Dick Munson, Environmental Defense Fund’s Midwest clean energy director, and I have been working with, thinking about, and doing research on the evolution of technologies and regulation in the electricity industry for a long time. I have used Dick’s book From Edison to Enron in my own work, and his blog posts at EDF are full of thoughtful and informative analysis of this changing industry.
Electricity is a changing industry due to digital and distributed energy innovations. Because of its history as a vertically-integrated regulated industry and its traditional pervasiveness and importance in our daily lives, it’s an industry in which change comes slowly. Change also comes slowly because parties who have a lot at stake in the status quo, especially the regulated distribution utilities and the state-level regulators who oversee them, have strong incentives to maintain that status quo in the face of disruptive innovation.
But we live in Schumpeter’s world, and no regulator or firm or industry can succeed in standing athwart the economy and bringing the perennial gale of creative destruction to a halt. We are starting to see the fruits of the strategic thinking of utilities, regulators, and technologists as we consider and analyze the implications of digital and DER innovation for business models, regulation, and competitive retail markets in electricity.
Dick and I hitched our wagons together and wrote an analysis of the challenges and changes in electricity for Electricity Policy. Our article, A Revolution in Power: Where We’ve Come From, Where We’re Headed, draws insights from an historical analysis of the long-run history of technology and regulation for the burgeoning changes in technology and regulation brought about by digital and DER innovation.
Unlike historic industry shifts that have been spurred by policy, these technological advances have occurred largely despite policy. In the U.S., the electricity industry’s regulatory structure – designed when Edison’s contemporaries were covering cities with wires – is woefully outdated. Although the country has long been electrified, monopolies still control most of the nation’s distribution networks. State regulation and planning props up incumbents more than it encourages the dynamism of innovation and free enterprise.
Utilities have been protected from competition for over a century, and the powerful decentralizing forces of digital and DER innovations are putting pressure on that protection. We saw a first wave of unbundling of the vertically-integrated firm in the 1990s in states that restructured when they liberalized wholesale power markets and required utilities to sell their generation assets.
Today, we are experiencing a second wave of innovation-induced unbundling, this time with production process innovation and new products and services in digital smart grid and distributed energy technologies. Digital technology is further decentralizing the electric power industry. Rival retailers in restructured states now offer customers menus of differentiated products and services. Some provide green electricity generated from solar collectors or wind turbines. Some offer lower rates during late evening hours when the demand for power is low. Some offer free weekend energy. And some bundle electricity with security, health monitoring, or entertainment services.
How, then, should the distribution utility business model adapt to these changing conditions? We argue in favor of the distribution platform business model:
Beyond its physical role, the electricity distribution platform firm would also be a market platform. As energy technologies become more diverse, the distribution company would create additional value by facilitating the interconnection of consumers and their technologies to the distribution network, layering a market platform on top of the physical distribution network. The very existence of these retail market platforms would generate incentives and opportunities for entrepreneurs to develop devices that could operate on this platform and applications that connect the owners of those devices to other agents via the platform. For example, a platform would allow home energy management providers to offer an array of services, including security, internet connections, as well as energy controls. For this market facilitation, the distribution platform would earn a service fee.
A distribution platform that earns a fee by connecting distributed solar owners with buyers would enable innovation around the distribution edge. While such a design requires significant attention to detail, in this article we lay out a vision for how and why such a policy conversation should proceed. Changing regulatory institutions so they prioritize the dynamic benefits of innovation while also implementing clear, transparent rules regarding safety, reliability, interconnection, and market access, will better enable this social system to foster a clean and prosperous future.