Supply Chain Resilience

Below is yesterday’s (April 22, 2024) full-day fuel mix for the Texas grid. Proportions change seasonally and (obviously) by the time of day. But the major contributors remain the same: solar, wind, natural gas, coal/lignite, and nuclear. Other sources are very marginal, but can be vital when the grid is teetering on the edge. The proportions at play in Texas ought not be generalized. For example, in Washington State hydropower delivers almost 65 percent of electricity generation.

Let’s try to quickly trace some individual links in the Texas grid supply chain. Wires and transformers are early steps upstream from electricity consumption. We all know about wires (at least in general). Transformers are less well known. PV magazine explains, “Transformers are a necessary piece of the energy puzzle, as they manage the flow of electricity along the power grid by changing high-voltage electricity from transmission lines into low-voltage electricity before it reaches consumers.” There is currently a “shortage” of both electrical cables and transformers.

The scare quotes are meant to suggest that while there are current supply-side constraints (here and here), this is less a matter of reduced supply and much more a matter of increasing demand. A recent study by the National Renewable Energy Laboratory (NREL) found that demand is surging because of “aging infrastructure, electrification and massive growth in electricity demand, increased failure due to extreme weather events, and proactive utility resilience replacement programs. NREL preliminary analysis estimates current stock of between 60-80 million distribution transformers with upwards of 3 TW of installed capacity, and estimates the growth in overall stock capacity by 2050 will see up to a 160%–260% increase on 2021 levels.” (More and more and more.)

If we follow the different-capacity wires and transformers further upstream, we are not surprised to find more than 160 natural gas power stations operating in Texas. Texas produces more natural gas than any other state and about a quarter of national output (here). Texans also consume the most natural gas. Roughly 40 percent of electricity consumed in Texas depends on natural gas. Both Texas and the Unites States have very robust proven reserves of natural gas. But during 2021’s Winter Storm Uri natural gas connections froze. The very abundance of natural gas can also contribute to price swings that undermine consistent investment in exploration, drilling, and maintenance. Even with production cuts, recent price action has discouraged producers (more and more). This sort of volatility can narrow resilience investments at every step in the natural gas system.

About sunrise yesterday the wind picked up across Texas and so did the contribution of wind power to the grid (see blue line below). With more than 15,000 wind turbines this sector typically contributes about a quarter of total electricity generation in the state (here). But typically the wind does not blow as much in summer as winter (especially under El Nino effects). This can be a problem when Texas gets very hot (here). And sometimes even winter winds can slow. Lagging transmission network upgrades are also a constraint (here and here). Lack of skilled labor and some parts problems have complicated build-outs (see transformer note above and more and more). China is home for about sixty percent of global wind power parts and supplies. There is some sense that China gets what it can use before selling what’s left to non-domestic customers (here).

Last month Texas surpassed California as the state with the most grid-scale solar capacity. In recent years, about six percent of overall electricity consumed in Texas has originated with solar power. This is growing quickly, just as Texan’s demand for electricity is growing quickly. On some days, solar can be the source for over one-third of Texas grid output. Supply chain resilience for solar is complicated by the turning of the planet, clouds, and lack of storage capacity. But Texas is investing more in grid-related batteries than any other state (here and here). On August 24 last year I watched while a modest blip of “stored power” reinforced a highly stressed Texas grid just as the sun was setting and demand was peaking (more). Given the chart below, “power storage” is now a much more regular contributor to grid management (more and more).

Batteries, solar panels (and related), and wind turbines (and related) all have complicated, long-distance supply chains facing high demand and technological innovation (more and more and more and more). Each of these separate sectors also share a dependence on at least seventeen rare earths. Supply chain resilience is challenged by the innate rarity of these components — and, potentially, by the over-concentration of global capacity for rare earth production in China (roughly 70 percent).

