Market shake up could lead utilities to new business model
By Mark Bernstein, Ph.D., Senior Vice President, MWW
Predicting the future of energy in the U.S., has generally been fraught with miscalculations — anyone who has made claims on how the mix of energy sources and patterns of delivery would change over the last 40 years has been wrong. In fact, nothing has changed much for 30 years, and the Energy Information Administration predicts it won’t change through 2035.
|U.S. primary energy consumption and shares of total U.S. energy. View the full-size chart. Source: EIA
What made us think things would change? What will it take for disruptive technology to gain considerable market share? Solar, wind, ethanol and others showed promise in the past, but none significantly shifted the mix.
What’s the hold up?
For one, logic said that when prices went up, consumers’ choices would change. But prices didn’t go up consistently — they fluctuated, so people forgot how cheap energy used to be even though prices dropped back down to previous levels.
For instance, when gasoline prices surged past $3 rising rapidly from $1.50, people were rushing to get rid of their gas-guzzlers and buying more efficient cars. When prices dropped — only to $2.50 — people went back to buying big cars despite the price being 65 percent higher than they had been. But compared to $3, that $2.50 seemed cheap.
In the 1990s, it looked like some new technologies would take hold because of a shift in the economics of large energy facilities. In the past, bigger was better because bigger was cheaper. It looked like that rule of thumb was changing and that bigger wasn’t always cheaper — but it didn’t happen fast enough.
Finally, there was still enough oil and gas around and siting new facilities wasn’t too hard — so nothing really changed.
Signs point in the right direction
Can new technologies break away from niche markets, and not be dependent on government subsidies?
|Commodity Metals Price Index. View the full-size chart. Source: Index Mundi
If so, the cost of electricity and maintaining utilities will need to continue to rise, while costs for conventional renewable technologies must continue to fall. This looks promising.
Regardless of the price of natural gas, the costs of maintaining current electric utilities will continue to climb. To maintain and modernize the electricity infrastructure, utilities need to build, replace and maintain equipment. This depends on key commodities like copper and steel, among others, all of which have risen substantially over the last decade driven by demand from China, India and Brazil, among others. Even though prices have slumped recently, they are still 5 times higher than they were in 2003.
In addition, cement prices in the U.S. rose 10 percent a year from 2005-2007. Even while prices slumped with the recession, they only fell 2.8 percent a year, so the net is substantially higher than just eight years ago. To simply maintain and upgrade the existing infrastructure is going to cost more and put upward pressure on electricity prices.
While rising electricity prices will help create a market for technologies that improve efficiency and bring down the cost of infrastructure, prices alone won’t be enough. New technologies and practices that can disrupt these markets are needed.
“If the electricity goes out, we’ll all be watching television by candlelight.
There are signs of progress on that front as well with new and innovative technologies generated by a different set of players than before. In the past, new technologies were driven by very clever engineers. These days, those engineers are working with innovators from a whole new set of disciplines — biologists, nanotechnologists and chemists — to information technology experts to name a few. And all these groups are working with behavioral scientists, economists and entrepreneurs to build new approaches and uses for technologies.
It’s no longer about building transmission lines and power plants and delivering electricity to consumers. It’s finding new ways to generate and use electricity efficiently together, packaged with innovative financing and connected to new partnerships between utilities, governments, companies and non-profits.
This is what will ultimately transform the market and move it from business as usual to an electric system that is more reliable, dynamic, efficient and cleaner than today’s.
If this doesn’t happen, get ready for higher prices and less reliability. To paraphrase a George Gobel quote — if the electricity goes out, we’ll all be watching television by candlelight.