mentioned: frequency stability is a bit harder to maintain without the large high-capacity spinning plants; and power generation becomes more dependent on weather patterns which may reduce the output from large numbers of wind or solar areas for significant periods in affected areas (but note that hydro-dominated systems have long had to deal with that risk, so it’s not a completely new one). Conversely, the grid may end up having to worry less about a technical failure at a very large plant or its associated transmission lines, or about a serial defect on a widespread technology (imagine if a problem pops up due to ageing on a vital part of a now 30+ years-old French nuclear plant – could you conceivably need to shut all 50+ plants for safety reasons until the failure is investigated and resolved in every identical plant in the country?). What is definitely true is that the grid, once a backwater of the power companies, is now at the heart of the ongoing transition to renewable energy generation.

As the system evolves, we are also discovering some potential new dependencies, like rare earths for the magnets used in direct drive wind turbines – but here the fact that production is very diversified between multiple wind turbine technologies and manufacturers, and renewable development in general between wind, solar, biomass and others, helps make such problems a bit less critical. No doubt other bottlenecks will be discovered as renewables keep on growing and will need to be tackled.

Ultimately, it is good if such incidents like the Ever Given’s temporary blockage of the Suez Canal make us think harder about potential risks and vulnerabilities. In the power sector pessimism is a virtue, and a ‘worried state of mind’ is needed at all times. For now though, we can take some comfort – from a “single point of failure” risk perspective, the move towards decentralised renewable energy is great thing.

Jérôme Guillet co-founded Green Giraffe in 2010 and was a Managing Director until 2021.