Let’s use power plants and some strained metaphors to make broader points about various societal, corporate and personal challenges underway at the moment (March 2020). What is spinning reserve? Does it truly have to spin? Why should you care? What in the world would this term have to do with Napoleon and Frederick the Great?

A general definition of spinning reserve might be: generation capacity (MW) that is on-line (connected to the grid) but unloaded (or partially loaded) and capable to respond to outages elsewhere in the system. An appropriate quantity of spinning reserve would need to be determined by the system operator but often is considered to be enough to make up for the loss of the single largest generator in the system. If N is the number of generators of the same size online, N+1 is a simple way to express a system with a certain quantity of reserves. So how does this play out in various scenarios?

Tale of Two Systems

Operating Configurations and Tradeoffs

Consider the two operating scenarios in the figure above. Assume the total system demand is 100 units, say MW. In the upper configuration (A), we operate 10 x 10 MW units = 100 MW. One 10 MW unit is operating (“spinning”) at 0% load, ready to ramp up load swiftly to meet demand if one of the other 10 MW units trips.

Note that there is another possibility for Configuration A. You could run all 11 units at ~91% capacity. Then you are still generating 100 MW but if one unit trips off, you simply ramp up the other ten to 100% load to sustain generation.

For the lower Configuration B, perhaps one tried to capitalize on significant economies of scale by building several larger power plants. Setting aside those real merits of size (lower CAPEX and OPEX per MW), we now find ourselves with 2 x 40 MW + 2 x 10 MW units generating 100 MW. The issue here is that if one of those 40 MW units trip, you have to make up 40 MW of generation rapidly, so you need the equivalent of 4 x 10 MW units of spinning reserve. Far more than required for Configuration B.

The Nth+1 unit is an economic inefficiency: an investment in capital and operating costs that when everything is working well provides no generation or return. Insurance basically. How you configure your system will impact how costly your insurance will be, or alternatively how severely your operations will be compromised when something happens if you do not buy said insurance.

Note that the old school term for this was spinning reserve since typically the electrical capacity on a grid would be provided by large rotating prime movers like steam turbines, diesel engines, hydro turbines etc. driving an electrical generator, and all that rotating mass provided inertia for the grid that could mitigate the impact on grid frequency when one unit tripped. Now we are developing energy storage systems (ESS), commonly batteries (BESS) that can provide this sort of reserve and other grid stability functions (or automated demand side management), so the trend in the electric power industry has been to shift the term to the more general operating reserve.

Alternative Perspectives

How are these terms relevant to other aspects of our lives? Consider:

  • Your schedule: perhaps there are 11 hours in your workday, and you are running hot with 100% output in each. We all like to be seen to be busy; it makes us feel important and indispensable. However, this provides minimal flex if other opportunities comes along. Or you may stumble badly with the slightest disruption, such as a sick day or weeks. Hold some spinning reserve for yourself. People will generally remember broken commitments 4x more than over-delivering on most others.
  • Company staff: 11 employees working at 91% capacity have the ability to ramp up to 100% and sustain generation if one becomes incapacitated. Perhaps 9 could work at 110%, or 8 at 125%, if multiple staff are lost. If everyone is already working at 120% however, and the smallest thing goes wrong, it will be hard to make up the difference without bringing in other reserves from outside (e.g. contractors), which can be costly. It’s good to have the flexibility to ramp up or down to meet demand within some bands, while overall staying at relatively high utilization.
  • Company projects: If one has a diversified portfolio of 11 projects, losing one will not have an undue impact on revenue. If one stakes much of the company on a few large projects, and something happens and one is lost or goes south, it could be enough to bring down the whole firm. How diversified are your clients and your project sizes?
  • Your personal portfolio: most financial advisers would recommend an investment allocation with assets spread across sectors, sizes, geography. This dispersion means rocket attacks on one holding can be made up by others. Clearly, an “all the eggs in one basket” approach is inadvisable and you will want diversification with appropriate proportions, backstopped by the all-important emergency fund.

Napoleon and Frederick the Great

Tangentially related to spinning reserve are differing philosophies from warfare that might relate to our era. For this we have to delve into a favorite sets of books by Hans Delbrück (1848-1929).

Though Vol I might be the best

In Volume IV Delbrück talks about the evolution of tactics between Frederick the Great (“Frederican”) and Napoleon. These different perspectives echo some of the views held by business and civic leaders today. Here’s a table describing those differences in how leaders deploy their assets during battles.

Both winners in their day

These leaders were products of their eras. Frederick (1712-1786) may have been no less brilliant, but was limited by the capabilities of his troops and communications at the time. Napoleon (1769-1821) had the benefit of evolution in both. You can probably come up with other historical or current leaders that reflect either tendencies. A Frederican leader might espouse philosophies like:

  • “Go big or go home”
  • “All in”
  • “Get there first with the most”

A Napoleonic leader might have a more complex mixture of wariness and boldness with philosophies like:

  • “Keep some dry power”
  • “No plan survives first contact with the enemy” (from von Moltke)
  • “The battlefield is a scene of constant chaos. The winner will be the one who controls that chaos, both his own and the enemies.” (Napoleon again)

Again with a crude diagram we can illustrate that difference. A Frederican battle front might be the lower group: totally committed at the beginning with little flexibility. “I have set my life upon a cast, And I will stand the hazard of the die.”

The Napoleonic group above has the strong reserves, capable of reacting to developments; reinforcing a stressed area, exploiting an advantage. “You commit yourself; and then, you see [but you have the flexibility to adapt].”

As a micro-example we can see these different behaviors with geothermal power plant developers. Some go all-in on a strategy at the outset for the largest plant size and fixed technology, regardless of scant resource data, since the financial model looks better the bigger it gets. It is as though they have to commit themselves irreversibly to the outcome with the flashiest PR before they potentially get the bad news from the reality of future resource exploration. Sometimes their optimism works, sometimes it doesn’t.

Others can view their projects with a broader probability-based framework, where the tactics evolve continuously as new data are received, and they can better readjust their plans and assets to deliver a successful project regardless of its final size and features.

Summary

When one looks at the past few decades, one can see a lot of examples of overleveraged, overaggressive, overoptimistic and “run to failure” behavior from many firms or countries. Seems very 1990s. Here in 2020 when we find spots where we are running out of dry powder, we can see the limitations: fiscally, politically, environmentally. Millennials had already gotten their shocks and developed resultant fiscal conservatism from the mid-2000s financial crisis. 2020 might sear yet another generation into developing a more resilient, science- and fact-based, N+1 technocracy and society. Hopefully good in the long term despite the agony in the short.