Are electric utilities on the cusp of being made redundant?


Electricity utilities may be on the road to irrelevance, and there may be nothing they can do to stop it.

There was a blog post recently describing the threat posed by new energy technologies to electricity utilities in Australia (see here).  The article describes how these utilities have realised that solar combined with the emergence of energy storage technologies poses a threat to their business models.  The problem that this creates is that it allows more and more consumers to either generate their own power, or  go off the grid altogether, leaving fewer and fewer people paying for the maintenance of expensive fixed electrical infrastructure.  This problem is often referred to as the ‘energy market death spiral’ (for a detailed description of the issue, see here for a paper by AGL’s Paul Simshauser).

The emergence of solar and energy storage technologies certainly present a problem for regulated electricity utilities, but the issue is far more of a threat than is commonly believed.   This is because these technologies display classic features of disruptive technologies and the environment in which they exist is fertile ground for the type of industry change that these innovations create. 

In terms of the technology, solar is quickly approaching the point where it can generate power at a similar cost to centralised coal fired generation in certain circumstances.  However, for a long time solar has been relatively expensive.  As a result it has been used in niche applications, where its scalability, environmental benefit or ability to supply power to remote sites was valued over the cost of generation.  More recently however, these niches have been used as footholds to improve performance to the point where solar is ‘good enough’ for a wider range of applications.  This process of starting out with poor performance, followed by rapid improvement in niche markets to a ‘good enough’ performance level is a hallmark of disruptive innovation.

The second issue here is how the incumbent market behaves in response to the rise of a potentially disruptive technology.  While incumbent utilities have responded to wind by being large buyers of the technology, solar and energy storage present a different challenge altogether.  The evolution of the electricity grid has been partly built on the need to provide reliable, high quality electricity to the end user – issues such as availability, power quality and network stability are at the heart of network design and the associated maintenance strategies.  The problem this creates is that technologies like solar (and not so long ago, wind) are perceived as being ‘mickey mouse’ in nature because of the quality of both the product and the power they produce.  In true disruptive fashion, this means that utilities continue to think the way they always have – that is, how do they maintain quality of supply when their  revenue base is being eroded by solar (and soon, by energy storage as well).  Instead of focussing on how they can ‘eat their own lunch’ by getting into the solar/energy storage game, they will continue to defend their traditional business models, looking for changes to network tariff structures and cost reduction to avoid the erosion of their income streams.

This is classic disruption.  When an incumbent continues to apply existing management thinking to serve their existing customers better, then disruptive innovations can sneak up on them and change the rules of the game completely.  These businesses will remain well run, with competent decisions being made by skilled managers, but they will be the wrong decisions.  This attitude can be seen in a figure published by the Australian Energy Market Operator and reproduced by Renew Economy (below).  In this figure, new technologies are shown as having decreasing ‘industry value’.  If you were to change the right hand axis to ‘customer value’, the curve would increase from left to right, not the other way around.  This style of thinking is real problem faced by utilities, not the loss of customers and their associated revenue base.


As a result, the future of electricity supply may not have ‘networks’ involved in it at all, and it is this future that utilities should put their minds to.  Because solar, wind, energy storage and other technologies yet to be on their radar could change the game completely.  So while utilities might be the best player on the network field, the reality is that the game might be played on another field altogether.  And they will be left wondering what happened, long after their expensive, well maintained networks have ceased to be relevant to the rest of us.