Teachable Moments in Next-generation Electricity

Seldom in industrial evolution do momentous changes occur rapidly, especially in industries like electricity that have been stable for decades. In electricity, we are at the brink of just such an inflection point. For students of industrial mutation, this is ‘whoopee’ time. Curiously, business schools and the economics profession appear to ignore the tectonic shifts.

Creative Construction

Joseph Schumpeter, in his classic The Theory of Economic Development (1934), noted that at the beginning of a new industry curve, there occur “a cluster of innovations.” New entrepreneurial businesses are formed based on them. Naturally, not all innovations take root; some startups flourish, others are abandoned, and yet others combine with complementary startups to give coherence to the emerging industry.

Beyond the early phase of somewhat slow growth — the so-called latent market stage — at a critical point the industry growth rate accelerates, represented by an inflection point in the emerging “S” curve. We then have the birth of a new industry, and with it, Schumpeter’s “creative destruction” described in Capitalism, Socialism and Democracy (1942). The new industry’s birth is accompanied by the decline, and even extinction, of elements of the existing industry. Such changes are occurring in a staid, taken-for-granted and in-your-face yet invisible industry of over a hundred years vintage — electricity. The Edison and Tesla electricity wars are being reenacted in a new metamorphosing industry.

As Telecom So Electricity

Creative destruction and creative construction occurred in the telecom paging industry, for instance. Ever-improved cellular phones and smartphones, and expanding coverage, replaced the old communications paradigms. Cellular phones and their towers gutted pagers and paging towers. Flip phones and thin phones (remember Motorola Razr?), and their operating systems, have also perished in the “gale forces” identified by Schumpeter.

Four fundamental and inter-related forces are converging inexorably. Consider:

• Barriers to entry in the electricity business have fallen — entrepreneurial entry is occurring and more entry is inevitable
• Economies of scale are no longer necessary for low unit costs of electricity. Therefore, we do not need “ultra-mega” power plants and a transmission infrastructure of towers and transformers
• Technological advance in solar generation and battery storage enables Distributed Generation (DG); we have “local generation, local consumption,” and soon “local trading;”
• Natural monopoly, the core of today’s regulatory dispensation, no longer holds.

As a result, the grid is not strictly necessary, except for select industrial applications or special cases like mega-cities.

Unprecedented Restructuring, Entrepreneurial Entry

But more is happening. Even the demand for electricity is falling due to efficient appliances from refrigerators to LED bulbs, air-conditioners to washing machines. Utility revenues may be flat or fall. How should utilities adapt to the new trends and technologies? Will utilities succumb to competition and reduced demand and shrink, or will they enter new businesses, such as broadband access, as EPB in Chattanooga, Tenn., has done?

New and smaller entrepreneurial companies, from rooftop solar to home energy management to microgrids, are usurping traditional utility functions. Public policy also favors entrepreneurial startups, community choiceaggregation, and municipalization because local autonomy and control brings in emissions-light, clean, and affordable electricity. One collateral benefit is 100% electrification worldwide. Regulators recognize entrepreneurial startups serve a new public interest beyond the customary reliable, resilient, affordable, and secure supply.

Naturally, reactive and resistive forces are also visible — for instance, the regulatory changes to net metering tariffs in Nevada; the battle preceding the merger of Exelon and Pepco; and the firing of the visionary, but ahead of his times, CEO David Crane of NRG Energy.

Business Schools: Missing

This environment presents numerous teachable moments. Next-generation electricity is a strategy-rich environment. What should incumbent utilities do? What should entrepreneurs do? What should regulators do? What will be the topology of the next-generation electricity network? Will electric utilities and ISPs overlap? Will we have flat rate pricing for lighting, air-conditioning, and more, like gigabyte bundles in telecom? Yet cases and studies on the electricity industry transformation are few.

Beyond strictly electricity, the intersections of electricity with transport, through electric cars, e-bikes, and charging infrastructure, and the intersections of electricity with the information and communications infrastructure present unexplored possibilities for cases, books, and scholarly articles.