I doubt that electricity is fundamentally a wide-area networking service. At first glance, this statement appears absurd. Like telephony or the Internet, electricity enters our homes through outside wires. Is it not therefore a networking service?

The spread of distributed generation, however, calls into question the nature of the electricity business. Rooftop solar panels, with accelerating price drops, no-payment installation options for households, and guaranteed prices lower on average than those of the incumbent utilities by solar companies, brings increasing “grid independence.”

The emergence of micro-grids and community grids also indicate a movement away from centralized, remote generation. California shows how this movement might spread throughout the U.S.; the Public Utilities Commission’s Net Energy Metering ruling on May 24 effectively doubles rooftop solar generation in the state’s utilities system.

More generally, over 1.5 billion people in India, the African continent and elsewhere are literally grid “independent;” they never had grid electricity. Today, they are getting solar-based electric lighting from standalone systems for the first time. The quaint story of a Florida community resisting grid electricity in favor of a certain lifestyle (New York Times, May 27, 2012) may be a harbinger of things to come.

The overall trend is that more and more households are choosing energy self-sufficiency.

The Smarter Grid

If electricity is not a wide-area network service, then the recent push for a smart grid, focused on improving the legacy infrastructure, is misdirected. The greater opportunity — the smarter grid — may be an entirely different network.  ­

In the next fifteen years, the importance of the current grid — smartened or not — will wane and a parallel “new intelligent network” may supplant it. This new intelligent network will manage thousands of distributed generation and consumption points, including rooftop solar installations and networked electric appliances. The network management would resemble that of today’s IT networks and would be easy to set up. We would simply treat solar panels, inverters, and appliances as analogous to computers and other electronic devices on the Ethernet.

While the current smart grid projects primarily address the operational concerns of electric utilities, tomorrow’s smarter grid will serve the end customers, and may not even be managed by electric utilities.  Of course, wherever the current grid is in place, which is most of the world, we should make it better and implement the smart grid solutions. But we should realize that parallel intelligent networks would likely be born.

The smart grid discussion is naturally about technology, but it ought to also be about business issues — how firms can adapt to non-traditional competition, industry structure changes, and disruptive innovation. With growing solar rooftop deployments, the traditional electric utilities face threats to their growth, though not to their immediate survival. Smart grid discussion therefore belongs at the corporate strategy level and in boardrooms.

The Legacy Network

Why is today’s electricity delivered to customers through transmission and distribution wires over long distances? For two reasons: a) the economics of scale and b) because we extract electricity from concentrated power sources, including coal, gas, nuclear plants, and dams.

Coal-based power plants or dams are so large and concentrated that only utilities can deliver electricity to customers inexpensively and afford transmission expenses and losses. The externalities of coal burning — the hazards of greenhouse gases – were unknown until recently, and are un-priced today.

Just as Yahoo! and Amazon are portals to repositories of content, electric utilities help us tap into concentrated energy sources such as fossil fuels. Whereas content is getting more concentrated in cloud computing platforms on the Internet, the distributed and “edge” paradigm appears to be the trend in electricity.

With distributed generation, the economics of the electricity business change because of new network topology, economies of scale due to retail installations on rooftops, and the use of diffuse energy sources, particularly sunlight. “Broadcasting” electricity through complicated, loss-prone, wide-area networks becomes unnecessary. While the economics did not favor rooftop solar generation until recently, grid parity is at hand in the renewables industry.

Competition and Parallels with Telecom

Even with thousands of net-zero energy homes powered by rooftop solar, most customers would still use the existing grid as insurance and pay a fixed price for access to it — a maintenance fee of sorts, known in telecom as an “access charge.”

When competition arrived in the telecom industry, new carriers had to pay an access charge to existing telephone companies for the use of their infrastructure. Competitors eventually won the right to use existing infrastructure to offer their services. In time, cellular operators accelerated the breakdown of the traditional landline infrastructure into component elements; competitors only paid for the landline components they used.

A similar fragmentation of the electricity infrastructure appears inevitable — there will be a price to access the grid elements. Power producers today sell electricity to the grid operators through power purchase agreements (PPA). In the future, they may sell directly to end customers. Such non-traditional service providers, like micro-grid operators or community power plants, will compel the disintegration or “unbundling” of the existing utility, whose infrastructure will be sold as separate components.

Households and businesses with rooftop solar are going further – they are becoming their own increasingly self-sufficient micro-utilities.

Substitution is Seldom Sudden

When cellular telephony became mainstream landline connections were not entirely cut off. Though usage has dropped, we still keep the connections. Similarly, even with widespread photovoltaic deployment, we will maintain connections with the classic grid. We need centralized generation from concentrated sources for large factories and railroads, and wired delivery at the consumption points. Substitution will not be complete and the utility architecture will stay in place. The smart grid deployment plan of San Diego Gas & Electric — a fine document — describes it as follows: “SDG&E stores the electricity the customer generates beyond their current demand, and returns that electricity to the customer when they need it.”

Widespread solar for homes faces the additional challenge of inertia: why replace something that works? Are the benefits of grid parity pricing, lower capital costs of deployment, and subsidies sufficient to outweigh the hassles of deployment? Nevertheless, starting with early adopter families, deployment will spread — for reasons including altruism, environmental consciousness, installation convenience for new homes, and rising affordability.

Those skeptical of energy self-sufficiency argue that, without good and affordable storage, renewables like solar and wind will remain peripheral and unreliable. The sun does not always shine nor does the wind blow predictably; renewables will never be mainstream.

But these are not credible arguments. When needed, diesel or gas-based generators and batteries can back-up renewables, as they do in countries with unreliable power. While expensive and polluting, diesel power may be needed only for a few hours per day.

Self Sufficiency and Strategy for Electric Utilities

In describing the transformation to the use of renewable energy sources, the word “self-sufficiency” is appropriate, not “grid independence,” which is commonly used in the industry. Why? Because the latter assumes the existence of the grid as the baseline. The starting point should rather be no power at all; for those without grid electricity, or those experiencing frequent blackouts, self-sufficiency is the only option.

While “self-sufficiency” indicates progressive deployment, “grid independence” suggests a drastic break, which is unlikely. Households may first offset their grid load by perhaps 25 percent, increasing renewable use over time.

In the face of transformative change, electric utilities face a lackluster future. They will lose usage and customers to renewable solutions, and they already have. But they might have a significant opportunity in a related area — the management of the information network linking millions of distributed generation points. The smarts of such a network — monitoring, tracking, billing, customer service, customization, reliability, peak administration, and storage optimization — may be the core competence of future utilities. Such an information network might be an independent overlay on today’s grid.

It might lead to an alternate or smarter grid managing millions of customers and their rooftop generation and usage. The convergence of mobile telephony and solar generation, or the ability to track generation on the Internet via connected solar inverters, are evidence of new intelligent network applications. In any case, the utility of the future is more of an information company and less a generation, transmission, and distribution company. 

In contrast, the smart grid being developed today views the electric utility as a customer and emphasizes operational improvements that, while necessary, are an extension of the current business model — a paradigm in decline. 

Image: Power lines via Shutterstock