Why utilities' monopoly days are numbered
Why utilities' monopoly days are numbered
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 (such as 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. Insull 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 – complete with guaranteed profits and relief from failure – 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.
Today’s electricity market, however, is changing more fundamentally, and most industry participants don’t recognize it. New and deep-pocketed players – including Google, Comcast and Walmart — 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.
Yet even some Utility 2.0 advocates continue to argue that electricity is a special commodity — one whose supply instantaneously must meet demand — and must be controlled by a monopoly. The grid, they say, is a wonderful machine that cannot face competition. Some experts focus only on how regulators can help investor-owned utilities increase their earnings opportunities in ways that improve efficiency and distributed generation. Yet this powerful alliance — of utilities and regulators along with the environmental and consumer advocates used to appealing to regulators for reform — is ignoring the whirlwind of activity within emerging energy-service markets, a whirlwind that challenges the very concept of power monopolies.
Competition is good for innovation
Edison, in fact, would be appalled by the lack of innovation within today’s utility monopolies, many of which bear his name. During an era of remarkable technological revolutions, electricity generators in the U.S. have not increased their average efficiency by a single percentage point in over 50 years. Part of the problem results from the very nature of the regulated-monopoly business model, whose guaranteed profits and protection from failure discourage risk and creativity.
Edison believed profits were to be earned and business failures led to advances. Rather than simply sell electricity or kilowatt-hours, he also wanted to provide services, such as lighting so people could read at night and heat so they stayed warm during the winter. Edison would welcome the multitude of new firms wanting to provide an array of such services.
Consider, for instance, the thermostat in your home. That relatively simple device is becoming smart, and numerous companies see opportunities to make money by using it to control a home’s operating system. Lowe’s, the hardware supplier, provides thermostats that also offer a front-door keypad and door-opening sensors that can be controlled by an app. ADT Corp., the home-protection firm, sees the modern thermostat as key to an integrated system providing security, networking, and temperature control — all done by self-adjusting or pre-programmed devices that relieve homeowners of the need for constant modifications.
And then there’s Google, which spent $3.2 billion — twice what it paid for YouTube — to buy Nest, which may be a thermostat and smoke detector designer today, but could offer the systems that control a smart home’s appliances, locks, lights and Internet. The real innovation and profit opportunities, of course, may come from the hundreds of entrepreneurial firms that are not yet household names but see profits in an electricity market that has been controlled by risk-adverse monopolies.
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 “gigafactory” that would double the world’s lithium-battery production and reduce battery costs. Because 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 such as 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 — and, coincidentally, reduce their pollution.
The move to competition doesn’t portend the end of regulation because 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 — and that’s exciting.
The utility-of-the-future discussions are timely because nearly every single power plant operating today will be replaced by the middle of this century, offering what one utility executive called a “blank sheet of paper” 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 — 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.