This is the first in a series of posts discussing the severe cross currents in, and the future of, the electric industry.
Past cost structures created our current electric industry organization. We use central station generation and a large network of transmission and distribution to deliver power to ultimate consumers. Technological change assaults this paradigm with new cost structures.
New ways of generating, storing, and minimizing the use of electricity creates opportunities for many new businesses. Most of these businesses will fail, but when just a few of them succeed, the industry will not be the same. Despite legal and regulatory bulwarks built by incumbent companies, new cost structures will drive electric industry structure, just as has happened in telecommunications where landlines are vanishing.
The ultimate test for any new cost structure is total cost at the point of use. If it is cheaper to save a kilowatt-hour then it is to buy it, consumers will save instead of buy. If it is cheaper to generate, or generate and store, kilowatt-hours at the point of use than to buy them from someone else, consumers will do that instead.
As it turns out, costs are falling for technology for generating at the point of use, storing electricity, and minimizing use. At the same time, equipment replacement and new capabilities are increasing the unit prices for most parts of the existing paradigm. Will new approaches become cheap enough to upend our current industry structure?
Future posts will look at the prospects of each of the main functional areas: generation, transmission and distribution, and electric demand. For now, though, let’s list some of the items that create the cross currents:
- Central station generation continues to be capital intensive and expensive, especially as climate change and concern with nuclear safety raises costs.
- Transmission and distribution (T&D) already makeup over half of the ultimate customer’s bill and with smart grid and scheduled T&D upgrades these costs will increase significantly.
- Falling costs of solar cells and increasing efficiency has made them competitive with grid power now in sunny locations.
- Huge investments in battery technology promise relatively cheap electric storage in the future.
- New products are increasingly energy efficient; they use less electricity to produce the same amount of output.
- The only significant new source of electricity demand on the horizon is electric vehicles.
Coming Up: Generation Incumbents