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Utility Industry Disruption? Electricity is not a Movie

Utility Industry Disruption? Electricity is not a Movie, Michaels Energy
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Because everyone reading this blog is in some way reliant on money from electric and/or gas utilities, I pay a lot of attention to the utility business and things like technological disruption and the utility death spiral.  I wrote about the utility death spiral back in April.  As a result of this fine article in greentechgrid, I’d like to bloviate about ballyhooed disruption.

Disruption is an updated buzzword for “game changer”.  Prime example: Netflix to Blockbuster Video, Au Revoir.

Greentechgrid notes a bunch of examples, and I have taken liberty to enhance the list by tabulating them into disrupted (Blockbuster) and disruptor (Netflix).  To examine what might be coming for the utility industry, consider what it has and does not have in common with the tabulated examples, and other business practices in general.   The utility industry fundamentally does not have much in common with these other industries.  What do I mean?

Convenience

Some of these disrupted industries held on or are holding on for nostalgic reasons or because some people are luddites.  For example, post offices and banks are “nostalgic” enterprises.  Old(er) people like to hand deliver checks, drop off, and pick up mail.  Speaking of which, they used to like to pay their utility bill in person too, accompanied by large doses of yammering with neighbors and people behind the counter.  I think I’ve only been in a bank about three times in the past 25 years:  Once to set up a mortgage; once to sign stuff; and again to refinance.  Doing these things in person is certainly not convenient.

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Selection

I haven’t visited a brick and mortar clothing store in years.  Why?  It’s a hassle.  I don’t have time.  They don’t have what I want.  They don’t have my size.  Answer: Amazon Prime.  I’m lucky if I can find a single pair of jeans my size in a store.  Amazon: about a dozen different materials in just one make/model that I like.

Electricity: electrons flowing at 60 Hz from the utility 24/7, about 99.99% of the time.  That’s all it will ever be.  That’s all it needs to be.

Availability Requirements

Most industries in the table provide things that are not necessary.  I.e., most people can survive without movies.  None of them have a requirement for 24/7 availability.  Some have 24/7 convenience, but that is far from 24/7 necessity.

Price

Nearly all disrupting forces include a strong dose of pricing advantage.  This is why I included those near the end of the list; namely retail, airlines, etc.  These are disruptors that don’t change the product or service; they perfect it.  The big box retailers are one example.  Walmart, Target, Costco are huge-volume retailers that beat their suppliers down on price, and they each wriggle a little differentiation with the others, but they are essentially direct competitors.

Specialization

This isn’t so much a disruptor, but rather a way to make more money and be more efficient at the core business.  I’m talking about outsourcing products and services.

As you may know, I grew up on a Midwest farm, growing corn, soybeans, alfalfa, oats, cattle, hogs, and even way back chickens, and before my time on the planet, dairy.  This is how city-folk may envision hayseeds in flyover country today.  It isn’t that way anymore.

First, product lines have streamlined down to only a couple crops and probably one, if any, type of livestock.  If “it” isn’t needed right now, such as during planting or harvest time, and “it” isn’t used all the time, “it” is contracted out to others because they don’t want to dink around with these things.  This includes trucking, barn cleaning, fertilizer application, manure hauling/application, and in some cases, planting and harvesting.  To the dismay of livestock, even reproduction (sperm) is outsourced from distant donors (better, cheaper).  Focus on the core business.

Many readers were in K-12 back in the late 1990s.  Boy, there was one “disruption” that imploded.  It was utility deregulation Enron/cowboy style.  The “free market” was going to sweep the industry, except it was not, and is not a free market.  It is a regulated monopoly market.  Back then, utilities were investing in telecoms, overseas generation, and offshore real estate.  It all collapsed with the stock market bubble prick around 2000.  Interveners howled that ratepayers were paying for failed investments in Bermuda golf courses.  Utilities retreated to what they do best: generate and deliver energy.

Utility Disruption?

A utility model disruption would have to buck just about every common characteristic with those noted on the list above.

Price

I took lashings from renewable energy enthusiasts back in January over this post that described the high cost of widespread renewable generation.  Well, I like to let others make my point.  The Wall Street Journal recently reported that in Germany, which is very aggressively moving to renewable energy, “Average electricity prices for companies have jumped 60% over the past five years because of costs passed along as part of government subsidies of renewable energy producers. Prices are now more than double those in the U.S.”  Ditto from Fierce Energy.  No spiking the football.

Convenience

I enjoy felling, cutting, and splitting wood to heat my house.  I use a resource that is free and it saves me some money, but I enjoy it – and it’s renewable!!!  Frankly, I don’t want to dink around with my own power plant and neither will the vast, vast majority of end users.

Specialization

Economies of scale; this is what a 2000 MW generating station is.  A bazillion 3 kW solar panels swings violently the other way.  Think it will be cheap to maintain and keep all that operating, while all the poles and wires must stay in place anyway?  I don’t.  Sorry.  This bucks every business trend in the last century.

Availability

Electricity isn’t a movie.  It is needed all the time.

Jeff Ihnen

Author Jeff Ihnen

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Join the discussion 3 Comments

  • Robin says:

    Thoughts on what could be the “Airbnbification” of distributed energy? A disruption to prepare for or niet?

  • Jeff Anthony says:

    Your data on renewable energy costs is flawed and outdated — regardless of the fact that you may have obtained it from the Wall Street Journal — which used to be a reputable source of information, but no longer. Instead:

    http://www.triplepundit.com/2014/04/electricity-prices-fall-europe-german-renewable-energy-increases/

    • Jeff ihnen says:

      Hold on, the Wall Street Journal goes on to say:

      “The government passes the subsidy cost on to consumers in a surcharge. While the flood of new energy sources has lowered market prices for electricity, consumer prices have actually increased as the surcharge has risen to make up the difference between the market and government-guaranteed prices. On the spot market, a kilowatt-hour of electricity costs 3.2 cents, half what it did in 2011. The average guaranteed price under the government’s price fixing regime is 17 cents. The renewable energy surcharge levied on German households and businesses has nearly tripled since 2010 and now accounts for about 18% of a German household’s electric bill. All told, the subsidies amount to about €24 billion a year, according to Germany’s economics ministry.

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