Smart Grid Business Model

Electronomics: Reinventing electricity

By Jesse Berst

The first step to profiting from Electronomics – which I define as the economics of the global shift to an Electricity Economy -- is to understand the revolution that is upon us and how it will impact the world.

Thomas A. Edison Thomas A. Edison

We are reinventing electricity -- how we make it, how we use it, how we deliver it. The first electricity revolution transformed our lifestyles. The second electricity revolution will likewise catapult us to a better standard of living. And, equally important, to a better standard of working.

Perhaps the best way to understand the impact of this second revolution is to examine the first one.

Life before electricity 1.0

Try to imagine life before Electricity 1.0. It was dark, dirty, disconnected and full of drudgery and pain.

It was dark without the electric lights that make our evenings so enjoyable now. For most of the people on the planet, nighttime was illuminated only by candles or oil lamps. (Richer people sometimes had kerosene or gas lamps.) Reading at night required huddling by a flame. Moving from room to room required slow careful steps while shielding the candle or lamp.

Life was unhygienic without the electric water pumps that make indoor plumbing easier to accomplish. It was full of drudgery without the washing machines and dryers and dishwashers we employ today. It was disconnected, as well, without the telegraph and telephone that electricity 1.0 made practical. And full of pain too, without the high-speed drills that make dentistry more palatable, not to mention the laser scalpels and robotic arms that are increasingly employed today.

Middle-class Americans in the mid-1800s – just prior to Electricity 1.0 – lived much like middle-class Romans at the time of Christ. They used much the same technology – candles, lamps, horses. Leisure time belonged only to those with servants or slaves.

The day the world changed

And then the world changed, at 3 p.m. on 4 September 1882. That's when Thomas Edison flicked a switch in lower Manhattan and illuminated 106 lamps in the Wall Street offices of J.P. Morgan. Morgan saw the light, and had Edison install electricity in his new Madison Avenue mansion. (And then, after several years of funding Edison’s innovation, the tycoon snatched the inventor’s company away and merged it with another entity to form General Electric. Morgan at this point controlled three-fourths of the nation’s fledgling electricity business. Edison, for his part, received a mere USD 750 000 for his efforts.)

Edison's invention (pun intended) electrified the world. Within two decades, it had spread to public buildings around the world and into many homes. Electricity brought about the greatest lifestyle transformation in the history of the world. Within a few decades, the well-to-do were living in conditions far superior to the nobility of old. Within a few decades more, that comfortable lifestyle had spread to the middle class.

Greatest servant of man

When a monumental building was constructed for a 1904 St. Louis world's fair, the builders inscribed it with a paean to mankind's two greatest inventions -- fire and electricity. The inscription reads, in part: "Electricity - carrier of light and power - devourer of time and space - bearer of human speech over land and sea - greatest servant of man..."

It is almost impossible to overstate how electricity revolutionized and transformed our lives. In the years after the launch of Electricity 1.0, we continued to invent new ways to harness electricity to make life more comfortable. In quick succession, we saw electric lights, electric motors, irons and toasters. Not long after we got fans and electric cooktops and radios.

Technology is not sufficient

But Electricity 1.0 wasn't just about technology. It was also about policy and business models. Edison and many other brilliant engineers created the technology to make electric power practical and affordable. But it was people such as George Westinghouse and Samuel Insull who figured out how to get it paid for.

And what a challenge that was. In essence, America needed to run a wire to almost every building in the country. And it needed to build enough power plants to power almost every citizen. It was an enormous challenge, one that was made possible only by the "invention" of regulated monopolies.

This business model was an ideal innovation for its time. We wanted electric power utilities to build more and more. To give them incentive, we created regulated monopolies with regulated returns. We guaranteed investors that if they put their money towards this massive build out, they would be guaranteed a certain rate of return.

A success formula that still operates

The original success formula was:

  • Better energy technology + Better energy policy = Better standard of living

That formula can work its magic again. Combining updated technology with updated policy can raise us to another level of convenience and connectedness and comfort. And not just to better living, to better working as well. Because Electricity 2.0 is directly tied to commerce and global competitiveness. Cities that fail to move to Electricity 2.0 will fail to remain competitive.

But the formula won't work if we try to add new technology to old policy.

The "traditional" business model was a brilliant mechanism... but it won't work in our modern age. Today, we don't want electric power utilities to build more and more. We want them to construct less and less. We want them to squeeze as much as possible out of existing assets. We want them to focus less on increasing supply and more on reducing demand through techniques such as energy efficiency and demand response.

The challenge today, then, is to begin innovating energy policy the way we've been innovating energy technology.

The original article appeared in:

Thomas A. Edison Thomas A. Edison
Edison's Pearl Street generator produced 100 kilowatts and served some 500 customers in lower Manhattan, New York City, USA Edison's Pearl Street generator produced 100 kilowatts and served some 500 customers in lower Manhattan, New York City, USA
Inscription on the Union Station building in Washington DC, USA (Photo Jyoti Srivastava) Inscription on the Union Station building in Washington DC, USA (Photo Jyoti Srivastava)