Utilities: Your monopoly days are numbered. (Yes, we've heard this before, but this time...)
You'll enjoy this guest editorial from the Environmental Defense Fund, even if you don't agree with it. Dick Munson argues that entrepreneurial innovation is about to disrupt the regulated monopoly utility model.
Yes, we've heard this before, but I think we should pay attention this time. We often begin talking about disruptive changes years or even decades before they finally hit the tipping point. (Recall Ma Bell or the music industry or bookstores if you want examples.) Skeptics conclude that the changes won't occur and they are right for years... and then one day they are very wrong as the ice dam unleashes and the wave crashes over those who are unprepared.
Are we finally at the verge of the long-forecast destruction of the regulated utility model? I don't know if the day is here yet... but I do know that it's getting ever closer. Read the comments below, then use the Talk Back form to tell us whether and when you think this change will hit us. â€“ Jesse Berst
By Dick Munson
Competition from new players will drive innovation in the changing electric utility market
The blogosphere is abuzz with plans to create a new electric utility business model, one that reduces energy costs and pollution. The power company of the future, many experts say, will feature new electricity rate structures that reward efficiency, finance and integrate local, on-site power generation (like rooftop solar), and put more smart meters in the system to help us better understand and control our energy use.
Such changes could indeed help reduce consumer costs and pollution, yet they ignore larger opportunities to advance innovation and efficiency. Missing in most Utility 2.0 discussions is any real debate about the emerging electricity-services market, filled with hundreds of innovative entrepreneurs who want to profitably provide consumer services that revolutionize how we use and interact with electricity. Instead, most experts simply assume the monopoly structure of the past several decades will continue. The introduction of new players into the electricity market, however, challenges that assumption.
Regulated-monopoly paradigm is being challenged
A little history could be useful. Thomas Edison launched the electricity business by arguing for competition, something he said led to creativity. His personal secretary, Samuel Insull, had a different vision, moved to Chicago, began buying up power companies, and led a campaign to allow his integrated firm to obtain a geographic monopoly in exchange for state regulation of his rates.
Competition, said Insull, was destructive, at least for his profits. The regulated monopoly structure â€“ complete with guaranteed profits and relief from failure â€“ worked well for several decades, helping to provide universal electrification for homes and businesses. The model has been so strong that even the deregulation efforts of recent decades did little to challenge the regulated-monopoly paradigm as holding companies in many states continued to control both the generation and distribution of power.
Todayâ€™s electricity market, however, is changing more fundamentally, and most industry participants donâ€™t recognize it. New and deep-pocketed players â€“ including Google, Comcast and Walmart â€“ are entering the industry and offering an array of consumer products that integrate electricity, security, and networking. Technology breakthroughs and economies of scale have substantially reduced costs for natural gas, small-scale renewable energy projects, and batteries. These advances are also allowing people (and entrepreneurs wanting to serve them) to obtain real-time information about their energy usage and options.
Batteries are disruptive too
Batteries also are disrupting the regulated-utility paradigm. Being able to store electricity destroys the very basis for a monopoly controlling power supply and demand. Most attention has been paid to Tesla, which recently announced plans to build a $5-billion â€œgigafactoryâ€ that would double the worldâ€™s lithium-battery production and reduce battery costs by 30%. Since the Tesla battery should be capable of storing enough electricity to power a home for 3.5 days, it could eliminate the need for solar-panel users to stay connected to the grid, and it could convert thousands of vehicles into electricity generators.
Not to be outdone, General Motors is investing almost $450 million to upgrade its own battery assembly plants to allow its Volt to drive more than 200 miles on a charge. Even appliance manufacturers are inserting batteries into their refrigerators, allowing people protection from blackouts as well as access to energy sources like solar and wind, which are most abundant during the late afternoon and evening respectively.
Similar innovation and business competition are occurring with meters, sensors, and the processing of the enormous amount of data that comes from those devices for the benefit of consumers. Scores of entrepreneurs are providing apps that help homeowners and renters reduce their energy costs â€“ and, coincidently, reduce their pollution.
The move to competition doesnâ€™t portend the end of regulation since power generators will continue to need to meet environmental and safety standards. What the advent of new players does bring is innovation and efficiency. With so many new businesses opportunities, the future of energy markets is not clear â€¦ and thatâ€™s exciting.
The utility-of-the-future discussions are timely since nearly every single power plant operating today will be replaced by the middle of this century, offering what one utility executive called a â€œblank sheet of paperâ€ that enables a major transformation of the U.S. energy system. Yet the Utility 2.0 discussions need to expand and focus on the most exciting change â€“ the introduction of hundreds of innovative companies that want to profitably provide consumer services that used to be controlled by a monopoly. Utilities and environmentalists alike should embrace their arrival and help remove the barriers to competition.
By Dick Munson is Director, Midwest Clean Energy, for the Environmental Defense Fund. He works to advance the use of clean energy in the states of Illinois, Ohio and Pennsylvania.
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