Given supply chain complexities we could clearly go deeper and wider. A full forensic assessment of these supply chains could be an evergreen, never-ending task. But just what is outlined above is evidence of an innovative sector that is growing quickly in an ambitious effort to fulfill fast-growing demand. What this also — almost ipso facto — means is that the risk of grid failure is structural, systemic, and likely to be stubborn for the next several years (more).

In my experience supply chain resilience can more-or-less be assumed if the grid persists and fuel is available. It may be difficult and treacherous, but where electricity and fuel can flow, demand and supply will conspire to keep other flows moving too.

I have long argued that Supply Chain Resilience — as strategy and practice — is mostly about how well volumes persist and push fulfills pull when the grid is gone for an extended time over wide areas. In such circumstances, fuel flows and alternative sources of power spike in substantive and financial value.

The world is in the midst of significant, fundamental energy transitions (purposeful plural). A quarter-century from now the grid and other energy sources will be structured and behave very differently than today. The path between now and then is variable, exploratory, and very risky… especially when and where energy demand is surging. (Not making the transition would entail even greater risk.)

Earlier this week I confessed to needing more time before offering anything meaningful about our current energy fitness. I am trying to discern — and accurately condense — how various fossil fuel dependencies and emerging alternative energy sources can (or won’t) play together in case of major hurricanes, earthquakes, cyberattacks, and other very hard hits on people and places.

As my quarter-century framing suggests, there are several longer-term speculative issues to engage. There are also nearer-term issues of grid reliability, natural gas availability, velocity of technological adoption, and many other factors to actively observe and try to anticipate. This morning, though, I am fixated on the following chart of trades on Brent Crude future contracts over the last two years and last few hours.

Given our recent and continuing geopolitical context and as someone who cut-my-teeth on the 1970s oil market, I am amazed — thankful and hopeful — but still amazed and edgy at how this morning’s news is reflected in market expectations. I certainly acknowledge that today’s energy system (and geopolitics) is vastly different from a half-century ago. But in the face of this morning’s price action I should also acknowledge deeply discounting just how different (and what this means for Supply Chain Resilience).

This is not a time to discount risk or reality. This is very much a time to engage reality and risk at full value. Much more to come…

The volume of supply trucks entering Gaza has increased since late March (see UN chart below). Volume remains below the 500-per-day pre-October 7 benchmark, but the improved pattern — especially if sustained — is helpful.

Distribution of food and other freight once discharged inside Gaza remains very constrained and entirely insufficient for a significant portion of the population. (Here and here and here and here and here.) [April 16 Update: Bloomberg provides a detailed map-based analysis of constraints in Rafah-proper.] This week the director of US AID confirmed in testimony to Congress that famine is stalking northern Gaza.

This morning NPR conducted a five-minute interview with Jamie McGoldrick, the just-departing UN Humanitarian Coordinator for the Occupied Palestinian Territory, regarding food and related supply chains for hard-pressed residents of Gaza. What I hear Mr. McGoldrick saying is coherent with the most credible reports I have otherwise received.

Big Picture: Demand is desperate, supply is readily available, distribution is tightly constrained by physical impediments and deadly risk to distributors. This risk must be persuasively mitigated before available supply can fulfill the fundamental needs of more than 2 million hungry people.

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April 14 Commentary:

The deaths of seven World Central Kitchen (WCK) staff in Gaza have had myriad consequences. Here is how the Israel Defense Forces (IDF) explained what happened:

The event occurred on April 1, 2024, during an operation to transfer humanitarian aid from the WCK to the Gaza Strip. The investigation found that the forces identified a gunman on one of the aid trucks, following which they identified an additional gunman. After the vehicles left the warehouse where the aid had been unloaded, one of the commanders mistakenly assumed that the gunmen were located inside the accompanying vehicles and that these were Hamas terrorists. The forces did not identify the vehicles in question as being associated with WCK. Following a misidentification by the forces, the forces targeted the three WCK vehicles based on the misclassification of the event and misidentification of the vehicles as having Hamas operatives inside them, with the resulting strike leading to the deaths of seven innocent humanitarian aid workers. The strikes on the three vehicles were carried out in serious violation of the commands and IDF Standard Operating Procedures.

