By Nick Youngman
Downloading PDF. Please wait... Issue 279

Blackouts: Not a Very Bright Idea

This article is over 20 years, 3 months old
Deregulation is the root of the recent spate of power failures.
Issue 279

Who keeps switching the lights off? At the end of September, Italy joined the growing blackout club of Britain, the US, Sweden and Denmark. Since the US led the way on 14 August, all have experienced major electricity blackouts.

And it’s not an exclusive club. At the current rate, every country in Europe will soon be a member.

The details in each case are slightly different. In the US nearly 50 million homes across eight US states, and Ontario in Canada, lost power. The Italians went one better: the whole of the national grid went down, taking out power for almost 56 million people.

Carlo Andrea Bollino, the chairman of Italy’s national grid operator, called in a newspaper interview for residents to save electricity until full power could be restored. ‘I’m not calling on people to wash their clothes by hand,’ he explained, ‘but maybe they could use the washing machine at different times.’

Italy blamed the blackout on a tree that fell during a storm and damaged a transmission line. According to the official report into the US case, a transmission line disconnected because of hot gases from a bush fire.

After each incident, officials and company executives have rushed to stress that it was caused by factors other than privatisation and international power markets. But how gullible do you have to be to believe that all these cases coming together is just coincidence?

Two related processes form the background to the current situation. The first is the break-up of national power companies into units which can then be privatised. The second is the creation of a market for electricity to allow transfer of power resources between these separate companies. As a result of this power market, companies can buy and sell their spare capacity. Energy trading had become one of Enron’s main activities before it collapsed in what was then the biggest ever bankruptcy.

In a prelude to the recent blackouts, California experienced six days of rolling blackouts in 2001 when a supply shortage and market rules invited traders to manipulate power markets. The US federal government eventually set up an investigation into whether Enron helped create and profited from the state’s energy shortage.

Access to cheap electricity from abroad has also reduced the urgency to increase production at home for the one or two times a year it’s really needed. Italy, Europe’s biggest importer of electricity, hasn’t built a new power plant for a decade.

In the era before privatisation, each national utility (in developed countries at least) would ensure a large amount of surplus capacity was available. But with the creation of national and transnational power markets, this spare capacity has driven down wholesale power prices by 40 percent in Britain.

Consumers have not seen the benefits of lower wholesale prices – just as the coffee you buy in a supermarket does not drop in price when the farmers who grow it are paid half what they were a year ago.

But the fall in wholesale prices has forced a wave of mergers and acquisitions among the power companies that were the product of privatisation. Giant multinationals such as Germany’s EON and RWE and France’s Electricité de France (EdF) have snapped up a large share of the UK market.

EdF – Europe’s largest power company – is still owned by the state, though it is earmarked for privatisation. It owns a stake in power companies in 21 different countries. In Britain, its London Electricity, SWEB Energy and Seeboard Energy units have recently been merged and renamed EdF Energy. This UK unit is worth £6.2 billion and has 5.2 million customers.

There are no rules against state-owned utility companies buying up regional utility companies in Britain. This is ironic given that when the utilities were sold off, the reason given was that the state could not be as efficient as the market in delivering services.

One by-product of the introduction of the market has been a more realistic valuation of the costs of nuclear power. In the days when all power was generated by a state monopoly, we were told that nuclear power was cheap and the energy of the future. But since private companies have had to account for its real costs, including the colossal costs of decommissioning nuclear plants, the story has changed.

British Energy plc is Britain’s biggest power generator. It is the holding company of Nuclear Electric and Scottish Nuclear, operates nuclear power stations in England and Scotland and used to own a stake in Three Mile Island and other US nuclear plants. It narrowly avoided bankruptcy at the start of October after the government and creditors bailed the company out. The company’s costs include at least £150 million annually for shutting down nuclear power plants. The question of what would happen if a nuclear power company goes bankrupt is where accountancy meets potential disaster.

Private companies will only invest in order to increase their profits, and they have little incentive to build spare energy capacity. They also have an incentive to invest as little as possible in transmission networks, which have been a factor in most of the recent blackouts. The companies who took over the utilities when they were privatised made agreements that they should not suffer significant financial or operational penalties in the case of blackouts. So we can expect more power cuts to come.

‘The European electrical power system cannot be considered protected against this kind of major event,’ said Andre Merlin, the head of ETSO, a European association of grid operators in Brussels last month.

According to industry association Eurolectric, European utilities companies need to invest €250 billion in new capacity by 2020. That’s just to keep up with growing demand and replace aging power stations. It would appear that ‘power to the people’ is definitely not their slogan.

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