The modern American electricity grid was born in New York City on September 4, 1882, just six blocks from Brown Brothers Harriman’s office at 140 Broadway. There, at 255 Pearl Street, a 100-volt coal-powered generator was connected to several hundred outdoor lamps to illuminate the winding streets of lower Manhattan. This first foray into large-scale electricity distribution in the U.S. was tremendously effective, and soon the Pearl Street Station was powering thousands of lamps in a localized matrix of interconnected lines. It took a matter of months for the yellow hue of gas lamps, once ubiquitous in downtown New York, to be replaced by the “pale moonlight” of Thomas Edison’s incandescent bulb and less time still for the idea of local electricity distribution networks to spread across the rapidly industrializing American Northeast. In the years following the opening of the Pearl Street Station, small electricity distribution networks sprung up not only in other parts of Manhattan, but also in cities across the United States, laying the groundwork for what would eventually become the electricity grid in use today.

Demand

In its early days, the scope of electricity usage was relatively narrow; the new form of energy was used to provide lighting in public and, on rare occasions, private settings. But it did not take long for advances in technology (specifically, the development of the induction motor) to catch up with this novel invention, and by the early 1900s, the application of electricity expanded to include a wide array of end uses. On the manufacturing side, the textile, mining, printing and steel industries electrified rapidly between 1890 and 1910. Meanwhile, inventions such as the sewing machine (1889), vacuum cleaner (1901) and refrigerator (1912) all incentivized households to connect to the “grid.” By the 1940s, this grid had expanded to affect the life of nearly every American.

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Grid Stability in the United States

At the beginning of the 20th century, there were more than 4,000 individual electric utilities operating regionally in the United States. But as demand for electricity grew – driven by the manufacturing boom and hyper-consumerism of the post-World War I and II eras, respectively – electric utilities found it more efficient to interconnect their transmission systems. Doing so introduced economies of scale, as larger electricity generation plants could be built to service wider swaths of consumers at lower costs. “Interconnection” also reduced the amount of extra capacity individual utilities were required to maintain to ensure reliable service. Over the course of several decades, three large interconnected systems evolved in the United States, serving Texas and the eastern and western halves of the country. These “mega systems” capitalize on the regional transmission of electricity to transfer load from areas with excess capacity to markets where supply is tight.

The sheer size of these interconnections means that the modern grid is materially more dependable than it was as a network of small utilities hooked up to localized generation sources. However, while smaller disruptions are largely avoided by pooling electricity resources, the unified nature of the grid means that when problems do occur, they are much larger in magnitude than would have previously been possible.

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The concern over “grid stability” has grown in recent years due to the state of the U.S. energy infrastructure. In 2003, former Energy Secretary Bill Richardson characterized the U.S. as a “superpower with a third-world electricity grid,” and there is a general consensus that insufficient action has been taken in terms of modernizing, updating and securing the system since then. Updated or not, the grid in its present form is a reality of domestic electricity transmission, and while its reliability may be questionable from a structural standpoint, developments in the generation sector have come a long way to stabilize the domestic electricity market.

Generation Sources

The first wave of electricity generation relied on the same coal-to-steam power technology that fueled much of the expansion of the first half of the 19th century. In this case, rather than moving a piston (as in a steam-powered locomotive or mill), steam was used to turn a turbine, converting heat to kinetic energy, which was then sent to a generator to produce electricity. At inception, this process was extremely inefficient – Edison’s Pearl Street Station converted less than 2.5% of the chemical energy of coal to electric current – and only suitable for the localized direct current (DC) electricity networks set up in the early days of electricity distribution.

But as DC networks gave way to alternating current (AC) systems, technology improved, yielding more efficient power generation plants that could supply larger consumer bases. These plants required high energy fuel inputs, which, for the first six decades of electricity generation in the U.S., were composed predominantly of coal and hydropower. Since the 1950s, the makeup of electricity generation by source has evolved as new technologies (nuclear and non-hydro renewables) were developed to supplement existing power sources in the struggle to provide electricity for a steadily growing market. However, while alternate sources of electricity generation have come in and out of use over the years, coal’s importance as a primary feedstock has remained static since inception.

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This all changed in the past 10 years, as the rebirth of the American energy sector provided the market with cheap, readily available natural gas, which began to challenge coal as a cost-effective source of energy. As is evident from the nearby chart, natural gas is still the more expensive generation source in terms of energy content, but the narrowing in price, paired with environmental regulations affecting coal-fired power plants, has been enough to reverse market dynamics that have been in place for more than a century. To this end, 2016 will likely be the first year that coal is no longer king, as its generation share will fall below that of a rival feedstock for the first time since the late 1880s.

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Shifting Generation Capacity

This shift in economics has engendered a rapid transformation in generation capacity in the United States. In 1990, coal-fired power plants accounted for approximately 42% of U.S. electricity generation capacity, while natural gas’s share was slightly under 20%. By 2014, these metrics had shifted to 28% and 40% of total generation capacity for coal and natural gas, respectively, according to the U.S. Energy Information Administration. Changes in renewables and nuclear generation notwithstanding, this is a remarkable shift in the dynamics of a relatively stable industry, and one that will significantly increase grid stability going forward.

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In contrast to coal-fired plants and nuclear generators, gas-fired plant capacity can be raised and lowered with relative ease. The technology employed in these plants affords them agility, both in terms of the costs associated with bringing incremental generation capacity online and the time it takes to do so. It is for this reason that natural gas-fired facilities have traditionally served as peaking plants, a sort of auxiliary force that comes online quickly at times when base load providers – generally coal and nuclear plants – are unable to meet the market’s load requirements.

But as environmental regulations, public sentiment and shifting economics put pressure on the traditional base load providers, this role is increasingly being filled by a more flexible generation of plants that can easily tread the line between providing for base and peak power demand. This is a good thing. Natural gas-fired generation is expected to continue to grow over the next several years, particularly around the major shale gas plays in Texas and the mid-Atlantic states. Demand and capacity have been growing at approximately equal rates, and yet as the composition of this capacity shifts toward a more flexible generation profile, the grid’s ability to react to localized spikes in demand improves.

One need look no further than spot electricity prices – which are notoriously sensitive to short-term supply constraints – to see how this newfound generation flexibility has affected the grid. Over the past decade, volatility in electricity prices has decreased comprehensively as a result of the evolution described in this commentary. Exogenous events (mostly weather-related) will always play a role in driving electricity prices, and therefore, there will be years, like 2011 (North American heatwave) or 2014 (polar vortex), where electricity volatility is abnormally high. However, it is clear from the group of nearby charts that overall volatility – in terms of both spikes and deviation from the mean – has been trending down over the past decade.

Orders of magnitude make it difficult to compare today’s electricity grid with the localized DC systems of Thomas Edison’s America. But given the state of the domestic electricity infrastructure and the sheer scope of the interconnections in the U.S., the grid is perhaps more vulnerable today than ever. That said, the shift in generation structure outlined in this article has had a profound impact on domestic electricity distribution and will continue to lend stability to an inherently volatile market.

Going forward, one can only hope that new technologies are introduced before there is a change in the dynamics that currently make gas-fired generation sustainable. Given the rapidity with which the electricity market has developed over the past century, this seems likely.

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ISO: independent system operator. ERCOT: Electric Reliability Council of Texas. Note: The hubs and zones above have been chosen as proxies for the major electricity markets in the United States. Price analysis considers year-to-date 2016 (1/1-11/4) and the corresponding timeframe for 2006 and 2010.


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