To Understand The Future Of The Utility, Look To its Past.
Ma Bess (not real name) ran a railroad motel in the late 1800's. She had mules to fetch the water for the hotel to salve the thirst of train drivers. The driver’s preferred not to travel at night for fear of robbers. At Ma Bess’ they got water to drink, a hot meal and candles to light their rooms. As her great grandson Chuck (also not real name) told me, the candle was a bit of an inconvenience to the train drivers who already had generators lighting the dinner cabins on their trains. One of the drivers fancied Ma Bess and decided to steal and offer her the generator from his train. He wasn’t bothered, the train company would replace it. All he hoped for was that this gallant act would win her heart. Unfortunately, it didn’t. But it did ensure that every other train driver who lodged at her hotel had lightbulbs in their rooms. Ma Bess’ became a popular rest stop for many train drivers…
She was a handy lady — she’d lost her husband to a freak accident — and soon rigged the generator to power her water system, which until this point was powered by a small windmill. Since there was no real grid to connect to she had developed her own self-sustaining nano-grid.
Then Samuel Insull got into the business.
Insull was the father of making ‘Ma Bess’ self-sustaining electricity rig-up’ into a commercial business worthy of the industrial era the world, and especially the US, was coming into in the late 1800’s/early 1900's. Edison might have built the power generation elements of the industry but it was Samuel Insull, Edison’s secretary for a time, who turned it into a major industry.
Insull had moved to Chicago in 1892 and became the head of a power station, one of only 20 that served 5000 customers, in a city of one million.
Before Insull, only the rich had utility-delivered power in their homes. One of those people was JP Morgan (that should give you a sense for how wealthy you had to be to get electricity flowing into your home) and the utilities were losing money. Folk knew electricity was something they wanted but not everyone could afford (or define a fair price for) that electricity. Insull, the savvy business man that he was, needed a lot of consumers to use electricity at all times to make his business profitable. He promptly went about
- consolidating and buying up the other power stations, effectively forming the first large scale utility. Insull recognized the economies of scale he could get by owning more factors of generation.
- advocating and advising the government on how to manage monopolistic structures in the industry, of which his company was the main one. This coincided with the period when governments believed that some industries were ‘natural monopolies’ so this played right into the hands of Insull. This relationship between utilities and the government for the most part still exists today.
- focusing on wiring homes cheaply and selling appliances/devices to consumers to ensure that, once they got the electricity he was supplying to them, they were sure to use a lot of it. This business model should sound familiar if you read my last post on how the utility industry is trying to figure out a new business model. Hint to the utility: it won’t be by selling us more products.
By the time Insull was done with his plan in the 1920’s, he served ~4M customers in 32 states and his company was worth $3Bn (or $37.5Bn in 2016). To finance all this he sold bonds and stocks. Then the great depression hit. Insull’s businesses began to suffer as customers (commercial and residential) could not afford to use or pay for as much electricity anymore. It wrecked his business.
Insull’s hubris came from his expectation that customers would use, and keep using electricity. Until customers stopped using electricity like the utility expected them to. This is pretty similar to the current state of the industry, as the utility business model was premised on a static understanding of the customer. In Insull’s time the shock to the system came in the form of the Great Depression. In more recent times the shock to the system, which has moved the early adopters off the grid, also coincided with
- the Depression of 2008 (as deregulation started to take hold in a bunch of states) and
- disasters that shook consumers and showed that their power could actually go ‘off’ at scale and the utility could do nothing about it.
Nothing is more disruptive to our mental models and expectations of a steady system than a catastrophic disruption to that system.
In ‘The Grid’ (a fascinating book by Gretchen Bakke), she talks about the consumers who moved off-grid after hurricanes, blackouts. She shares about how hurricanes and other disasters have exposed how vulnerable we all are to an electric grid that is fraying at the seams (in infrastructure terms) and struggling to keep up with our demands as more informed and demanding consumers (in business model terms). Nowhere is this more apparent than in markets where the grid system never really provided what consumers needed. I’m referencing utilities in countries, especially in sub-Saharan Africa, where the generation capacity has never actually matched the demand of the consumers. In these markets the consumers, residential and commercial, are taking things into their own hands building their own Nanogrids.
There was no loyalty to a monopolistic utility in the first place so the split was easy. It’s now happening at scale in the US, the loyalty (if it ever existed) is gone… and similar to Ma Bess it’s commercial entities that are choosing to take themselves off the grid or create their own grids first. Amazon announced a deal with a 253 MW wind turbine development deal (think of it as three average sized power plants) with Lincoln Clean Energy just yesterday. That’s one more company, amongst the hundreds in the past year, that has chosen to move a lot of it’s demand off the traditional grid.
The natural progression here is clear; more residential consumers will start to push for power for their homes, closer to their homes, to retake control. It will play out in the sorts of devices we buy (hopefully not flogged to us by the utility) that turn our homes into nanogrids (single points of consumption and generation). Because what we truly want is not exactly the electricity that comes through the wires but the convenience we get from using the electricity to shorten the dark hours, make & enjoy a hot meal and heat our water to take a hot bath after a long day. Not a system of wires and lines controlled by some entity that is more concerned about stockholders than the consumers who help them keep stockholders happy.
It turns out we have a lot more in common with Ma Bess than our utilities understand…
It also turns out that the utilities might have a lot more in common with Samuel Insull than they realize. Insull didn’t believe that the market would change so dramatically around him, he didn’t consider adapting quickly to a changed landscape. He ended up bankrupt by the time of his death.
I guess we already know the fate of some of our utilities…
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I’ll be giving a talk on this at SXSW Eco on Oct 11th. Say hello if you make it!
