Electricity is a unique industry. In most businesses the goal is clearly defined and innovating new technology drives growth. In the electricity industry it is the reverse. The technology is relatively well-defined. Even the “cutting edge technologies” of lithium-ion batteries and solar panels have been commercially available for at least the last 20 years. Despite the weekly headlines about new battery and solar breakthroughs, recent improvements in energy technology have, for the most part, only been incremental decreases in costs. Instead, the true source of disruption in energy has come from politics and business strategy innovation.
Energy has always been political. In ancient times, the source of energy was calories (via food) which required land. The owners of land controlled the source of energy, and thus society. Democratic philosophers like Thomas Jefferson recognized that when the means of energy production were held in too few hands, tyranny soon followed. In Jefferson’s time, this belief inspired the political drive for westward expansion – to provide all citizens access to the means of production (except for of course, native americans). In our time, electric utilities are regulated monopolies for much of the same reason – they provide the benefits of a commoditized means of production (energy) with a democratically controlled regulatory framework to keep the tyranny in check. Yet, for the first time in decades, this regulatory framework is starting to change.
Despite the fact that the technology of renewable energy generation has only improved incrementally, it is finally reaching a point where the cost is getting “close enough” to compete with traditional grid energy. In parallel, under pressure from environmentally conscious constituents, city and state politicians are seeking ways to show their commitment to sustainability by setting “renewable portfolio standards.” These standards describe a percentage of total energy use that will come from renewable energy, and over the last decade the goals have continued to get more and more aggressive.
In 2016, the City of Las Vegas made headlines by becoming one of first cities to power all city buildings with 100% renewable energy. This goal has been targeted by the City of Chicago for all public buildings by 2025. Not to be outdone, in early April this year the City of Portland committed to “100% clean energy city-wide by the year 2050.” States are toying with the idea as well, with Hawaii and California leading the charge and other states like Oregon, Nevada, and Vermont following suit.
Here’s the catch – these governments do not achieve these standards by installing solar panels on their buildings or wind turbines in their parking lots. Instead, governments and businesses are achieving their renewable energy goals through a policy called “virtual net-metering,” which allows organizations to “purchase” their energy from distant renewable resources without having to install the renewable resources themselves. As it turns out, purchasing renewable energy from large solar farms is significantly cheaper than installing distributed energy systems.
In the midst of growing demand for renewable energy, two innovative business strategies are now evolving. The winning strategy will largely decide the future of how we get our electricity:
- Purchase large scale renewable energy and resell it to customers demanding renewable energy choice through “virtual net-metering.”
- Leverage existing grid assets to distribute the energy and earn a return on the invested assets.
Distributed Renewable Companies:
- Leverage net-metering rates to “ladder-up” to a point where distributed “rooftop solar” is significantly cheaper than grid power.
- Increase R&D into energy storage so that at some point, the cost of adequate battery storage is less than the cost of using the grid as “virtual storage.”
At this point, it is difficult to predict who will win. Utilities have tremendous inertia and today power line networks are much cheaper than current energy storage technology. However, both rooftop solar and distributed energy storage have been experiencing cost declines, while grid costs have at best stayed flat. There is a negotiated option between these two strategies, but either way the winner(s) will be the industry with the best business innovation.
If you liked what you read please click “follow” blog in the right column or follow me on twitter @CDBNV