Editor’s note: Hemant Taneja is a partner at General Catalyst and co-founder/chairman of Advanced Energy Economy (AEE).
Throughout the history of the power industry, the answer to all of our problems has been to “get bigger.” Due to economies of scale, utilities have concentrated on building larger and larger power plants to increase efficiency and improve profitability. That’s why we still receive the vast majority of our power the way we have for decades — from massive plants based on natural gas, coal, oil and nuclear energy.
Now, the industry is starting to reach the limits of scale. Utilities are facing declining demand due to substantial advancements in energy efficiency, and they are grappling with stern new rules regarding carbon emissions from the Environmental Protection Agency. Global climate change is putting incredible stress on our power system, requiring us to find new methods to increase its resilience and reliability in the face of more severe weather. In short, we urgently need to find a new way to upgrade our aging infrastructure in a time of austerity.
If we want secure, clean and affordable energy, we can’t continue down this path. Instead, we need to grow in a very different way, one more akin to the Silicon Valley playbook of unscaling an industry by aggregating individual users onto platforms.
Let me give two examples of startups that have taken on large industries through just this form of unscaling. For years, many homeowners have had extra bedrooms, but this untapped resource was wasted except for a handful of days per year. Now with Airbnb, that owner can place their unused bedrooms online and rent them, securing an additional income. Despite the scale of the hotel industry, Airbnb has managed to become the largest hotel company in the world, adding just one room at a time. Another prominent example is Uber, the on-demand taxi service. Uber allows car owners to drive their vehicles and accept taxi rides, again making an income from a previously underutilized resource. Today, Uber is the largest taxi company in the world, simply by aggregating all of these individual users together.
The more I think about what I am seeing in these two startups and others in Silicon Valley, the more I believe that economies of unscale is the way forward for the power industry to tackle its looming problems.
Unfortunately, many of us already have a car and an extra bedroom, but we don’t just have a spare power generator lying around. Generators have traditionally cost tens of thousands, if not hundreds of thousands, of dollars, placing them out of reach to all but a handful of people.
With a greater density of small-scale power plants and sophisticated grid technology, our energy system can become cheaper, more environmentally friendly, and more resilient.
The creation of small-scale power plants — exemplified by the rooftop solar panels that are increasingly visible on homes and businesses — has begun to solve this problem. Only within the last decade has it become feasible for everyday homeowners to purchase their own energy production technology, thanks to lower costs, better financing, and easier installation through companies like SolarCity and Admirals Bank.
With more local power generation, our aging grid infrastructure became the next obstacle. Given its design, the grid we have installed today can’t easily handle the diverse and intermittent energy sources that come from small-scale generators. But we finally have the enabling technology necessary to make our grid more flexible. Gridco, a company that we incubated at General Catalyst, has invented power routers that allow utilities to harness energy from any source and standardize it for distribution.
Together, these innovations are making a real economic case for decentralized power generation. With a greater density of small-scale power plants and sophisticated grid technology, our energy system can become cheaper, more environmentally friendly, and more resilient. Even more importantly, this transformation means that local citizens are increasingly reaping the rewards of power, literally turning their roofs into sources of income.
Despite all of the gains we have made with technology, my discussions with dozens of utilities CEOs and PUC commissioners has surfaced a number of obstacles that need to be solved in order for a fully unscaled energy system to emerge.
Due to the deep influence of equity analysts and public utilities commissioners, utilities have a great aversion to risk. They can’t shed their old business and regulatory models and make the investments needed in technology to become energy platforms and provide differentiated services for customers.
With a changing operating environment, the status quo is no longer feasible. We need to educate all stakeholders on the value of this new model and why an investment in platform technology is important. For instance, decentralized power generation can allow utilities to grow with lower capital expenditure needs. For PUC commissioners, that means more local control and more local job creation, and for stockholders, that means a better balance sheet, more profits, and more returns.
It’s not often that an industry has the opportunity to disrupt itself in the face of a whole new competitive environment, but utilities still have plenty of time to embrace and profit from the changes in the energy markets. By transitioning to a platform model and unscaling power, we can create a better system that is secure, clean, and affordable.