Centralization: Economy of Scale? Looming Disaster? Lil Bit of Both?

(The following has been adapted in part from Nat’s graduate thesis).

Bigger! It’s better, right? Throughout history, utilities have often pushed for centralized infrastructure for some simple reasons. Giant power plants, while expensive, make for relatively easy napkin math about how much power you will be able to supply to the grid over a given time frame. It’s much harder to forecast and plan when you’re talking about bazillions of rooftop solar panels and wind turbines distributed over a huge territory than, say, the reliability of a nuclear power plant that produces an unwavering stream of marginally-per-jiggawatt-hour-affordable electricity, 24 hours a day, 365 days a year, with minimal downtime. Easy enough, right? Well, yes. But also no. Because the bigger something gets, the more a disruption becomes catastrophic.

Power Grids 101

We’ll compare a few examples. Nuclear plants, for example, generate a large, consistent baseload supply that remains virtually constant. Coal can, at least to some degree, be dialed up and down, but it must be run relatively continuously. Natural gas can usually be modulated– not only substantially up or down, but also quickly started or stopped. This makes natural gas popular for “peak” generation. In cooling climates, this is needed in the late afternoon into early evening when the air is warmest and everybody is using their air conditioners. But how did this process of “bigger is better” get started in the first place? Surprisingly, it’s a little bit more complicated than the simple question of “economy of scale.”

The Historical Debate of Centralization vs. Decentralization

In my research, I looked at how infrastructure systems got centralized in the first place. Why do we have one bus system and not fifty bus systems? Why one power company and not six hundred power companies? Obviously, there are serious issues of economy of scale and efficiency. But it was interesting to learn that centralization isn’t just a question of economy of scale. It’s also a question of ensuring control and consistency. Economies of scale can be really expensive to build. A nuclear plant’s fuel costs only fractions of pennies per kilowatt hour– but the construction costs are in the billions of dollars. That’s intuitive. But it’s harder to understand how we got to this point.

In historical terms, I first found evidence of this in street lighting, which, well, didn’t used to be a thing. (A Wayne State dissertation that I came across in my research, written nearly a century ago, lamented that there was no comprehensive history of street lighting. The same still seems to be true today). Before the Industrial Revolution, lamps were lit in major public areas. Or, in the medieval times, if there was public lighting, it was generally only when some fancy event was happening– say the Pope was going to be in town to raise money for his latest crusade, or whatever.

One source cited an arcane city regulation from New York in the 17th century. The city stipulated that every such-and-such-th house must light a lantern on every night that it was so dark, so as to illume so much of the street in front of that house. I mean, you can imagine some Dutchman with the goofy hat, getting the 17th century equivalent of a push notification and being like, bro, are you serious right now?

Development of Parallel Interests

Clearly, this sounds ridiculous. Imagine how quickly the city fathers realized the fallacy of this– and that they’d be better off creating a centralized system for managing this infrastructure. Power distribution and generation thus became tied to public lighting– and streetcars. Natural gas could be used to create heat for boilers (and later turbines) or it could be burned for illumination. Incidentally, but relevant to the question of these crossover universes of industry and energy, petroleum was also first discovered in the 1850’s. By this time, mining science was already aware of the dynamic nexus between the various types of gas that came out of the ground. Or could be produced by the treatment of coal. (There are two wonderful reads on the evolution of energy and science in the 18th and 19th centuries in Richards Holmes’ The Age of Wonder and Rhodes’ A Human History of Energy).

Private Responsibility to Public Works 

Just as generation or resource extraction involved some sort of cogeneration– oil and gas, for example- or, just as innovation often involved some sort of “co-innovation,” like the idea of mining coal to power new industrial development and then figuring out how to mine the coal more effectively, usually the interests of two or more infrastructure systems were often intertwined. In Chicago, for example, Samuel Insull built the State Line Generating Plant– and also operated streetcars. It is, one thinks, a sensible synergy. Historian Ann Durkin Keating has pointed to this parallel development of things like railroads and telegraph lines. Owing not only to matters of space but also to matters of functionality, the latter favors the development and effectiveness of the former, and vice versa. In economics or business terms we might call these “complementary.”

