Outlook: Just admit it, Mr Urwin. National Grid needs to invest more

"Fears that Britain risked future power cuts at times of peak demand rose after the North American blackout in mid-August. Powergen was quick to suggest that power prices would have to rise to meet the cost of updating Britain's distribution system. But neither the distribution network nor generating capacity looks vulnerable..." So wrote The Economist in a spectacularly ill timed editorial yesterday, its deadlines presumably too early to take account of the transport chaos that occurred in London on Thursday night after power cuts which seemed eerily reminiscent of the ones that afflicted New York earlier this month. There but for the grace of god go all us scribblers.

Yet even discounting the unfortunate timing, the sentiment is completely wrong. It may be just coincidence, but the same company, our very own National Grid Transco, was involved in both cases. Blame has not yet been established for the New York black out, yet National Grid's ageing North American infrastructure was very much at the centre of events. National Grid's chairman, Roger Urwin, insists there is no parallel whatsoever between the two blackouts, whose causes, duration and scale he thinks worlds apart.

On the other hand, the effect was much the same, paralysing two of the greatest cities in the world. And the idea that it couldn't happen here, much trumpeted by National Grid, The Economist, the Government, uncle Tom Cobleigh and all in the aftermath of the North American debacle, has been well and truly trashed.

Mr Urwin is certainly right to suggest that technically the set of events and faults that led to the power going down in New York couldn't be more different than London. Yet on a general level, the two episodes were quite similar. The function of an electricity transmission system is at all times to ensure that demand is matched by supply. When the two get out of sync the system cannot cope and shuts down.

The grid is therefore chock full of fail safe mechanisms to ensure this doesn't happen. Localised power disruption is an everyday occurrence in any big transmission system, say because a tree branch touches a cable, or because a workman unintentionally severs one. When this occurs, the system automatically isolates the problem, shuts down the immediate locality, bypasses it and if necessary adjusts supply to take account of any lost demand.

In the North American power cuts, there were multiple failures causing large parts of the network to be closed down in an uncontrolled cascade, which in turn left too much power feeding the remaining, active system. As a result, generating capacity had to be shut down too so that when the transmission problem was corrected there was insufficient supply to meet demand.

What happened in London is not so dissimilar. Three sub-stations went down at the same time, taking out one fifth of demand and causing the network radically to reduce its calls on supply. National Grid was able to address the problem much more swiftly than occurred during the eastern seaboard blackouts in North America, but not before large parts of London including the underground system had lost all power. For safety reasons, the tube couldn't start running again as quickly as the lights came back on.

The New York debacle has been widely blamed on years of chronic under investment and a fragmented transmission system run by as many as 130 separate private sector companies and more than 2,000 municipalities. The figure is presumably plucked from the air, but there is talk of having to spend $100bn to bring about the necessary degree of renewal and integration, and thereby prevent a reoccurence.

Mr Urwin claims there is no such underinvestment in the transmission system for England and Wales, which also benefits from a degree of integration quite unknown in the US. Yet with sufficient spending, there plainly would be a way of preventing the sort of chaos seen on Thursday night. Mr Urwin says the coincidence of three sub-stations going down at the same time is an extraordinarily rare occurrence, by which he presumably means to insinuate that the high cost of safeguarding against it would not be an effective use of money. That's at least debatable. It is always impossible to cost widescale disruption, but Thursday was a biggie by any standards, and in any advanced, prosperous economy, people are entitled to expect a completely bomb proof transmission system. National Grid has fairly obviously failed to deliver it.

I don't want unduly to knock Mr Urwin, or turn his own words against him, but actually he's being quite disingenuous in insisting that underinvestment is not a problem for National Grid. It is and if Mr Urwin isn't saying so in his conversations with the regulator, then he shouldn't be at the helm of this company. Ever since privatisation, Ofgem has set prices for the grid on the basis of a 100 year depreciation charge, whereas in fact the life of these assets is more like 50 years. Furthermore, generating capacity is migrating progressively away from the main conurbations towards the outlying areas of the country, which in itself will necessitate a high degree of extra investment in transmission.

The problem of underinvestment in electricity transmission is not yet as acute as it is on the railways, but left unaddressed, it will eventually become so. National Grid spends a lot on renewal. Regrettably, it may not be enough. Thursday night's power cuts ought therefore to be seen as a wake-up call, and not lightly dismissed as fluke.

Underinvestment in the grid finds its mirror image in electricity generating capacity. At the height of the heatwave, Britain came perilously close to major power cuts, notwithstanding the fact that the amount of generating capacity is said to exceed peak demand by at least 20 per cent.

The problem was much worse in France, where a combination of strike action, excessive demand, and the fact that large parts of the system couldn't function effectively in the intense heat, caused the country to switch from being a net exporter of electricity to a net importer. Much of this imported power came from Britain, whose reserve capacity margin consequently fell from 20 per cent to 7 per cent. In such circumstances it would only have required a single outage at a major plant for there to have been blackouts.

This again would have been an extraordinarily unusual coincidence of events, yet it very nearly happened. In any case, a more predictable shortage in capacity looms. The Government's New Electricity Trading Arrangements (Neta) have been highly successful in driving down wholesale electricity prices in the UK. The only trouble is that prices got so low that there is now virtually no new generating capacity being built.

The Government wants to replace ageing nuclear and coal fired stations with renewables and gas. In order to encourage the development of wind powered generation, it has set a guaranteed price for renewable energy. Even so there is likely to be a considerable gap between the retirement of old capacity and the birth of the new. In any case, there are no such incentives for construction of other forms of generating capacity, which continues to look uneconomic even at the higher wholesale prices that rule after the summer scorcher.

There is only one other region in the world that has tried to deregulate the electricity market in a manner which failed to safeguard supply, and that was California. The end result was widescale brown outs, insolvency and rocketing electricity prices.

Britain very definitely does have a problem of underinvestment in its electricity infrastructure, whatever Mr Urwin says, but it is on a long fuse and most of the time it is largely invisible. Do we want to wait until we have another Railtrack, New York or California on our hands? Or should we not be addressing the problem now when the cost would still be relatively modest? There are already enough warning signs in this industry to set alarm bells ringing.