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How Many Electric Utilities Does A Market Need?

Del Mar, population ~4,100, is an affluent beach city just north of San Diego, Calif. Solana Beach, also on the ocean and just north of Del Mar has ~12,000 residents. Carmel Valley is a master-planned adjoining community with a population of ~40,000. Can Del Mar, Solana Beach, and Carmel Valley each have their own micro-electric utility (MEU), providing cleaner, cheaper, and more reliable power than the current San Diego Gas and Electric (SDG&E)? Can Carmel Valley have four or five MEUs, and can the city of San Diego have 100?

Maybe Mumbai, India can support 500 or 1,000 MEUs.

Microgrids are scalable, and relatively new in consumer applications; we don’t really know what the optimum population each microgrid serves is. The question is: How small can an economically viable electric utility be? Can the electricity business be in thousands of private, entrepreneurial hands, and not with monopolistic, state-run or regulated enterprises?

Electricity: No Longer a Natural Monopoly

Electricity services from today’s few giant, mostly coal-based and regulated power companies have worked well for over 100 years. The utilities owe their existence in their present form to several increasingly invalid assumptions, principally that the electricity business is a natural monopoly.

The electricity business until recently consisted of “natural monopolies arise where the largest supplier … has an overwhelming cost advantage over … competitors; this tends to be the case in industries where fixed costs predominate, creating economies of scale that are large in relation to the size of the market, as is the case in water and electricity services.”

But this is no longer the case. Technological advance has rendered the “natural monopoly” model obsolete. With microgrids, we can have electricity at today’s costs from small, community-sized infrastructure. Dadar Electric, named after a locality in Mumbai, can compete with Maharashtra State Electricity Board, and Del Mar Electric with SDG&E. 

Looking back 100 years at a clean slate, and given technology trajectories, we would not build the electricity infrastructure of today. We would build thousands of MEUs, each linked to the others like a swarm of bubbles. Only the benefits of incumbency — “lock in” — keep the utilities the way they are. Markets find a way to “right size” such anomalies; though the transformation can take long.

For those who think the utilities are powerful and entrenched, consider:  In November 2013, Berlin had a referendum to “municipalize” their electric utility by wresting it away from Vattenfall, a multi-national utility company. That vote narrowly failed, for now.

With microgrids:

  • Electricity can be produced less expensively than through traditional fossil fuel fed large generation plants,
  • Power generated locally is consumed locally. It is cleaner since microgrids use solar, micro-wind, batteries, fuel cells, and diesel or bio-diesel based generation, optimized to meet local demand. They do not incur transmission costs,
  • Standalone existence for a utility is possible; macrogrid connectivity is optional.
  • Relative economics improves with advancing technologies, and also since the existing utilities will become progressively less competitive when emissions are priced, inevitably, by a carbon tax.

How Many MEUs Can the US Support? 

Rand McNally defined U.S. markets as 493 Basic Trading Areas (BTA) that were auctioned for mobile telephone services in the mid 1990s. If each BTA had 10 MEUs, it would total ~5,000, depending on the demographics of individual markets. In other words, a MEU would be available for every ~ 65,000 people. 

Consider a university of 15,000 students with faculty, staff, and related businesses, totaling ~60,000 people dependent on the university. Can a university campus be served by a MEU?

Markets may be defined in other ways, by municipalities, for instance. For example, the Sacramento Municipal Utility District, SMUD serves a population of 475,000. By the foregoing argument, Sacramento can have 8 MEUs. Could San Francisco have about 15, and could Portland support 10? 

Can supermarkets and their population served be used as a proxy for microgrids? The U.S. has over 37,000 supermarkets of median size 46,000 sq. ft. each, that is, one for every 8,000 people. If that number is optimal for a MEU, the U.S. can support close to 40,000 standalone MEUs.

India: The Blessings of a Creaky Infrastructure

India comprises 28 states and seven union territories, sub-divided into 640 districts; each district is centered at a city or town. Some districts are large and are divided into smaller geographies called tehsils or talukas. The districts and the talukas can be candidates for several MEUs. How many?

The average district has ~1.3 million rural people. If each micro-electric utility serves 5,000 people — greater population density, lower wages compared to the U.S., and therefore smaller population for viable economics — then each district can support ~260 MEUs, and rural India can support around 170,000. 

The number of MEUs can be derived in other ways. According to the 2011 census of India, 69 percent of Indians, around 835 million people, live in the country’s 641,000 villages. The village size varies; 4,000 villages have a population of over 10,000, while 236,000 villages have a population of less than 500. Let us assume that these latter quarter million very small villages are served only with standalone solar power with panels on rooftops, and the homes are not wired into a distribution network of a MEU.

Let us focus on the relatively larger ~400,000 villages. If every two villages have at least one micro-electric utility, say, managed by an entrepreneur under the direction of the village panchayat, India will contain approximately 200,000 MEUs. But some villages may be large enough to support more than one utility. The point is: it is conceivable for India to have quarter million new MEUs.

Micro-electric Utilities as Economic Stimulus

While 300+ million Indians struggle without electricity, and the rest with shortages, MEUs represent a major entrepreneurial opportunity for Small and Medium Enterprises (SMEs). MEUs can help eliminate electricity shortages and contribute to 100 percent electrification while stimulating the economy. 

Can a community own its own electrical cabling, and bring in contract micro-grid electricity suppliers who offer the desired level of service? If a supplier fails to meet desired criteria, the community can switch to a new provider. Such community decisions are possible with MEUs.   

Technological advancements and business logic lead us to electricity provision methods that are cheap, reliable, secure from cyber attacks, environmentally sound, and compatible with local management control. 

MEUs are a compelling value proposition – substantially lower costs, unmatched features, novel services, plus other benefits of microgrids. Where reliable infrastructure exists, why fix something that’s not broken?

Currently, MEUs in the U.S. are for jails, military bases, and university campuses. But to go beyond niches, the place for MEU experimentation is rural India, where the need is basic, affordability is rising, infrastructure is inadequate, reliability is poor, expectations are high, and consumer appliance demand is soaring.

For standalone and grid-connected next generation electricity solutions, the microgrid economic modeling, optimization, prototype development, and the establishment of value propositions should occur in India. Its poor infrastructure offers greenfield deployment opportunities; the U.S. requires substitution, which is much harder. 

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