Tasmanian Data Logistics and Renewable Energy Curtailment
This edition takes a look at Tasmania's internet blackout, the increasingly evident challenges of managing electricity grids facing the green revolution and container shipping alliances
The Tasmanian Data Logistics Crunch
The beginning of March brought some interesting challenges for Tasmania when, for an entire afternoon, the state was accidentally disconnected from the rest of the world as two of its three undersea communications cables were severed. This event was surely traumatic for teenagers unable to access their digital lives but also had some serious consequences on local businesses, large and small.
If you’re wondering where this exotic sounding place is, Tasmania is the island state part of Australia (not to be confused with Tanzania). Tasmanian communications are linked to mainland Australia by three undersea cables, all linking the island with the neighbouring state of Victoria. On Tuesday, 1st of March, in a series of unrelated events, two of the three undersea cables were severed, virtually disconnecting the island from the rest of the world for about 6 hours. The consequences, as you may imagine were quite significant, even for such a short disruption.
Although just two of the three cables were severed, the remaining cable didn’t have enough capacity to handle all data and communications requests in reasonable time. In essence, what happened was data congestion. When accessing websites or data stored remotely, computers make data requests to servers for the data to be fed. If requests are caught in congestion, they reach servers with delay. If servers fail to respond in reasonable time, requests return a “gateway timeout error”. What this looks like for regular phone and internet user is no service.
This communication loss showed how many devices, processes and activities depend on this communication infrastructure. Voice and data services were the most obvious victims. Card payment services also failed. Given that roughly 63% of payments are made using debit or credit cards in Australia some retail stores were forced to close their doors. Many companies that operate using cloud services - data storage, virtual private networks, remote access software, found themselves unable to use cloud services as most cloud service providers operate in the Australian mainland. Flights to and from the island’s airports were delayed because of issues accessing passenger details and reconciling check-in records. Hobart’s (the Tasmanian capital city) electric scooters were also rendered useless as they use mobile geo-positioning to track and charge users for the distance travelled.
Why does this all matter? Just like the Ever Given obstruction of the Suez Canal exposed global shipping’s reliance on the Canal, the Tasmanian disconnect exposed the general reliance on communications infrastructure. In some cases, this reliance is unavoidable. However, as businesses firmly transition towards paperless processes, remote operations and cloud services, the hidden costs of these transitions become increasingly apparent. Yes, having the ability to print a document on any printer in an office building is great, but less so when this ability increases the probability of printers being rendered useless, especially when operating a printing business? Paperless processes and remote data storage are great until the organisation is locked out from its own data. Michael Scott Morton wrote in The Corporation of the 1990s (a book published in 1991 but still very much relevant today) that when he met managers showcasing a new digital tool they had installed he would often ask how the capabilities of the tool improve the business and how much does it cost the business to operate the tool. He concludes by saying “the problem is knowing when to change to using new capabilities and knowing when new capabilities should not be employed even though they exist”. Just as the Ever Given incident prompted companies to consider nearshoring, the Tasmanian disconnect could prompt business leaders to consider the business benefits and costs of everything digital and that digital service may cost much more than just monthly subscription fees.
There are two important lessons from this event:
Beyond software retailers’ promises of increased efficiency, accuracy, accessibility, cost reductions, businesses leaders should seriously factor in the costs of digital systems’ failure on their business in their procurement processes and understand whether the disruption risks are worth the benefits. This argument isn’t against technology, it’s against using an excavator to dig a firepit.
Maintaining localised data storage and paper-based back-ups is critical for business continuity and resilience. Doing away with the old because the new is better is not a sensible option when the failure of the new leaves businesses paralysed.
The Renewable Energy Plot Thickens
Both in Australia and in the U.K.
Renewable Energy Curtailment
An interesting development in the Australian renewable energy front, especially in South and Western Australia, is what is called renewable energy curtailment. This effectively means that solar panels on homes are remotely deactivated, often without the owners’ awareness.
In essence, as the number of solar panels on homes increases, more renewable electricity is consumed and, the remainder, sold back to the electricity grid. However, when the electricity supply exceeds demand, electricity generation must be reduced to match the required output. One way of reducing electricity generation is by turning off solar panels. However, by turning off solar panels, not only do homeowners not sell electricity to the grid, but they also need to buy electricity from the grid to run their appliances, heating or cooling and charge their cars.
The problem is that renewable energy curtailment makes solar panels significantly less attractive as an investment for homeowners.
