When the lights go off: Economic and social impacts of a large scale blackout

Alessandra Motz, senior researcher in energy economics at the Institute for Economic Research, comments on the consequences of a blackout on families and businesses

The recent electricity blackout that started in Spain around noon on April 28 and lasted for several hours, spreading to Portugal and some border regions of France, has kindled the debate concerning the economic impact of electricity supply interruptions and the measures to limit damage to people, infrastructures, and economic activities.

The cost of a blackout and the cost of avoiding it

Estimating the cost of a blackout is, indeed, much more than a theoretic exercise. Precautionary measures that help reducing the probability of a blackout, such as back-up devices or redundancies in transmission and distribution grids, come indeed at a cost that is ultimately paid by electricity consumers. Any information on the cost of blackouts is thus particularly useful, in order to ensure that the investment in prevention measures fits the needs of the consumers and local economy, and strikes a fair balance between security and affordability of the electricity supply.

How do researchers compute the cost of a blackout?

Estimating the cost of a blackout is however complex, at the very least because blackouts – especially long ones as that observed in Spain – happen very rarely in Europe and in the global North. There are only a few examples to learn from, and European families and businesses are not used to gauging the consequences of blackouts on their daily routines and budgets. Used to giving security for granted, they may regard as suspicious or even unjustified any increase in their electricity bills that is connected to supply security.
Energy market companies and institutions involved in deciding energy policies and investments thus have to rely on the best available estimates. These usually build on two approaches. The first approach relies on macroeconomic data, such as gross domestic product and electricity consumption of a given region, and computes the cost of a blackout as the share of gross domestic product that is lost if one unit of energy – say, 1 MWh – is missing. The second approach exploits instead ad-hoc surveys distributed among residents and local businesses, asking them to evaluate the damage associated to a given blackout scenario.

These two approaches complement each other, and yield interesting findings.

Most researchers agree that longer blackouts cause bigger harm, but the damage of an additional minute without electricity is not uniform over time. The first few minutes without electricity cause the highest damage, due to the abrupt and unexpected interruption of ongoing activities. For a while, a longer blackout duration does not cause much heavier consequences, but the situation deteriorates if the blackout lasts longer than a couple of hours, and appropriate measures to protect vulnerable people, infrastructures, and material goods need to be adopted.
The timing of a blackout is also important: blackouts tend to harm less if they happen overnight or late in the evening, when most economic activities are closed. There are, however, some exceptions, as any football enthusiast hit by a blackout during the World Cup finals would easily tell.
The structure and performance of the affected economy matter too. The macroeconomic approach is based on the idea that richer economies or regions, or more productive business, face higher costs than their poorer or less performing peers.

Individual reactions to blackouts may be very heterogeneous

The survey-based approach suggests however that richer economies and most productive businesses are not necessarily those suffering the highest damage, and some caution is needed when considering the measures obtained through the macroeconomic approach. Some economies or businesses, indeed, could be better endowed in terms of back-up devices, or could benefit from some flexibility, allowing them to reschedule their activities and minimize losses. A study conducted in 2018 at IRE on a sample of firms located in Canton Ticino showed for example that around half of these businesses owned at least one backup device, such as a UPS, a generator, or even a backup connection to the electricity grid. While almost 40% of the sample placed an extremely high importance on avoiding any blackout, some of the respondents were willing to accept a small compensation for the inconvenience caused by short outages.

The limits of a purely macroeconomic approach are particularly visible in the assessment of blackout damage for households. In this case, indeed, the cost of a blackout is computed as the value of one hour of leisure lost, set equal to a fraction of the average hourly wage. Individuals, however, may perceive a higher damage from blackouts during certain time spans, or if they need to attend kids or vulnerable relatives, or depending on what appliances in their home exploit electricity. Individual attitudes matter too. A study published at the IRE in 2021 on a sample of Swiss residents suggests for example that individuals may be willing to tolerate occasional short blackouts if their electricity supply comes from local, renewable sources. According to the same study, long blackouts harm everyone, but individuals with a higher environmental sensitivity or showing support for nuclear phase-out are more willing than others to pay a higher price for security. Some individuals may even be willing to take full responsibility for their own supply, and ready to detach from the grid to produce their own, green electricity – with all the investment and maintenance work implied by this choice.

What can we learn from the recent Spanish blackout?

The technical causes of the blackout are still under investigations, and it’s too early to say which of the lessons learned from the performance of the Spanish grid and generation plants will be most useful for Switzerland. This is even more true if we consider the differences in the generation mix of the two countries and the fact that Switzerland is much more interconnected to the European electricity network, and thus enjoys a larger flexibility as compared to the Iberian peninsula.
There are, however, important takeaways if we look at how electricity consumers reacted to this event. The more we proceed towards electrification, the higher the social and economic cost of a blackout will be. Estimating the cost of a blackout is key to deciding the optimal investment in prevention measures, as is a close monitoring of the needs and preferences of families and businesses, that might be neglected in a purely macroeconomic approach. Individuals and organizations have heterogeneous priorities and needs, but also resources and strategies that may help reacting and minimizing the most negative outcomes of these unexpected events.