Electricity: the Next Generation

Transcription

1 Electricity: the Next Generation New Strategies for a New Era John Caldwell Director of Economics The Edison Electric Institute

2 Why is the Current Electricity Model Under Siege?

3 A Walk in the Clouds Some General Theories on Business Strategy Michael Porter: What is Strategy? Clayton Christensen: Disruptive Innovation Peter Thiel: Creative Monopoly Pamela Morgan: Find the Next S-Curve

4 Michael Porter on Strategy Operational Effectiveness: Performing similar activities better than rivals perform them. Strategic Positioning: Performing different activities from rivals or performing similar activities in different ways. Constant improvement in operational effectiveness is necessary but not usually sufficient to achieve superior profitability. A company can outperform rivals only if it can establish a difference that it can preserve. From Michael E. Porter, What is Strategy?, Harvard Business Review, Nov.-Dec. 1996

5 Clayton Christensen and Disruptive Innovation Disruptive Innovation: a new development (generally technological) that helps create a new market and value network, while eventually challenging an existing one by displacing an earlier technology Non-threatening A disruptive innovation is often regarded as inferior by an incumbent and/or appealing to customers in the incumbent s market that are of marginal importance Examples: Steamships, the telephone, digital watches, steel mini-mills, Google, digital cameras, MP3s The Solution? Sustaining Innovation (by incumbent), e.g., Miller Lite, HP inkjet printers, Amazon Kindle From Clayton Christensen, The Innovator s Dilemma, 1997

6 Having the Right Stuff for Success Peter Thiel and the Creative Monopolist Peter Thiel (founder of PayPal): the Most Successful Businesses are not Great Competitors, but Great (Creative) Monopolists Four Qualities of a Creative Monopolist: Branding Scale Advantages Network Effects Innovation / Proprietary Technologies 6

7 Finding the Next S-Curve Pamela Morgan and Product/Service Redefinition Product Saturation Could Result in the Death of Earnings Growth, or the Downfall of an Entire Product Line The Solution to Saturation is to Create a New S-Curve, by Taking a Systems View of What It Is That Can be Offered The S-Curve is a Common Growth Trajectory in Both Nature and Business From Pamela Morgan, From VHS to DVD: Need for a New Business Model for the Electricity Industry in the 21 st Century, Electricity Policy, Sep. 21, 2010

8 But... Where Do the Earnings Come From??? Providing a Product or Service Providing a Meta- Product or Service The Value Diamond Delivering a Product or Service Providing and Delivering a Product or Service

9 The Channel What is a Channel? A conduit between a product provider and the provider s customer. Product Provider Customer USPS, Internet, Phone Delivery Payment Product information / Advertising Customer Service Store, Internet, Phone USPS, UPS, Store USPS, Internet, Television

10 Channel ABC s Having the Best Sales/Service Channel is Critical Access: Who has access to the channel? Does it come at a cost? Bypass: Are there alternatives to this channel? Can one be created? Control: Who has power over the channel? Can it be challenged?

11 Channeling Success Effective channeling strategies depend upon whether you are the gatekeeper, the product provider, or both. Strategy Gatekeeper Product Provider Maintain exclusive access for one s own products and services Provide unlimited fee-based access X X Find or create alternative, lower cost and/or more effective channel than that used by competitors (disintermediation) Use threat of bypass to negotiate lower channel fees Bundle multiple channel services, or channel/product combinations X X X Both X X

12 When Does a Channel Become a Network? Channel Uni- or Bi-Directional Well-Defined Compensation for Delivery Profitability comes from controlling transactions Network Multi-Directional Fluid / Organic Compensation for Intermediation Profitability comes from facilitating transactions

13 Social/Economic Network Example: 15 th -Century Florentine Marriages Source: Padgett, J.F., and C.K. Ansell (1993) Robust Action and the Rise of the Medici, , American Journal of Sociology 98:

14 Customers A Modern Economic Network: Amazon.com Retail Book Sellers Book Publishers Amazon.com Other Manufactured Goods Internet sales/purchases Purchase suggestions Links to other sites Customer Ratings/Rankings Kindle

15 Utility Business Models Will Be Driven by the Network Control Access Bypass Hardened Grid Cost-Based Open Access Subsidized Open Access Post- Modern Grid Central station paradigm maintained Investments in reliability Minor inroads by 3 rd party providers Full cost recovery limits risk Proliferation of 3 rd party services Must find new earnings platforms Utility relegated to provider of last resort Reinvention required Passive Consumer Active Prosumer Centralized Decentralized Multiple Networks

16 A Little Bit of Heresy What if existing electric regulatory and business models should not be changed?

17 Sales (Tcf) Margins (Billions) Gas Margins Increased While Sales Declined U.S. Natural Gas Sales and Margins: Source: Energy Information Administration (Adjusted for Normal Weather by EEI)

18 The Natural Gas Paradox A Closer Look An analysis of 25 natural gas utilities Period examined was Observations Sales volume grew by only 0.4% per year Net utility plant increased 5.7% per year Gross margins increased 3.1% per year Net income increased 6.2% per year Conclusions Infrastructure replacements/upgrades are supporting continued margin growth General productivity improvements are resulting in earnings growth margin growth Could electric utilities adopt the same strategy?

19 From Channel (Business-As-Usual) to Network: What Roles Can the Utility Play? The Market Enabler manages decentralized energy sources on the grid, acting as a hub between customers, the utility, and bulk power markets. The Solution Integrator provides custom energy solutions involving customers asset development, natural gas supply, energy information services, and energy retrofits. The DG Asset Developer focuses on developing and/or owning distributed generation on the customer side of the meter. From Paul De Martini, Eric Ackerman, and John Caldwell, Utility DG Business Opportunities, unpublished EEI manuscript, 2014

20 The Post-Modern Grid What Could Bring About This Future for Utilities? Cyber-security concerns: greater complexity and/or integration lead to greater vulnerability Customer and state regulatory resistance to costs for investing in a smart grid, or even in grid hardening Growing public exasperation with extended outages may lead to search for alternatives to traditional electricity supply Poor customer relations may lead to search for white knight Institutional electricity users (e.g., government facilities) already exploring adoption of microgrids Innovation by new market entrants may produce viable models that bypass conventional electricity supply and/or delivery entirely

21 What Might Our Bypass Threat Look Like? 54-year-old man slashes electric bill by 75% using this 1 strange trick. Actual internet ad appearing on certain popular websites.

22 General Conclusions Three (Not Necessarily Exclusive) Outcomes 1. Traditional Grid 2. Transactive, Decentralized Network 3. Post-Modern Grid Rx for Success 1. Customer Focus: Positive Branding and Anticipation of Evolving Tastes and Preferences 2. Innovation: Adoption of Innovations that Will Promote Cleaner Energy and Better Reliability 3. Proactive Regulatory Strategy: Fair and Timely Recovery of Costs; Level Playing Field 4. Never Be Complacent!!!

23 Thank You! Questions? John Caldwell