Importantly, Keating points out that the development of these “invisible networks,” the term she uses in her book, often facilitated a transfer of a formerly private responsibility to a public one. People used to have outhouses– then they had indoor plumbing. A miraculous development, to be sure, and certainly a costly one. This private to public transition was true even if the private user was paying to access the public system. You pay a water bill, for example. But you are not responsible for the maintenance of the pipes.

Municipalization of Water, Power, Lighting, Transport

This process has played out differently in pretty much every city around the world, certainly. I looked at some examples from London, where a slew of private water companies dating back as far as the 17th century eventually became municipalized around the same time that US streetcar municipalization was happening. Centralization of control of water systems was done in London in the aftermath of some disastrous cholera outbreaks. Remember our mans John Snow? The 1854 cholera outbreak prompted a lively discussion about the need for better infrastructure and water treatment.

In Detroit, where the city was, in contrast, blessed with an abundance of fresh water, municipalization of streetcars and power revolved around issues of power and corruption.

In Search Of Cheap, Scalable Solutions For Grid Resiliency

‘Bigger’ Is Better? Or ‘Broader’ Is Better?

Into the 20th century, electricity becomes widespread. Economies of scale are quickly developed. In the 1930’s, The New Deal (the O.G. Stimulus Package) brought electrification to the farthest reaches of rural America, for example, in just a few years, via the Rural Electrification Act, or REA. Economies of scale are good from a standpoint of marginal cost per unit. But there are some caveats.

The New Deal, just as the 2021 Texas winter storms, showed that sparse density of service area is tough. Before the REA, a lot of utilities lacked the economic incentive to invest in rural electrification. A lower demand density means less generating infrastructure and more transmission infrastructure– and losses. The only way to address this was to pool resources locally, either to demonstrate sufficient demand, or to go it alone. No one was building, say, micro-hydro dams in rural Iowa, for example, before the REA.

Economy of Scale vs. Market Access

It’s helpful to understand “bigger is better” in terms of the economy of scale. In power terms, this is the tradeoff between a big power plant that produces more efficiently than a tiny power plant. It’s also helpful to understand “broader is better” as a question of increasing market access. This means more of an emphasis on power distribution than on the centralized economy of scale. Orthodox and heterodox economists would both probably agree that more market access is better. This means that consumers have choices and they have information. The REA attempted to address this by bringing electricity markets to rural areas. But the financial math is different.

Arguments for Decentralization

A lot of research has looked at why decentralization, on the other hand, is good. Proponents argue that the economy of scale from big, centralized power generation is outweighed by the loss of local control or economic benefit. If the combined (capital + operating) costs per kilowatt hour are the same, there are oodles of reasons why you’d want local generation. One reason has to do with grid resiliency. A grid that is less reliant on a giant power plant is less susceptible to disaster or other disruption.

Fires, storms, acts of God, zombie outbreaks, or disruption by fictional geomagnetic Department of Defense superweapon (a foreshadow of my next article)– these could all really screw up a lot of people’s respective days if they brought down a coal power plant. In contrast, as the SISE haiku says, “a major wind spill / at the offshore farm today / caused no injuries.” It’s really hard to disrupt generating infrastructure that is spread out over a huge area.

Arguments Against Decentralization

Utilities don’t like this, though. Forecasting is harder, as is the path to predictable profitability. Or, indeed, profitability at all. If Joe Blow owns a solar panel, that might be a few bucks a day that your utility isn’t earning. Given that utilities are fairly heavily regulated, their skepticism is warranted, or at least understandable. In other words: if utilities are required to deliver the power, that requirement becomes a bit harder when so much generating capacity becomes distributed over the whole service territory. There are some ways to even out these kinks. But it requires a mix of policy and technical innovation.

Next time on Handbuilt? When Big Goes Wrong, in which I will look at the popular imagination of disaster, and whence this peculiar and uniquely American phenomenon might come. Stay tuned for more in this exciting series on the history and future of infrastructure.

Further reading

This article is part of a series on transportation and mobility. Thank you for supporting independent journalism!

Nat M. Zorach

Nat M. Zorach, AICP, MBA, is a city planner, journalist, and social entrepreneur based in the border town of Detroit, where he writes about infrastructure, sustainability, tech, and more. A native of Lancaster, Pennsylvania, he attended Grinnell College in Iowa, the Kogod School of Business at American University. He enjoys long walks through historic, disinvested Rust Belt neighborhoods at sunset.

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