What Business Are Electric Utilities In?

What Business Are Electric Utilities In?

Mahesh Bhave, Indian Institute of Management
March 06, 2015
Many businesses can now perform the traditional functions of an electric utility — provide affordable, reliable, resilient power to homes and businesses. The barriers to entry in the business have fallen. For instance, a home with rooftop solar panels, batteries, and gas-based generators may choose to be grid-independent. Even when homes decide to remain grid-tied, utilities face falling demand and revenue, and the possibility of future grid-defection. Further, competing electricity solutions can emerge quickly, and not one-home-at-a-time — microgrids can offer community, village, or campus-level solutions.

What then should electric utilities do? The first part of the answer is: Join the solar and batteries-based electricity delivery business — be the change maker. This will shore up falling revenues, but will not be enough. The second part of the answer is: Augment revenues. How? The best way might be to get into the broadband ISP business.

In an industry where new, non-traditional electricity service providers are expected to enter, playing defense is not enough.

An Underappreciated Revolution

EPB, a municipal electric utility, entered the ISP business, and through EPB Fiber Optics offers 1 gigabit per second symmetric Internet connectivity to their customers for ~$70/month. That’s fast and well priced, an accomplishment worthy of recognition, emulation, and celebration.

EPB’s service is more than ten times faster than that typically provided by traditional ISPs for downloads, and much faster for uploads. Symmetric speeds allow new, “edge,” services of a kind we cannot yet fully imagine. For example, a personal and portable data center becomes possible; the center shifts to the edge of the network. What are the consequences? I think it is too early to tell since we’ve never had a platform so powerful. The high upstream speeds appeal to entrepreneurs contemplating new services.

In offering such ISP services, electric utilities likely enjoy a competitive advantage because incumbent ISPs might not easily match the built-from-scratch and incremental cost infrastructure. One outcome might be that the beleaguered electric distribution companies become among the growth companies of the future.

The incumbent ISPs — cable and telephone companies such as Comcast, AT&T, and Verizon — represent competition. By and large, they offer relatively slow, asymmetric, consumption-centric, and overpriced Internet access, bundled with telephone and entertainment services.

With gigabit speeds, electric utilities can easily match the entertainment and telephone services of incumbents. Greenlight, another revolutionary municipal utility offering gigabit ISP services in Wilson, North Carolina, does that.

Reorganization

Of course, realizing the growth possibilities from combined electricity and Internet service requires breaking down traditional industry and jurisdictional boundaries; re-purposing network architectures and topologies; and even re-structuring the ownership structure of utilities.

Yet what choice do utilities have? The electricity business, particularly in mature markets, is at an inflection point, facing Schumpeterian “creative destruction” and decline.

Utilities must make fundamental choices; business as usual will not do. They need a separate ISP division with its own leadership focused on end-user customers, and less regulators. They need a holistic view of services, uncluttered by old notions about product or service boundaries.

Zero-based Business Assessment

During times of fundamental change, when the business model itself needs revision, Clayton Christensen recommends a “zero-based” assessment of the business. “If we didn’t have an existing business, how could we best build a new one?” he asks. How might we answer this question for electricity?

Figure 1

Answer: If we start from scratch, the new business might comprise of a federation of microgrids, working cooperatively with each other to offset each others’ limitations, offering electricity and broadband access (including telephone and entertainment) services, and using a variety of non-fossil fuel based renewable generation sources and storage.

Cellular towers and the electricity sub-stations may host the solar panels, batteries, and other generation sources and equipment, and be the focal point for services, as shown in Figure 1.

For a long time, fiber optic cores have been built into the transmission infrastructure of utilities. For instance, Southern California Edison has an extensive fiber optic network. Such fiber optic infrastructure has been wholesaled by utilities to whoever needed it, mostly to cellular and telephone companies, and other businesses.

While utilities obtain most of their revenues from electricity delivery, bits delivery has had a niche existence, but seldom for households and small businesses. In India, Powergrid Corporation, a transmission utility, is an ISP focused on business customers. It could partner with distribution companies to offer residential broadband services.

The intermingling of electricity with information systems — customer data management, operations control, automated metering, smartgrid related upgrades — has been progressing apace. I have argued in the past, for instance, that performance monitoring of solar panels on rooftops is analogous to network management of remote computer terminals, and thus within the scope of IT. Equally, electricity distribution companies are ISPs too. The network topologies of electricity and telecom make them closely aligned relatives.

Can the bit-delivery business become as significant as electricity delivery itself? Yes. The poor job done by incumbent ISPs — telephone and cable companies — create such options.

What Business Are We In?

In “Marketing Myopia,”a celebrated 1960 article in Harvard Business Review, Theodore Levitt wrote, “The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because that need was filled by others (cars, trucks, airplanes, and even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad oriented instead of transportation oriented; they were product oriented …”

Electric utilities may no longer define their business based on generation technologies — coal, nuclear, diesel, hydro, even wind or solar or fuel cells — as is historically done.

When solar panels are utility-scale and feed the grid, they may be regarded as just another fuel equivalent. Even large wind farms similarly belong within the existing paradigm. Rooftop solar panels, on the customer side of the meter — and which serves as a demarcation point — challenge the utilities’ business model. Utilities typically have limited exposure to, and no control over, operations on customer premises for historical and regulatory reasons.

This needs to change, as shown in Figure 2 where, as substitution progresses along the Y-axis, differentiation of services and blurring of traditional service boundaries occurs along the X-axis. The meter may not be a suitable demarcation point as services extend inside customer premises. And “kWh” need not be the measure of service delivered. A service provider, who may or may not be today’s utility, may instead sell comfort — heating or cooling, or lighting, or refrigeration bundled with broadband access, entertainment, and more, and measured in unique ways.

Figure 2

In emerging markets where access to both electricity and the Internet is limited, electrification and Internet deployment programs have typically been distinct and placed under different ministries. A common infrastructure may now serve both needs. Opportunities exist to leapfrog old paradigms and simultaneously provide both electricity and Internet access quickly and cleanly.

To the strategy question, “what business are we in?” utilities may not answer “electricity;” they are equally in the next generation ISP business. Not acting on this prospect may be harmful to their business health.

See link for figures 1 and 2:
http://www.renewableenergyworld.com/rea/news/article/2015/03/what-business-are-electric-utilities-in?cmpid=StorageNL-Thursday-March12-2015