Tuesday, February 21, 2006

Blackout! The Cost of the Margin .

Blackout !
The Cost of the Margin

A quick theory overview:
For every additional dollar spent on an existing system , we get R dollars in value in return . Seen over time , R is initially much bigger than one , but decreases as the system matures and complexity increases ( ie the Law of Diminishing Returns) .

As the Return R decreases to one , risk assessment plays a bigger and bigger role . Riskier investments are not made or , more importantly , no precautions are taken against the more unlikely risks .

Simultaneously , the complexity of the system increases ( by definition , the simple and easy things get done first .) The number of things that can go wrong increase exponentially . If humans are involved , the system is non-linear as well . In other words , an unlikely outlier can feedback to affect the whole system . But no effort or expense is made to prevent the unlikelier problems . Hence , it is only a matter of time before the system is negatively affected in a major way .

It is a “ Damned if you do , damned if you don’t “ scenario .
Trying to cover the exponentially increasing number of risks must bankrupt any system .
Trying to prevent the system becoming more complex in a competitive environment will lead to such a relative disadvantage that the system (or its CEO ! ) will suffer a catastrophic drawdown .

A Civilization is composed of many systems like these , at various stages . Any individual system will eventually self-destruct , but innovation can create new systems .

Any freezing (or slow-down) will result in destruction by a competitor.
If it is a monopoly , there is no competitor . The eventual collapse will be much quicker and more devastating .

There is one out : a non-competitive environment . Note that the civilizations with the longest history of stability ( Egypt , Christian , Islam , China , Buddhist , Hindu) managed to create both real and virtual pockets of non-competitiveness inside their boundaries (ie Monasteries , Universities ) .

A case study : ESKOM in South Africa .

ESKOM (Electricity Supply Commission) was originally founded to smooth electricity supply from private and municipal electricity generators to the gold mines and their supporting industries on the Rand . It enjoyed one insuperable advantage : by Act of Parliament , it could not be sued for any losses its customers suffered due to
interruption of electricity supplies .

It used advantages of scale , cheap copper (for the wires) and legislation to become the sole supplier of electricity in South Africa . An example are the farmers: many farmers had their own generators , but were compelled by legislation to pay connection fees , even if they did not use ESKOM power . So eventually , they were forced to become ESKOM customers out of economic necessity .

The result was an enormously complex web wires strung all over South Africa to every home . After 1994 , the demand for power exploded . The cost of copper wire exceeded the revenue from any supply through them or the cost of safeguarding them All to be done without raising the cost above inflation level . An impossible task .

So the cost of power has been rising inexorably in real terms .

The Western Province Blackouts 2006

The City of Cape Town used to be self-sufficient in its power requirements . ESKOM promised cheaper and guaranteed power . The local power stations were phased out , except for the Koeberg nuclear station . Maintenance in respect of unlikely events ( like supervision to prevent a bolt being dropped into one of Koeberg’s main generators , cutting undergrowth under transmission lines , cleaning insulators on transmission lines after soot ,birdshit and dirt build-up , wear-and-tear on transformers and switchgear , etc) was not done .

Now the network is under stress , and the most fragile elements are failing first . Hence , the oldest , richest areas which first got electricity tend to be most affected as the engineers try to bring the network into stability while doing decades-needed maintenance . Newly revamped areas (like V&A , Sea Point) seems to be unfairly exempt .

Prognosis : not good.

ESKOM’s marginal return is less than one . If it remains the only electricity supplier , it’s collapse will drag down the whole sub-continent , or require exponentially increasing government subsidies / prices .

A solution is to reduce complexity voluntarily instead of waiting until outside factors does it for you .

A nice way that retains power for all is to split the big cities from the rural areas . The big cities are to be encouraged to build their own stations (eg pebble bed reactors) , while most of the complexity of the rural areas can be offset by renewable energy sources like wind or solar power . Note that central distribution of electrical power via valuable metal wires is never going to have a marginal return bigger than one (ie it will always have to be subsidized) . It is also in our civilization’s interest to keep the rural areas independent from the cities .

Will this happen?

You judge : it is your future.


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