The pace of technological and business model innovation in the energy industry continues unabated. But what sort of reception is this getting in the utilities? Can innovation force its way into such a well-established system, or can the system continue to control the rate of innovation adoption? A couple of posts this week provide some insight into what could become a ‘steel cage death match’ for the utilities as they seek to fight the growing pressures created by technological innovation.
As a starting point for the discussion, it’s worth noting that the electricity industry is an incumbent technological system, which has developed highly standardised technologies, design methodologies, rules and regulations since AC supply won the war of the currents in the 1880s. As a result, the system exhibits the characteristics of a technological regime, which defines the sorts of innovations that are acceptable within it, and which are not. The technological lock-in that this creates is an incredibly powerful mechanism for selecting and rejecting new technologies.
Contrasting with this stability are renewable energy technologies and the business models that they enable. These represent potentially disruptive innovations that may end up replacing incumbent thermal power generation technologies while facilitating the transformation of the electricity industry itself. According to disruptive innovation theory, the incumbent industry is only likely to react to the transformative effect of these technologies when it is too late to do anything about it.
Returning to the question of innovation versus the system, two posts in reneweconomy last week provide insights into the dynamics of technological change in the electricity industry. One identified an innovative approach to the management of distributed energy generation and storage that might well support a future business model for utilities that keeps them relevant (see here); the other highlighted how these same utilities are changing the rules to stop the adoption of this type of innovation in an attempt to preserve their 20th century business models for just a bit longer (see here).
The former described how a US based smart energy start-up company is enabling the creation of ‘virtual’ pools of energy through the aggregated management of solar and energy storage technologies. This approach uses a combination of cloud based technologies with distributed solar and batteries to create dispatchable energy out of an otherwise unpredictable resource. In contrast to the ‘death spiral’ risk presented by distributed energy, this model appear to be an ideal way to keep pole and wire networks relevant into the foreseeable future.
In contrast, the later post described how utilities in Queensland, Australia, are acting to limit the ability of consumers to send energy back into the grid. While this seems sensible within the constraints of the existing electricity system and its understanding of energy delivery, it denies the advancing trend of innovation in the industry. The history of technological development suggests that innovation in the industry will continue to advance faster than the current technological system can adapt to it – particularly when that innovation takes place outside the established industry. Trying to shoehorn technological advances into historically derived operational models is only likely to force innovators to find ways to circumvent the system, leading to its accelerated demise.
The dynamics of technological change within large technological systems differs from those of, say, consumer products, where rapid obsolescence and product substitution seem to take place at a dizzying pace. A reliance on complementary infrastructure and established expectations around energy supply mean that change takes place at a more measured pace in the electricity sector. But change does occur and systems can only accommodate a certain amount before a break point occurs. And in this case, it means that the technological trajectories established over the past 130 years may take a decidedly different direction. In these circumstances, it’s not just the technology that will change, but the wider system itself, including supply chains, industry structures and the people that determine the future of the system itself.
While this might sound a little apocalyptic, my own research confirms that change like this can occur. The question though, is what does it mean to the established electricity system and those who seek to develop and promote technological innovations?
Well, the adoption of potentially disruptive technologies within technological systems requires the modification of the system as well as the technology. This means that technological innovators need to examine the technical as well as non-technical barriers to adoption of their innovations and undertake their product development accordingly. This can include modifying technology so it functions more like incumbent technologies in some way. For example, in the case of the electricity industry this can include implementing control systems that more easily integrate into utilities’ normal network management practices. Sunverge are doing this by allowing the networks to access functionality such as the voltage regulation and frequency control functions of energy storage and solar energy technologies.
Similarly, the system (i.e. the people that run it) needs to recognise that adaptation is required to accommodate technological innovations. In contrast to the action by Ergon and Energex in Queensland, utilities need to acknowledge that the adoption of technological innovations is not totally in their control and adapt the system accordingly. The retrograde action described in reneweconomy indicates that these utilities, at least, are looking backwards rather than forwards. This presents significant risk for them, particularly where disruptive innovations such as energy storage are involved. In this situation, they risk being excluded from the future of the energy market as these innovations evolve faster than their ability to adapt to them. While they may think they can anticipate and control where this type of innovation might go, history suggests that rear guard actions to combat disruptive innovation leads to an elimination of the laggards, not the preservation of incumbency.
So like good jujitsu fighters, innovators and the system need to recognise the transformative potential of disruptive innovations and harness the forces that accompany them. In this way they can remain leaders in the field, rather than becoming defeated antagonists consigned to the sideline of technological history.