The retail market for gas and electric utilities consists of two linked but quite distinct markets and businesses: utility energy and customer energy. The former is low organic growth especially in the Northeast, Midwest and Great Plains, with the threat of margin compression. Geographic consolidation to extract efficiency gains appears to be the model here. The latter is high organic growth with the opportunity for margin expansion. Customers that need integration to extract innovation gains appears to be the model here.
Very few utilities differentiate between “utility” energy and “customer” energy but an increasing number of customers make and act upon this distinction. A generation ago, this distinction was nascent. Today, it is substantial.
Utility energy is also referred to as diffused or diluted energy and, by definition, must conform to the lowest common denominator of customer needs, i.e., it is the equivalent of an ordinary phone call carrying voices in a telecommunications context or a basic checking account in a financial context. Customer energy is also referred to as concentrated or focused energy applied to specific needs and functions.
Utility energy is delivered to the customer meter via the utility distribution system while customer energy is reshaped (i.e., focused or concentrated to a much higher degree of purity) and redistributed within a customer premise by a customer energy system or customer energy infrastructure that is often invisible to the utility. The utility provides “fuel” (piped gas and grid electricity). The customer transforms it into “energy.”
Customer Energy: A Large and Different Business
Increasingly, the customer values and must have energy precision and control that is impossible with the utility energy or “fuel.” Therefore, the customer must invest in and pay for an energy infrastructure in premise. This infrastructure is quite separate in technology, function and origin from the utility’s infrastructure.
Advances in consumer or user domiciled technologies invariably have two consequences. The first is efficiency which reduces the energy intensity of current uses (e.g., space and water heating and cooling, refrigeration, food processing, manufacturing, illumination). The second is innovation which creates new uses which increases total final energy consumption (e.g., always on digital appliances and devices, remote monitoring and management, new lighting applications, multiple specialized kitchen and entertainment appliances, automated landscape and water feature systems, telemedicine).
In every industry, technology-driven efficiency has compressed margins and lowered costs of current uses while technology-driven innovation has created entirely new profit opportunities, margins and uses. This is true in healthcare, financial services, retailing, telecommunications and home appliances. It is becoming increasingly true in the energy retailing industry.
The energy density (energy divided by surface area) of customer technologies keeps increasing generation after generation, decade after decade and now, year after year. The trend is accelerating. The greater the energy or power density, the higher the per unit price of customer energy but the higher the power density the more uses customers find for applications that use dense energy.
Even as the price per unit of customer energy rises, the demand for this kind of energy increases. This is counterintuitive but true. The value of this energy for customers escalates far more rapidly than its price. It is in stark contrast with utility energy or “fuel” whose value does not escalate as prices go up. The value of fuels for space and water heating and cooling or cooking or industrial processes (i.e., industrial cooking) is not really greater than it was a generation ago or a decade ago or two years ago. Customer energy becomes more valuable each year but utility energy does not. When it comes to utility energy, customers want to use less; when it comes to customer energy, customers want to use more. Customers invest in efficiency to use less utility energy but in innovation to use more customer energy.
Clearly, the demand for energy is not a function of its price per unit of raw heat but its price per unit of relevance (precision and control) to customer needs. This is, of course, why electricity is more valuable to customers than oil or gas even though electricity per unit of heat is much more expensive and why oil and gas and uranium are more valuable than coal or wood even though per unit of heat coal and wood are much cheaper. This is also why electricity is increasingly the retail “fuel” of choice since only electricity is directly usable in an economy increasingly driven by digital technologies, opto-electronics, life sciences, nanotechnology and robotics. Thus, even though electricity is the most expensive utility fuel, its share of total fuel sales keeps increasing. Now electricity is moving into both thermal and motive markets. In residences, the microwave is increasingly displacing the role of the gas oven. In high-end industrial processing, magnetics, microwaves and lasers are displacing conventional gas ovens and equipment.
In no other major industry is the dichotomy between service provider and customer as pronounced as in the utility industry. In the financial services, telecom and even healthcare, industries, consumers have substantially outsourced customer assets to the provider. It is the provider who makes almost all the applications development, capital and operating investments and the customer buys applications or services or results for a fee under either long term service contracts or an on-demand basis from the service provider’s network. The customer’s capital investment is modest and limited to desktop, laptop or handheld devices. Almost all the customer spending is for fees. The telecom and now healthcare industries have gone far beyond the legacy interface with the customer, deep into the customer’s work and life and substantially reduced the distinction between provider and user. This, until recently, propelled the brisk growth of these industries compared with the slow to very slow growth of the energy utilities industry. The rapid growth in energy has been on the customer side of the utility/customer interface.
The Retail Energy Business Keeps Changing
Over the past 100 years, grid electricity has steadily taken markets away from piped gas, not because grid electricity was cheaper but always because it was deemed by the customer to be cleaner, more reliable, more precise and safer; more compatible with customer needs.
Grid electricity has much less “noise” than piped gas. Getting rid of noise (i.e., disorder or lack of coherence) in energy is a prime concern of consumers. This is, of course, the same concern that drove coal away from the house and the municipality in favor of gas before the advent of electricity.
Today, however, grid electricity is simply too noisy and unreliable to be used directly in many applications at home and at work. Shedding noise from grid electricity and increasing its reliability is an issue for most homes and almost all enterprises. This is why customer spending on making utility energy less noisy and more reliable is so large and growing so rapidly.
First, customers have to create buffers and purifiers between their equipment, devices and appliances and utility energy before they can use utility energy. Then, they have to further high-grade or add coherence to energy within their capital equipment before the equipment can deliver results. Thus, customers must spend a lot more money and effort on energy after they have paid for utility energy before they can satisfy their wants, needs and desires. Customers have trillions of dollars invested in hardware and software to convert utility energy into customer energy and have to spend scores (maybe hundreds) of billions of dollars annually and much time and effort to take care of all this hardware and software.
In the aggregate, all this customer money, time and effort has made customer energy into a very big but (to most utilities) an invisible industry or business opportunity. Before World War I, customer energy was on-site production of thermal energy and poor quality electricity and illumination. The customer then outsourced this energy production and supply to a new industry that emerged to better manage the money, time and effort the customer was spending while improving energy quality and reliability. This new industry was called “gas and electricity utilities.”
However, utility energy was and has remained an industrial age industry. As more and more customers migrate to a post-industrial age economy and way of living, the gap between their energy needs and industrial age utility energy has grown. To fill this gap, the customer energy industry has re-emerged, not to produce energy this time, but to make it more relevant and useful.
Disclosure: the author owns stocks in natural gas and electric utilities. See Profile for further disclaimers.