Here is what World Central Kitchen says happened:

The WCK team was traveling in a deconflicted zone in two armored cars branded with the WCK logo and a soft skin vehicle. Despite coordinating movements with the IDF, the convoy was hit as it was leaving the Deir al-Balah warehouse, where the team had unloaded more than 100 tons of humanitarian food aid brought to Gaza on the maritime route. “This is not only an attack against WCK, this is an attack on humanitarian organizations showing up in the most dire of situations where food is being used as a weapon of war. This is unforgivable,” said World Central Kitchen CEO Erin Gore.

The United Nations Office for Coordination of Humanitarian Affairs (OCHA) has regularly reported on the deaths of others involved in delivering aid. Since October 7 at least 244 aid workers have been killed.

Since mid-November I have been peripherally involved — at a safe distance — in efforts to increase food-flows into Gaza. I gave initial priority to increasing throughput rates at Rafah. I was encouraged by the reopening of the Karem Shalom checkpoint. I then worked with others to increase the number of gateways, especially to fulfill the needs of survivors in Northern Gaza. Despite what sometimes seemed to be potential progress, throughput remained constrained and each newly promised gateway evaporated as if a desert mirage. By the end of 2023 we were trying to squeeze through a minimum of 200 trucks per day, but most days saw less than 100.

By late December I was increasingly focused on improving velocity — speed and direction — inside Gaza. Impediments ranged from structural to technical to kinetic to emotional. But in any case, poor velocity — sometimes near paralysis — further reduced the effective distribution of already insufficient volumes. Constraints on both volume and velocity needed to be (still need to be) loosened to feed increasingly desperate tens-of-thousands.

My first play to improve downstream distribution involved decentralization. In addition to the purpose-built relief nodes, I advocated for proliferating push points, including many more organized and spontaneous charitable operations, commercial sales, and even the black market. With more supply than could be responsibly distributed, I was explicitly pressing for “irresponsible” distribution. Some of my argument — more sanitized in writing than on Zooms and phone calls — can be reviewed at this January 21 post.

By late December I had reached a treacherous strategic judgment. Here is how I started to ease it into operational discussions:

In catastrophic contexts supply chains are almost always caught in a narrow place between what is prudent and what is imprudently possible (and failure may be probable). From this distance, I recognize the painful pinch in Gaza. I am not ready to second-guess decisions made by those whose lives are wedged in this tightly constricted time and space. But in any case, each day the deadly consequences sharpen and accumulate.

January saw no substantive improvement. February’s incoming volumes fell precipitously and distribution velocity decreased even further. Hunger accelerated toward famine. As the war entered its fifth month, the dogged determination of aid workers was, it increasingly seemed to me, diminished by despair. Again and again it was asserted that a sustained ceasefire was the minimum precondition for improved mass feeding. This was and is a prudent judgment. I continued to argue for imprudent possibilities.

On Thursday, February 29 as the IDF attempted to distribute food at Nabulsi, fear, chaos, and violence resulted in more than 100 dead and multiples wounded (more). In response to this horror, creativity and courage confronted both hunger and despair. World Central Kitchen was at the forefront of this new thinking and action. By mid-March, WCK was the first to use the Amalthea maritime channel. WCK arranged the construction of a practical jetty and delivered almost 200 tons of food into hardest-hit northern Gaza. A second even larger delivery was completed by sea on March 30. The seven who were killed on April 1 were pushing forward with plans for more. WCK has now paused operations. Development of the Amalthea maritime channel continues, but in the dark shadow of those who have died — some suddenly and too many slowly — despair has reclaimed much of its prior prominence.

Despair is a terrible adversary. Courageous creativity is needed now more than ever. Aristotelian prudence benefits from dialogue with Homer’s heroics and revelation of hubris… and Amalthea’s tender care.

