This winter, Citibank Research issued a report in which it concluded the utility industry is a dinosaur waiting to die.
It is not the first report in the past year to warn of the demise of the utility industry; most of these blame what has been labeled a "disruptive technology" – distributed generation. Within this disruption, rooftop solar, the solar leasing model, net metering and cost-shifts have emerged as the critical issues.
State regulators have been given the task of balancing the interests of the utility industry and the interests of consumers, ensuring that options are affordable, reliable and diverse. It is their job to fashion solutions that are in the best interest of society, taking into account the costs, who should bear them, environmental impacts and how to allow for innovation.
For the most part the process in Arizona is addressing these issues (albeit slowly) with one possible exception – the lack of innovation and change to the utility business model – which in turn is generating commentary like “death spiral” and “dinosaurs waiting to die.”
Stanford University Professor Tony Saba has coined the following phrase to describe the lack of attention to the utility business model: “Choosing to wait is choosing to be disrupted.”
Saba cites Kodak’s experience with digital imaging as an example of what can happen when an industry leader chooses to dismiss business model innovation in favor of maintaining the status quo.
Kodak invented the mega-pixel camera in 1986, created the Photo CD in 1990 and released the first digital camera in 1991. Kodak even invested $5 billion in digital imaging R&D. They knew that digital imaging was poised to dominate the industry, even going so far as to forecast a $225 billion market potential.
Nonetheless, despite being out-in-front of the technology, when it came to their business model Kodak chose to wait, trying to force digital imaging into their already existing model of making money each time a photo was snapped.
In the end, Kodak got left behind. But why? They knew what was coming with regard to the technology – in fact, they even pioneered it. Yet they failed to make the appropriate adjustments to their business model.
It is a question our regulators should be asking electric utilities: Do they think they can catch up after losing valuable time futilely trying to reshape the solar industry into their one-size-fits-all business model of central plants and distribution wires?
If so, maybe they should take a closer look at what happened to Kodak. With the advent of digital photography, photographs became free and overnight the film production and developing industries were wiped out. This is the disruption that Citibank and others warn about – solar electricity, like digital imaging, is free once you purchase/install the equipment. And you can’t compete with free.
Is it possible that utilities can catch up and become players in the new solar electron marketplace that is being dominated by upstart tech-savvy companies that didn’t even exist six years ago? Not hardly.
Here's the problem – the rate of solar adoption is rapidly accelerating. Between 2008 and 2012 the rate of acceleration quadrupled. Between 2012 and 2014 the acceleration increased even more.
Solar adoption is not going to slow down and it is not going to wait.
Solar has achieved grid parity in many places and that is contributing to the acceleration, driving prices down even further and making it more economical for utility customers to invest in solar.
A similar market acceleration scenario is what prevented Kodak from catching up. It is a lesson people like Professor Saba believe is repeating itself with solar.
Kodak ignored the first wave of disruption when Flickr came along. Then came Facebook with its electronic/internet photo album. Facebook quickly became the world’s largest photo company. Then came Instagram, which went from zero valuation to a billion dollar company overnight. Now, out of nowhere, comes Snapchat – and overnight it has become the second largest digital imaging company on the planet.
Professor Saba calls these innovations -- waves of disruption. One wave after the next wave, after the next wave. If you aren't part of the first wave, Saba puts the likelihood of catching up at somewhere between really difficult to "Good luck with that!"
Same thing happened in the computer industry. It took 20 years to reach 40 million PCs, 12 years to reach 50 million laptops, seven years to reach 50 million smartphones, and only two years to reach 50 million tablets. These are waves of disruption, and each is ever shorter than the previous one as adoption rates accelerate.
And that is why Kodak could not catch up. The architecture of change – be it the digital camera, the internet or cell phones – has been to transform from a top-heavy, centralized system to one where anybody can generate, sell, use and transmit data.
The energy market today is like data was in 1980 – a transformation is underway in the way electricity is produced, stored, transmitted and used. Choosing to wait to innovate is choosing to be disrupted.
Arizona Solar Center
Question: Should state regulators require changes to the utility business model? How can regulators influence the evolution of the utility business model? How do state regulators manage this discussion while balancing the interests of the utility industry and consumers?