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Electric Utility Innovation 22 November 2004 Electric utilities were once one of the most conservative of sectors. Now, however, the industry is facing major changes, both in its ownership structures and in its technologies. Consider a few examples:
Ø Financial companies are becoming the new power generators. These companies have been buying power plants wholesale from electric utilities. According to estimates by Platts Global Power Report published in Business Week, over the past 20 months financial firms have announced or closed deals for power plants worth nearly $15 billion. Goldman Sachs alone has spent $4 billion over the last year buying 30 power plants stretching from N. Carolina to Minnesota.
Future Owner: Goldman Sachs?
The financiers figure that their knowledge of commodity markets will enable them to buy fuel, like coal and oil, at lower prices than the utilities. At the same time, what they learn about power demand from the power plants will enable them to trade commodities better as well.
Ø Electric utilities may be the best internet service providers yet. In mid-October, the FCC endorsed BPL, which stands for “broadband over power lines.” It turns out that sending data over power lines is eminently feasible – in fact the utilities have been doing it on a limited basis for years.
The famous “last mile” problem may be solved by the electric wires already in virtually all US homes. Within the next several years, we can expect many homes to have a choice of three broadband providers – cable companies, telephone companies, and electric utilities.
The new frontier for high speed internet access
All of this change represents a significant challenge for the senior management of public utilities. From 1930 to the mid 1980s, electric utilities were steady businesses that had been under extensive price and service regulation. They were designed to earn a specific rate of return on capital and to provide highly reliable power to a city or region. The stability and predictability of the business was one of the attractive features for many utility executives.
In the early 1990s, as the industry de-regulated, a number of utilities became involved in energy trading. The whole industry was significantly affected by Enron’s bankruptcy. For many utility executives, this was their first taste of economic dynamism, and it was extremely unpleasant and costly.
Now, according to a recent report by UK consultancy Innovaro, most electric utilities have gone back to the basics. As Innovaro consultant David Coates noted:
“In a highly regulated industry under considerable pressure to control costs … there has been little incentive to direct technical resources to anything but developments that lead to cost savings.”
Most utilities have eliminated any R&D functions in their companies, relying instead on industry associations like the Edison Electric Power Institute in the US or QinetiQ in the UK.
While the focus on cost reduction is understandable, it may not be in the best interests of the companies, their shareholders, or their customers. Because of advances in both electrical and management technologies, companies in the electric utility industry have no choice but to become more innovative.
The Innovaro report highlights some successes in consumer-focused innovation among utilities. Consider the example of Centrica, a £17 billion electric, gas, and telephone utility. David Coates of Innovaro noted:
By developing strong, recognizable brands, Centrica is successfully selling an increasingly wide range of service to residential customers throughout the UK. Electricity, gas … and telephony … are being offered in bundles with other home services such as home security, plumbing, domestic insurance and financial services.
Can you imagine getting plumbing services from your electric utility? Perhaps someday soon ….
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