Going forward in Gaza — and other catastrophes — the last four months have taught me to give much more attention to threat frequency, virulence, and intentionality.

Most of my prior experience has been in post-catastrophe contexts: the hurricane has moved on, the flood is draining, seismic aftershocks are diminishing. In responding to major disasters there are significant risks, especially in immediate response. But intentional violence is rare. Rather, in the aftermath of most disasters there is often an outbreak of intentional altruism and unusual collaboration. War time is different. Gaza has been different. I have failed to give sufficient weight to the amplified sense of risk when and where there is a pattern of intentional violence.

The frequency — recurrence — of any threat influences disaster response. Up to a point, more frequent encounters with a recognized threat can reinforce resilience — at least when a threat is perceived as random as with most natural hazards. Florida is more resilient to hurricanes than other places because of recurring experience. Gaza has been more resilient to food shortages due to many years of experience. But at a certain point too-many too-hard hits in too-short a period of time will exceed resilient capacities. Perceived — and actual — intentionality of recurrence accelerates this exceedance.

Virulence — severity and scope — of harm is also a threat amplifier. Three-quarters of Gazans have been displaced from their pre-October 7 homes. It is estimated that more than one million (of roughly 2.3 million) Gazans are experiencing “catastrophic levels of food insecurity.” More than 33,000 have been killed, many more have been wounded. Homes, workplaces, hospitals, water systems, roads, and power networks have been destroyed. That these are the outcomes of intentional action amplifies the expectation and experience of harm.

Given this context, I ought not discount the courage required to survive each day. It is short-sighted and stupid to critique caution in risking innovative scalable answers. World Central Kitchen was taking this sort of risk. Seven of their staff paid the ultimate price for their creative commitment.

The last two weeks I have been engaged in reconnaissance of an active seismic area with catastrophic potential. When these faults explode the virulence of the event will, of course, inform the perceived risk of responding. The magnitude and frequency of aftershocks will, of course, shape the response and recovery strategy. If I am still alive for the aftermath, I will now be much more attentive to any aspects of intentionality that seem to be emerging. We need a response strategy that will lead with explicit, consistent, intentional care and as much courageous creativity as possible. Some of my peers who were in New Orleans post-Katrina have previously discussed these lessons-learned, but until now I did not fully hear them.

Saifeddin Issam Ayad Abutaha, Laizawmi “Zomi” Frankcom, Damian Soból, Jacob Flinkinger, John Chapman, James “Jim” Henderson and James Kirby, I have heard you. Thank you for your courage, creativity, and profound instruction. Thank you for your lives of self-sacrificing service to the most vulnerable.

NBC News reviews persisting impediments for connecting demand (desperate need) to (plenty of) supply. Over the last week there has not been much change in actual flows since my March 24 update here (or for that matter since mid-December). Please see chart below. The Associated Press reports that, “A three-ship convoy left a port in Cyprus on Saturday with 400 tons of food and other supplies for Gaza as concerns about hunger in the territory soar. The World Central Kitchen charity said the vessels and a barge carried enough to prepare more than 1 million meals from items like rice, pasta, flour, legumes, canned vegetables and proteins. Also on board were dates, traditionally eaten to break the daily fast during the holy month of Ramadan. It was not clear when the ships would reach Gaza.” (More and more and more (and one more link from an April 1 WSJ report))

April 2 Update: The Washington Post reports, “World Central Kitchen said Tuesday that seven of its workers in Gaza were killed in an Israeli strike and that it was immediately halting its operations in the region.” Please read an April 3 essay by José Andrés, founder of World Central Kitchen, published by the New York Times.

While the prompt for this discussion is the collapse of the FSK Bridge, Mr. De Bok’s answers are relevant to much broader demand and supply networks. His answers also reflect an emerging strategic consensus that — so far — is much more aspirational than habitual for the vast majority of supply chains. Entirely worth a less-than nine minute listen.