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The Next Disruptive Technology – Distributed Generation

September 2000 Energy & Utilities

Is Enron coming for lunch?

Introduction

The past three decades have offered ample evidence of the ability of disruptive technologies to create and redistribute wealth. From disc-drives, to flat panel displays, to audiocassettes, each of these technological advances have shared a set of the common features: An existing technology satisfied the market demand. A newly invented technology suffered in Performance-to-Price compared to the existing, dominant technology. Most customers were satisfied with the existing technology and only start-ups or whackos would invest their career in making the new technology work. But, in the next life-cycle of the product category, improvements enabled the new technology to satisfy the market demand and the older technologies were relegated to niche uses. The market was disrupted by the new technology that was in many ways inferior, but in a few superior.

2000-09-25 DisruptiveTech

Distributed generation is another disruptive technology that can overturn the entire energy industry in the near future. How an energy generation company reacts will determine its position in the next round of competition. In this paper, I will discuss how distributed generation is a disruptive technology and, as such, how an energy generation company can react to take advantage of this new market opportunity.

Concentrated Generation Trajectory

In the past, energy companies pursued a safe pathway towards profits through increasing their efficiency and reliability for their customers. The pathway included heavy infrastructure investments in transmission and distribution to allow for the efficient flow of energy throughout geographic regions. Concurrently, larger power plants offered more efficient conversion of energy from raw materials to electricity. Combined, these features offered clear returns to scale similar to the brewing, DRAM and automobile industries. To improve the value capture along this value chain, incremental improvements in the technology were pursued and the Performance-to-Price trajectory continued its upward trend. Energy production followed a concentrated generation trajectory.

Distributed Generation Trajectory

Distributed generation has been discussed since the time of Thomas Edison but for many reasons it has never been very popular or profitable. It offers a lower power-generating efficiency. It relies on locating a small generation plant close to a customer who is often in an urban area with strong NIMBY coalitions. Odder still, it might require customers to be both consumers and generators of energy – actively managing their resources. Simply put, distributed generation’s Performance-to-Price metric has been inferior to that of concentrated generation.

Yet there are always improvements. Just as concentrated generation, distributed generation technology has followed an upward Performance-to-Price trajectory. Improvements in fuel-cells and natural gas generators, changes in attitudes concerning pollution of coal-fired plants, and the demand for ever increasing reliability for some C&I customers has brought discussions concerning distributed generation out of the realm of the fantastical. However, even though the Performance-to-Price trajectory of distributed generation has followed an upward trend, it is questionable as to if it will ever catch up with the concentrated generation trajectory. But this may not matter.

Market Demand

While the Performance-to-Price metric of distributed generation may be inferior to that of concentrated generation, what is of importance is its position in relation to the market’s demand. The market will seek power from the source that satisfies its entire set of needs the most effectively. While concentrated generation technology has performed well in the past, distributed generation may meet a market segment’s needs better. When the market needs are fulfilled by distributed generation, concentrated generation technology will be relegated to niche status.

Distributed generation, like other disruptive technologies in the past, solve a different set of problems and offer a different value proposition than the existing technology. Hence looking for opportunities or applications of this technology is equal to looking for niches in the current market – market segmentation. A clear value of distributed generation in comparison to existing concentrated generation technology lies in the ability to produce energy in African developing countries where reliable power grids would be prohibitively expensive to build. In the States, distributed generation offers the ability to both cleanly produce electricity and providing alternative uses of the dissipative heat in warming an office building. Alternatively, it can offer more reliable service, cost-effectiveness in lowering peak load, or enable the C&I customer to make real-time decisions whether to buy energy from the market, or supply energy to the market.

Conclusion

What makes a disruptive technology disruptive is that it overturns a market and creates a new set of players. In the disc-drive industry, each new size of the floppy disc, from 8” to 5 ¼”, from 5 ¼” to 3 ½”, and now to the mini-disc, has brought a new firm to the forefront of the disc-drive industry. Distributed generation has the ability to do the same for the energy industry.
To prepare for the upset of the market that will be brought by distributed generation, current energy generation companies have a few options:

• Experiment with distributed generation and be a market leader.

• Wait for others to develop the technology and be a fast follower.

• Ignore it and await to be a niche player or worse – an acquired dinosaur.

The choice of which route to take is for the generating company to make, but based upon the aggression that some relative newcomers in the market have expressed, the question may be one of having your lunch or being theirs.



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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