Creative Destruction: Solar Wars
Can we compare the original AT&T and the electric power industry?
Until 1982, AT&T had a phone system monopoly. Not even imagined, cell phones did not exist. Instead almost everyone received phone service from one company. Called a natural monopoly, AT&T was national and local. It installed the wires and provided the telephones. It did the research through Bell Labs and the practical stuff through the phone companies. True for almost a century, its scale was cost effective and eliminated the need for duplication.
Then, Ma Bell was replaced by new technology, a process that economist Joseph Schumpeter called creative destruction. Once cell towers were invented and service could be provided without duplicated telephone lines, the reason for AT&T’s existence crumbled. Eventually government agreed and broke up the monopoly.
Some people are asking now whether electric utilities are undergoing the same phenomenon. Some say yes while others say it is different.
Those who say yes point out the fragmentation in the industry. New technology has enabled residential and commercial customers to become their own energy providers. In states like California, solar panel purchases and leases are increasing. Across the country, firms like Kroger, Apple, Google and Wal-Mart are partially leaving the national grid and installing their own alternatives. Many use solar panels; others have installed generators and harnessed waste recycling.
Just like the beginning of the end of AT&T, the net result is the same. Individually, we are using less of the energy generated by the big utilities.
The difference though is federal and state subsidies. Rather than the market challenging the status quo through cheaper and more convenient alternatives, government is creating the incentives. The Energy Act of 2005 mandated, for example, net metering whereby electric companies have to give consumers credits for unused energy that they create from their own systems if those consumers request them.
Utilities have said the government assistance places them in a “death spiral.” If their consumer base shrinks, then they have to charge existing customers more. The higher rates then make alternative energy even more attractive and those consumers also flee. And yet, unlike the AT&T scenario, most of us believe we need a national electrical grid.
So you can see the dilemma…
Should government create the incentives for cleaner energy?
Should the market decide the pace and extent of alternative energy usage?
Whatever the answer, for now, we will have what might be called “solar wars.”
Sources and resources: There is an abundance of articles that provide insight about the challenges facing electric utilities and the future of power generation. This blog talks about the monopoly issues, The NY Times, here, and WSJ.com look at the growth of solar (gated) and increasing fragmentation, here. More biased but full of detail, this article presented the utility industry position.