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The Innovator's Dilemma

Assessing the risks and rewards of distributed energy strategies.

Fortnightly Magazine - February 2014
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There’s an understandable feeling among utility executives that the longstanding regulatory compact under which they’ve operated is at significant risk. For years, the deal seemed straightforward: you invested in necessary infrastructure, you operated cost-effectively and reliably, and your investment yielded reasonable rates of return. Today, the regulatory and political situation for electric power has become increasingly volatile. 

Facing the seemingly imminent arrival of large-scale distributed energy resources (DER), utilities are concerned. Regulatory rulings that support consumers bypassing the electric system, but remaining connected to it at no charge for failsafe back up, pose profound economic and regulatory consequences. Potentially disruptive innovation is underway in the global utility market in distributed energy resources, including energy storage, distributed PV, microgrids, demand response, efficiency, and load management, among others.

Utility executives are discussing with regulators the reality that this innovation in DER poses significant business and technical issues, including the effects of cost shifting between rate classes and consumer segments. Distributed solar PV is growing rapidly. But if the interconnection, net metering, and other rules to allocate costs and set rates aren’t handled carefully, the people who will take the brunt of the hit are consumers whose economics don’t allow them to install their own generation. Utility executives share concerns that if load dwindles and DER penetration grows, it could produce, in a worst-case scenario, a self-fulfilling collapse of the electrical system and the current mechanisms that support it. 

Somewhat uncharacteristically, utility executives are talking very openly about this, and the issue is a hot topic in boardrooms and regulatory forums. Are DERs really a mortal threat to traditional utility business and regulatory models, or is the so-called “death spiral” threat being overplayed? 

The answer will lie in the utility strategy roadmap that executives and regulators will embrace. The journey ahead must include portfolio strategy that takes advantage of the benefits of DERs, while avoiding the pitfalls inherent to particular local conditions or hindered by longstanding (and potentially outmoded) approaches to meeting consumer needs. 

Creative Destruction

It might seem obvious, but it bears stating that each utility and its regulator must tailor an approach to DER to reflect local resources, needs, and circumstances. There are benefits and risks across the adoption life-cycle curve and they must be aligned with current customer conditions, resources, and regulatory frameworks. These localized solutions also must take into account the ability of the infrastructure to effectively absorb this innovation.

In his book The Innovator’s Dilemma , Clayton Christensen describes the pitfalls created when companies focus too narrowly on the near-term needs of customers while failing to embrace new technologies and business models that will proactively address changing customer needs in the future. The global electric utility industry – and by extension the governments and regulators charged with ensuring it meets the needs of stakeholders in the future – face a profound innovator’s dilemma today. 

It’s one thing for Steve Jobs to knowingly and creatively destroy

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