Electric utilities seeking the renewal of their franchises, and politicians seeking municipalization, both ignore the transformative possibilities of the microgrid. Microgrids represent a promising new business opportunity for both existing utilities and new entrants in the electricity business. Microgrid deployment will also provide the same public benefits as municipal control, likely more.
“Across the country,” says the New York Times, “cities are showing a renewed interest in taking over the electricity business from private utilities.” According to one Minneapolis resident “what we pay for our utility bills would recirculate back into the city general fund rather than us paying for corporate jets, multimillion dollar lobbying sprees, lavish executive bonuses, [and] dividends to distant out-of-state shareholders…It is demoralizing that a distant corporate board of directors … gets to decide where our energy comes from by monopoly power…”
Municipal control of electric utilities also allows cities to increase the use of renewable energy, lower prices, and ensure local responsiveness, especially during severe weather events. Boulder, CO and Minneapolis, MN are attempting to municipalize their electric utilities. Both are battling Xcel Energy, an investor owned utility. Davis, CA “is proposing to acquire the PG&E assets within the incorporated boundaries” and operate a municipally owned utility.
For the reasons above, it makes sense for a city whose utility franchise is up for renewal to consider municipalization. LADWP, SMUD, and CPS Energy, in Los Angeles, Sacramento, and San Antonio, respectively, are good examples of relatively well-managed large municipal utilities. The American Public Power Association points out that, “More than 2,000 cities and towns in the United States light up their homes, businesses and streets with “public power” — electricity that comes from a community-owned and -operated utility.”
What appears poorly understood, and finds little mention in the media, is that microgrids can achieve the very public purpose cities seek. As such, they represent a “win-win-win” solution for the utilities, cities, and for “climate.”
What Business is a Municipality In?
Xcel lays out the arguments against municipalization — increased debt, unrealistic cost assumptions, savings far in the future, long lead time, significant costs in planning, and loss of access to Xcel’s R & D resources. Citizens’ opinion is also divided. A comment in Minnesota Daily notes: “If the city does spend billions to take over power distribution, I hope they do a better job than they do maintaining and plowing the streets.”
As a business strategy professor, I have to ask: What business is a municipality in? Should it be in the electricity distribution business, at a time when the technology is changing rapidly?
The answer need not be: Renew the utilities’ franchise for another 20 years. Rather, regardless of whether Boulder, Minneapolis, Davis and others municipalize, they should plan for micro-electric utilities (MEU) for their cities.
Municipalization: Yesterday’s Solution
Municipalization may be yesterday’s solution to yesterday’s problem. It belongs to the pre-distributed generation (DG), kilowatt hour era. The fight is no longer between Investor Owned Utilities (IOU) and municipal systems — it is also among a host of new entrants in the business.
Today, innovation and technical progress has made exclusive utility franchises over large markets obsolete. As a result, the industry structure, based on “natural monopoly” arguments, does not hold, except for distribution in smaller and smaller geographies. Why? Because of decreasing relevance of scale economies in the electricity value chain. Even town- and village-sized systems may be too large.
How small can we get? One argument is that solar panels with battery, or small gas-generators, may permit homes and small businesses grid independence, economically. Between this home-level solution and today’s mega-grid are microgrids.
If electricity providers require relatively small markets, then the businesses of the future may be local, and community-centric. In this respect, electricity is different from telecom, railroads, or inter-state highways that benefit from large markets, and positive network externalities, that is, “the value of a product to any user is greater the larger is the number of other users of the same product.”