Positive returns in the power industry that existed under vertical integration are now gone. New positive returns will come from business model innovations of retailers’ enterprise solutions to be developed under strong competition.
Positive Returns under EWPC
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
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Dear Prof. Banks,
Thank you for pointing out clearly where you understand the positive returns are in the power industry. I contend that the most important positive returns in the power industry were to be found in power systems interconnections, but they are no longer available.
Under vertical integration, which has demand as an externality, incremental costs decreased up to around 1970. From there on, an unstable period initiated in which incremental costs increased and sometime decreased. That is why Sweden’s old days of low costs and high reliability were to go away and went away, as it happened all over the world. I agree, however, things got away further than necessary for the worst, when the economy first, reliability second, movement got underway.
As incremental costs are no longer decreasing permanently, increasing returns in power systems (the combination of generation and transmission) can’t be guarantee either. Hence, positive returns have been lost in the vertically integrated industry since 1970.
EWPC restructuring brings positive returns to the power industry in the open market with demand integration at the retail level by the large reductions expected in transactions incremental costs under (information technology) Moore’s law, while the regulated transportation market assures a reliability first priority policy for a stable environment. Therefore, the positive returns come by letting the information revolution penetrate the industry.
Instead of state or EU country level regulated first generation retailers, the open market should allow horizontal integration of second generation retailers, at the federal level, in the U.S.; at the EU level, in Europe; and hopefully at the global level, all under federal, EU, and WTO, prudential regulation disciplines, respectively. The positive returns will be the result of software development on business model innovations of retailers’ enterprise solutions, as explained in The Future of the Power Industry in 2006, which I transcribe below:
Repeating the GMH Post The Future of the Power Industry in 2006,
The Future Utility Customer Service Model, by Jamie Wimberly, CEO, Distributed Energy Financial Group and Peter Shaw, Director of Customer Strategy, Navigant Consulting, is at the center of a generative dialogue. The article is in synchronicity with my suggestion to Let's Get Out of Back Rooms to a Generative Dialogue, being a welcome contribution to the future of the electric power sector as a whole.
Since I wrote An Alternative Business Case for Demand Response [two years ago today] as a rebuttal to The Business Case for Demand Response, which Jamie co-authored with Thomas Brunetto, Managing Director, Distributed Energy Financial Group, I have added many comments on EnergyPulse about an emerging End-State of the utility industry.
The reason that “Customers are demanding more information and control over their usage,” as the authors state, is that they want to reduce their energy costs, or, better yet, to increase the value that electricity enable for them.
Almost a [now two] year ago, under the article Strategic Perspectives on Utility Enterprise Solutions, by Warren Causey, Vice President, Sierra Energy Group, I said:
Deloitte Research made a Scenarios Study and found that the "Continuity" scenario is what is expected by most companies in the next 5 years. However, Deloitte also found out that the next five years might turn out very different from the strategic plans of many companies (read utilities). The result is a very different perspective on the interdependencies of markets and Enterprise Solutions.
On one, or both, of the other two scenarios ("Tough Times" or "Rising Expectations"), instead of Utilities Enterprise Solutions, a Retailers Enterprise Solutions arrives, which will make much more business for IT suppliers than expected under the Continuity Scenario. The main reason is that current business models are at the end of there useful life, while new technology is available to be transformed into competing innovative business models, leading to true deregulation [now re-regulation] of electric markets.
What the authors are calling the “incremental change scenario,” is the same as the “continuity scenario.” However, I see a lot of progress has occurred in just one year, with the insights added by Mr. Wimberly and Mr. Shaw.
While the authors are proposing to adopt an analytical approach, I am proposing a systemic approach that goes beyond trends – pattern of behavior, “responsive” explanations, as Peter Senge calls them – to generative or “structural” explanations for the discovery of the emerging system. The change is going from a mechanistic thinking to systemic thinking.
Please join the generative dialogue, that cuts across topics, which had the latest (not lasted) insight on the EnergyPulse article: Condemned to the Fourth Quartile? by Matt Chwalowski, Principal Consultant, PA Consulting. Posted on 12.9.06. At this instance out of "Active Discussion" and out of "Highly Read." The post starts as follows:
I think I found by myself, on the website of the PA Consulting Group, the answer to my question: “Should Electricity Without Price Controls (EWPC) be considered as a new paradigm of the electricity industry?”... [see the details please in the specific article]