Remotely controlling solar panels installed on homes basically offshores electricity generation to homeowners. Homeowners are responsible for installing and maintaining the panels while their earnings are effectively controlled by market operators by remotely controlling the amount of electricity sold to the grid. Every time solar panels are switched off, homeowners lose two-fold: first because they cannot collect the feed-in-tariff (roughly 10 cents/kWh) and second because they now have to pay for electricity from the grid (up to 29 cents/kWh in Western Australia and approximately 25 cents/kWh in South Australia).
With every kilowatt undelivered to the grid, the recovery period for investments in rooftop solar panels gets blown out of the water and so does their appeal. Owning rooftop solar panels becomes meaningless when the control over electricity generation (not only sale to the grid) is surrendered to a 3rd party.
This situation is very similar to the truck owner-operator model in American logistics. In the owner-operator, truck operators own or lease trucks, pay for truck maintenance and fuel and are contracted by intermediaries that decide which truck goes where and which don’t allow drivers to work for any other company. In effect, owner operators are employees without employee benefits. Similarly, rooftop solar panel owners may bear the costs of the panels while not being able to fully take advantage of their output.
Electricity Rationing
My family grew up under a communist regime in my home country, where electricity cut-off at 8pm and resumed early mornings. I’ve heard stories of having dinners and studying in candle-light (not as romantic as it sounds). Reading about the U.K. Government “National Grid scheme to ration households' power use at peak times“ brought back interesting memories.
The scheme currently offers financial incentives to homeowners to lower their electricity consumption during peak times, to protect the electricity grid. I previously wrote about this issue and of the challenge resulting from intertwining energy needs to one source, best summarised by the figure above.
While getting money to turn off some electric appliances may sound somewhat appealing, what tends to happen is that as more people subscribe to the scheme, the financial incentives diminish and then disappear, leaving people just with electricity rationing.
I suspect U.K. preparation for the ‘green revolution’ should include candles as well.
Cartels and Container Shipping
In light of recent container shipping price rises, the U.S. and shipper associations in the E.U. have urged policymakers to investigate container shipping alliances for cartel-like behavior. Unfortunately, it’s highly likely that policy interventions in this sense will create more problems than it will solve.
Container shipping lines operated in conferences which controlled the shipping capacity and prices on sea routes until the 1998 Ocean Shipping Reform Act (OSRA) in the U.S. and 2008 elimination of block exemption from EU competition rules for liner shipping companies operating on European trades routes. Shipping prices were higher but relatively stable as was shipping capacity. Following the regulatory changes, container shipping reorganised- mergers, acquisitions and restructuring into alliances.
The key differences between conferences and alliances is that in alliances, shipping companies should not coordinate pricing decisions nor individual shipping capacity decisions (i.e. buying new ships) thus leading to several problems:
If several shipping companies operate on the same route (e.g. Asia-Europe), on the same ship travelling at the same speed, what differentiate line A from line B? You probably guessed it, price.
If shipping price is dictated by the market, then the ability to lower prices is directly related to costs. The lower the shipping costs, the lower the price a shipping line can offer, thus attracting more customers. Hence, most shipping lines started buying bigger and bigger ships.
Partly as a result of these regulatory changes (and the global financial crisis amongst other factors), container shipping prices dropped significantly while ship sizes and shipping capacity increased dramatically. Most shipping lines were bleeding cash (in 2009, Maersk line’s container shipping arm lost more than 2.1 billion dollars). In June 2015, the Shanghai Containerised Freight Index (SCFI) was at 243 dollars/TEU. Yet, while shipping lines were clearly engaging in an all-out battle, between 2013 and 2015, the E.U. ran an inquiry into collusion amongst container shipping lines. The inquiry found no evidence of collusion amongst shipping lines.
How is this history lesson related to the current problems? While the shipping prices may be much higher than in 2015, I find it hard to believe that container shipping lines behaviors have changed. Ever Given and ensuing port congestion have reduced shipping capacity which seems to be the main factor driving shipping rates upward. As long as the capacity crunch persists, shipping rates are likely to remain high.
Regulators have however few levers at their disposal: they can either break alliances up or cap shipping rates.
Breaking up alliances, which is what some shipper associations suggest, are likely to achieve the opposite outcome than desired - fewer shipping lines and less competition. Breaking up alliances will likely result in further consolidation meaning that individual lines will have significantly more power both over capacity and shipping rates. Consolidation also means fewer lines, fewer options hence less competition.
It would be interesting to see if regulators would find it necessary to cap shipping rates, as this would effectively signal the revival of the conference system.
In Other News
The picture of tractors pulling a tank (not the only one on the web at the moment) may well be one of the best John Deere ads. Most blitz military operations rely on extremely robust fuel supply chains - the Nazis learned that the hard way in their Russian invasion in 1941. Eighty years later, these lessons are still very much relevant.