This article is a follow up to “A Faster Horse,” in which I briefly discussed the origin of investor-owned utilities (IOUs). In that article I referred to five characteristics of natural monopolies and in this fourth of five follow-up articles, we take a brief look at another of those characteristics and the impact of current technology developments on it. In this article I focus on another key aspect of natural monopolies — their necessity and the necessity of what they provide.
Natural monopolies are usually associated with the provision of products or services that are considered necessities and generally acknowledged as essential for the community. There is absolutely no doubt that electricity falls into this category. Modern lifestyles and the information technology that support them depend on not only a reliable supply of electricity but also on increasingly higher and higher power quality requirements.
Nell Scovell said that if necessity is the mother of invention, urgency is the uncle of change. Without it, progress slows, then stops, and then reverses. Of course, necessity as the mother of invention refers to the need for innovation and this is something that is not especially valued under the cost of service regulation structure. Electricity may be a necessity but the urgency for change has not been strong. While the industry has continually evolved since its origins, resulting in a much more interconnected system with more monitoring and competitive markets, natural monopolies are not incentivized to innovate. The focus for electricity has been on safety and reliability/adequacy, hence the unbundling of generation in some states but not the core distribution businesses.
When something is as important to our lives as electricity, and we have proven methods for generating and delivering it, why would we need to change? Add to this the heavy level of capitalization described in a previous article and the long, multi-decade life of most assets. With these factors, the innovation cycle tends to move slowly. Yet over the last couple of decades, technology has been advancing in many areas that impact the way we all interact with the grid and how we use electricity, including our ability to generate economic power at home and to store that power.
So, in a world where we are more dependent than ever on electricity and where we are told that there are no stupid questions, today’s stupid question is: does grid modernization make electricity less of a necessity or less essential to the community from a natural monopoly perspective? The answer is not as straightforward as it might seem. Yes, we are more dependent than ever on electricity, but we are also less dependent on the utility as the source of that power.
A better question might be: do the changes we are seeing on the grid and behind the meter reduce the necessity of products and services currently provided by natural monopolists — that is, utilities? Let’s not forget that it’s not just the power we are buying, it’s also stable frequency, regulated voltage levels, and reliable supply to name a few. Grid modernization — involving renewable energy and distributed energy resources (DERs) including storage and flexible loads — will not make electricity less vital to our way of life. It can also help us look at how and why we use electricity, and to separate the necessary use from the luxury use. It also can help us examine the opportunity cost of the next kilowatt-hour or of running the pool pump for an extra hour, or of leaving outside lights on all night, or in deciding when to charge our electric vehicles (EVs).
Some, if not most, electricity use is necessary and here the demand curve is inelastic. However, some can be considered a luxury where there is some elasticity of demand. There may not be much elasticity when it comes to business-critical operations but advance planning and incidental use adjustments create some flexibility. Whether using an Xbox is considered flexible or not depends on who you ask — in my household, at least. In short, I believe that our dependence as a society on the power provided by utilities is lower than it has ever been but is still absolutely necessary. So, while this element of a natural monopoly has been minimally eroded, it still exists and is still strong.
Increasing deployment of DERs and behind-the-meter photovoltaic (PV) will continue to statistically reduce the dependence on utilities. However, even those net-zero buildings still rely on the grid. As we see increased electrification of transportation, agriculture, cooking, and many other areas of our lives, we may well see an increased role for centrally generated power or large scale renewables (for example, offshore wind) that need utility infrastructure to distribute the electricity to our homes.
Today we face a time when electricity is more necessary than ever, when we are less dependent on utilities to provide that power, and yet when we need utility infrastructure more than ever to help the integration of renewables and DERs. It’s not an easy job being a utility today, so let’s thank all of our utilities for the work they do.