Electricity networks and disruption

Clayton Christensen’s theory of disruption was originally based on his observations about disc drives. He saw that the manufacturers of 14” drives for mainframes had been driven out of business by manufacturers of 8” drives for mini-computers, and then the companies that made the 8” drives were subsequently driven out of business by manufacturers of 5.25-inch drives for PCs. So why hadn’t the 14” drive producers simply started producing 8” drives? And why did consumers want the inferior 5.25-inch drives?

In low-end disruption, inferior products compete in a smaller market with lower profit margins, but are ‘good enough’ for some consumers at a cheaper price. While established producers are focused on improving their products and profit margins, low-end producers capture economies of scale, and some products eventually gain a foothold by offering enough of what consumers want at a budget price. By the time the established producers realise that they’ve lost market share, a new market segment has been established and it is too late.

Discussions around solar and batteries are frequently discussed as ‘disruptive’, but is this really a good description of the changes happening in electrical systems?

Distributed power is to conventional generation what electric vehicles are to internal combustion vehicles. Both disrupt the incumbent products (generation assets or internal combustion engines respectively), except that EV’s are better described as high-end disruption. Furthermore, distribution networks are to electricity what roads are to transport. In both, the maintenance of the distribution assets is essential.

But when discussing EV’s, nobody talks about the ‘disruption’ of the road network, or the massive infrastructure and regulation that overlays passenger transport. All of the bridges, traffic lights, emergency and medical care, road law enforcement, traffic engineering, council maintenance and parking control. Roads are the arteries of transport. EV’s or internal combustion, the systems and infrastructure is the same.

On the other hand, the problem for electricity distribution networks is that the tariff structures employed in Australia, and around the world, rely mostly on energy-based tariffs rather than demand-based tariffs. Since owners of distributed energy assets consume less energy from the grid, their share of network costs is reduced by more than the avoided costs of installing the distributed generation. In other words, solar owners still rely on the grid at times of peak demand although they draw less energy from the grid over a billing period.

 

transformers

So will physical assets of the distribution networks be disrupted? The short answer is no. Indeed, much of the discussion around solar and batteries is around integrating virtual networks, aggregators, using blockchain to facilitate electricity trading among small users, network optimisation with smart grids, etc. The maintenance, modernisation, and upgrade of networks is absolutely essential to integrating a higher share of renewables. In virtually all high-penetration renewable scenarios, geographic diversity of wind and solar is a primary mechanism for smoothing intermittency. This requires an expansion of transmission infrastructure, not a contraction.

So what about disruption of the tariff model? Earlier tariffs were based on the social contract that those that used the most energy paid the most, regardless of the marginal cost of an individual consumer. Some consumer classes are implicitly protected as a matter of social justice. For example, pensioners that operate air conditioners on hot weekdays are cross-subsidised by other consumer classes, such as full-time workers not at home until the evening. Do we really want pensioners to avoid using their cooling on the hottest days? Large-scale grid defection would be a disaster for those least able to afford distributed energy, such as the elderly reliant on pensions, renters, the unemployed, and single income families.

So is disruption a useful theory for distributed power? It’s clear that distribution network providers in Australia are concerned about being left with a stranded business model. They want to be part of any prospective developments, regardless of whichever way it turns. I think the concept of low-end disruption applies to distributed power, but strictly only to the business model and not the physical assets. Regardless of the business models and tariff reforms that emerge, the physical infrastructure of networks needs to be maintained.

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