About this series
This is the second piece in a three-part series on the development of grid-based technologies in modern society.
Also in this series:
While acknowledging that the emergence of grid-based physical infrastructure networks took place over quite a long period and via quite complicated socio-technical processes, we will, for the sake of argument, simplify things. The underlying logic can be summed up in this way: the benefits gained from building and operating one large unit (be it a power station or a wastewater treatment plant) instead of many small units, offsets the costs of building and operating the grid used to connect each individual customer.
Note here the assumption that there seems to be benefits to be gained from concentrating power generation or wastewater treatment in a few large units. Let us explore this a bit further and see if we can get a better appreciation for economies of scale.
If a technology, process or system is characterized by economies of scale, average costs of the service provided go down as the total output goes up. Economies of scale can come in many shapes and forms, be present at different levels of organization, and vary between industries and technological processes.
At the level of technological equipment, economies of scale often boil down to fundamental physical properties, with one property being particularly important: the so-called cube-square law. This describes how the relationship between volume and the surface area of a three-dimensional object varies with size (see box below). This relationship holds – with slight variations – for all three-dimensional shapes so, for all containers, you will get economies of scale simply from having to use less material per storage volume as your container increases in size.
The cube-square law
Say that for some reason you want to build a container from steel plates, and that (for simplicity) you are adamant that the container has to be in the shape of a cube. Those steel plates are expensive, so you want to minimize how many you use. If you do the math for different options when it comes to size, you will find that if you build a cube container where each side is 1 metre, you get 1 m3 of storage volume, but you will need 6m2 of metal sheets. If, however, you team up with a few of your neighbours and build a cube container with sides of 6m, you get 216m3 of storage volume using 216m2 of metal sheet. In other words, the ratio between storage volume and area metal sheet needed has gone from 1:6 to 1:1. An 84% reduction in cost!
But there is more to the cube-square law. More heat, to be specific. Heat transfer between the insides of a container and its surroundings also follows the same relationship, meaning that large heat-holding containers are more energy efficient than smaller ones. This is something that plays – and has historically played – an important role for the development of the electricity sector. Almost three-quarters of 2019 global electricity generation were produced with heat as the intermediate medium – either burning fuel to produce steam and turn a turbine, or generating the heat needed from nuclear fission. In other words, economies of scale are at the very heart of much of the global electricity sector.
As demands for fuel gas cleaning have grown stricter and stricter, the economies of scale in electricity generation based on combustion have become even more compelling – it is less expensive to install advanced filters and scrubbers at, say, one 1000 MW coal power station than at 10 different 100 MW coal power stations. This is a logic that has clear parallels in the wastewater treatment sector as well. Because wastewater treatment plants have added increasingly sophisticated processes in response to societal demands for reduced emissions, this has strengthened the economic benefits from concentrating sewage treatment to fewer and larger facilities.
However, these predominantly technological phenomena pertaining to parts and components constitute only the most granular form in which economies of scale play out. In addition to these, economies of scale affect the plant or site level as well. For example, doubling the capacity of a power station or a wastewater treatment plant will not require twice as many operators, so staff costs will go down.
So, the conclusion appears to be the following: in setting up systems for the provision of basic services such as electricity, water and sanitation, size matters and bigger is better. Or is it?
New economies of scale and the future of grids
Up until this point, we have used steam power stations as our main example of an electricity generation unit. We know this might seem odd in the context of 2020 when global investments in steam-based technologies for electricity have plummeted. However, ever since electricity systems became part of human societies, steam power stations have dominated the electricity mix of most countries – up until the fairly recent emergence of solar and wind, hydropower is the only large electricity generation technology which has not been based on heat as an intermediate medium. These have therefore also come to shape global electricity systems, largely via a techno-economic logic which prioritizes economies of scale.
Let’s take a closer look at current developments in global electricity systems. Think about the expansion of solar photovoltaics and wind turbines, which in 2019 made up two-thirds of new global electric generation capacity. You could be forgiven for thinking that this is a sign of dramatic cost reductions in “renewables”. But is it really? Other renewables, like hydropower and bioelectricity, have seen nothing close to the cost reductions in solar and wind. So what can explain the drop in costs of wind turbines and especially solar PV? Well, it is not so much that they are renewable but that they are substantially more granular. Individual generation units – wind turbines, solar panels – are orders of magnitude smaller than traditional power stations. But this is compensated for by their being deployed in large numbers.
While it is important to acknowledge that wind turbines are actually a bit of a mixture between “build many” and “build larger” (off-shore wind turbines can be as tall as the Eiffel tower) for solar PV this scaling-by-numbers is very pertinent. The individual units of solar PV – i.e. the solar panels – are typically only around 300–500 W, but these are mass-produced in the millions. In other words, there are economies of scale at play here as well, but they are accrued not from building larger units but by manufacturing massive numbers that are deployed modularly.
There are several advantages to this approach compared to the approach of building larger units, which used to dominate the narrative of electricity generation. One such advantage is that a single standardized design can be broadly applied in many contexts and use cases. For example, a single 300 W solar panel can be sold commercially for an off-grid application, but put 50 such panels on a rooftop and you cover the annual power consumption of a fairly large house. Or why not bundle 3.2 million panels together? Then you get the world’s largest solar PV park at Noor Abu Dhabi in United Arab Emirates.
Another property of technologies like solar PV that scale by numbers rather than by increased unit sizes is that there is less to gain from concentrating large amounts of generation capacity in a single point location, as is done with, say, a coal power station. Now, solar power can certainly be produced more cheaply in a park of 300 MW than from a 15 kW rooftop installation, so there is certainly an element of economies of scale at the project level. However, the difference would probably be a lot larger if you compared a 300 MW coal power station with a 15 kW one. (It is difficult to verify this though, because frankly, no-one would build a 15 kW coal power station, especially if we also require it to meet the same criteria in terms of flue gas cleaning as the 300 MW one.)
So, what point we are trying to make here?
It’s something like this: In the first part of this series, we postulated that we have grids in society because of the economies of scale gained from concentrating electricity generation (or wastewater processing) in large, centralized units, which offset the cost of the grid. Let us further assume that we are correct in saying that the economies of scale of solar PV at the project or plant level are a lot less substantial than for the incumbents in the power system. If the International Economic Agency (IEA) is correct in crowning solar PV the “new king” of global power markets, it would seem that its ascendence to the throne might have some consequences for the grid itself. In part three of this series, we take a closer look at those “map-line things” that we discussed in part one.