Technology and Changing the Business Model in the Electricity Industry

Lynne Kiesling

Germany’s utility Yellow Strom is a technology leader. They are leading in the introduction of digital technology in the interface between their wires network and the customer’s home; for example they are one of the first partners with Google to roll out Google’s Power Meter, and they are working on an application that will use data from the customer’s meter and enable customers to set up a Twitter stream for their home’s energy use (like the now-private Andy’s house that I discussed in October 2008).

In an earth2tech article today, Katie Fehrenbacher points out what’s been my drum beat here for a long time: digital (and ultimately transactive) technology transforms the set of possible end-use value propositions, thereby changing the possible range of differentiated retail products and services in the retail electricity industry. It also changes the business models of firms in the industry … if the firms don’t resist it and use political mechanisms to stifle it, and if regulatory inertia doesn’t stifle it.

Compare that type of innovation to what your average utility is doing — just keeping the lights on — and it’s like night and day. “There’s close to a revolution happening,” when it comes to bringing the Internet and energy consumption together, says Martin Vesper, Yello Strom’s executive director. Think about it: The emergence of broadband connections in our homes has changed the way people consume media, communicate with each other, buy goods and work. And the hope, which Yello Strom is betting on and which could do wonders for fighting climate change, is that broadband will also fundamentally change both our energy consumption habits and what it means to be a utility.

However, she then goes on to say that she’s not arguing for retail competition in the US:

While we’re not arguing for U.S. energy deregulation — various U.S. states have already failed miserably at that — it does create a more friendly market for leveraging consumer trends, like the emergence of home broadband connections. It also leads to companies taking bigger risks and being more innovative.

In this instance she is incorrect, and I believe those two positions are internally inconsistent, as the second quote I pulled from her article demonstrates. While many states claim to have retail competition, only Texas has truly rivalrous, meaningful competition for the business of residential consumers. Retail restructuring in other states has been hamstrung by phased-out retail rate caps, by default service contracts that constitute a substantial entry barrier in a market segment where customer acquisition costs are already high, and by other administrative and regulatory half-moves that leave the retail market uncertain and entry costly for the competing retail provider. Thus it is incorrect to say that various US states have failed at deregulation, because they actually have not had the political gumption to do it.

This article, and Germany’s Yellow Strom, illustrate the chicken-egg problem associated with innovation and regulation in the electricity industry. Retail competition is easier with smart meters at the interface between the regulated wires company and the customer premises. But it’s also true that innovation and entrepreneurship flourish, with benefits for both consumers and entrepreneurs, in rivalrous retail markets with low entry barriers. Which should come first?

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