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Jan 14, 2014

The De-Commoditization of the Kilowatt-Hour

Lessons from produce, supermarkets, and the rise of Whole Foods

 

Fresh TomatoesFor years, decades, even a century, retail residential electricity consumers like you and me have used kilowatt-hours as a commodity. We treat them as uniform and fully interchangeable. One kilowatt-hour is as good as the next. And within a respective geography and with some exceptions, we pay a single price per kWh without regard for where that kWh is generated (down the street or hundreds of transmission miles away), how it is generated (from coal, natural gas, nuclear, wind, or solar), the time of day or night at which we use it (and the relative supply and demand at that time), how much of it we use, and myriad other factors.

Those inside the electricity industry—regulators, utilities, grid operators, wholesale generators—of course know that every kWh is not created equal, though most customers consume them as if they are. But the days in which the kWh can be treated universally as a commodity on the retail-facing side of the industry are coming to a close. I’ve seen it happen in other industries.

Lessons from the world of supermarkets

Outside of my energy-related work at RMI, I’m a cookbook author and food writer/blogger. It’s there—in the world of food and supermarkets—that I see the writing on the wall for the electricity sector.

Not all that many years ago, supermarkets were to consumers what utilities are today: purveyors of commodities, whether produce such as fruits and vegetables in the case of the former or kilowatt-hours with the latter. Pick your produce—corn or tomatoes or apples or whatever. They each used to be, by and large, a commodity. Prices tended to be relatively uniform and stable, and no matter where you did your grocery shopping, an ear of corn was an ear of corn, a tomato was a tomato, and an apple was an apple.

But several consumer-driven movements changed all that. Concerns about pesticides and genetically modified crops (GMOs), coupled with growing interest in organic agriculture, made how the food was grown front and center. Similarly, the rise of the locavore and Slow Food movements made where a food was grown a matter of importance. These two developments fundamentally reshaped the produce department.

Nowadays, when I go to my local supermarket, any given piece of produce is much more likely to be labeled with its country, state, or even farm of origin; whether it was grown ‘conventionally’ with pesticides or organically; and whether it is GMO-free or not. The story is similarly true of eggs, and increasingly of meat and fish. And of course, the price can vary widely depending on those many factors.

Though food-as-commodity still exists in some circles, for many retail consumers—especially those buying primary whole foods such as produce, eggs, meat, and fish that have not been processed into food products like cereals and crackers—those days are over.

As fruits and vegetables go, so does electricity

Fresh ProduceThe kilowatt-hour is well on its way down the same road traveled by supermarket produce. Concerns about climate change and carbon emissions, the rising cost of fossil-fueled energy (whether electricity or other sectors) and its economic impacts, and a desire for both energy independence and reliability are all fueling customer awareness, pulling back the veil on the kWh-as-commodity. Suddenly, how, where, and when a kilowatt-hour is generated matters.

The evolution of net metering, time-of-use pricing, third-party renewables monthly lease or PPA rates vs. utility-sourced energy, the ability to participate in interactive retail or wholesale energy and ancillary services markets, two-way power flows across the meter, deregulation in some markets (with consumers able to choose their generator), and many other factors are further driving the transition.

More than ever, consumers are increasingly knowledgeable, have values that ultimately differentiate one kWh from another, and are willing to pay a varying price for the differences between kWhs.

Responding to de-commoditization

As consumers gained knowledge, shifted their demands, and demonstrated their willingness to pay a varying price, supermarkets and producers/farmers had to adapt their offerings. ‘Incumbents’ that failed to do so lost market share. Disruptive start-ups that embraced these new trends profited handsomely. Think of the success of Whole Foods, which built its fortune on offering consumers organic, high-quality produce sourced from clearly identified local and regional farms. Produce that was once a commodity had become diverse, differentiated, and available at many price points, with consumers willing to pay a premium for produce that matched their values.

So, too, must utilities and generators adapt. It is no longer enough to sell naked kilowatt-hours at a flat per-kWh rate. Once upon a time, when the kilowatt-hour could still be considered a commodity, that was fine. But we live in a different era now. More than ever, we cannot ignore the highly differentiated merits and costs of each kilowatt-hour. Time-of-use pricing, unbundled retail electricity rates, value-of-solar tariffs, and other strategies are a start, but there’s more progress to be made. As we increasingly recognize, kilowatt-hours are far from created equal, and as our electricity system evolves toward even greater transparency and consumer empowerment, utilities, regulators, wholesale generators, and third-party developers must find a way to profitably deliver affordable electricity that honors—and values—the kilowatt-hour’s de-commoditization.

Join the Discussion


Showing 1-6 of 6 comments

January 23, 2014

Great analogy and I certainly hope you are prophetic. Do you feel that KWHs will be handicapped by the same INcomplete cost accounting associated with produce? The organic tomato costs more off the shelf than the conventional but not if we engage in full (true) cost accounting when the pattern is markedly reversed. Do you anticipate that alternative and renewable (boutique) KWH will remain more expensive than the conventional variety thus keeping the market a boutique one for the well-to-do or highly motivated?


January 23, 2014

This is a great article. A few years back one of my clients, a mid-tier utility CFO who just happened to previously been an executive at a national food distributer, lamented to me that "If people think selling a kWh is tough, try unloading produce and making money." The underlying question to me is are the consumers really ready for this approach? It's all fun and games if the monthly bill goes down, but what if it goes up?


January 23, 2014

Kilowatt-hour = 3,600 kilo-joules = 3,412 British thermal units and is simply a measure of energy. As such it is not a "commodity". It can neither be created nor destroyed, only transformed, i.e., it can become less available to do useful work. The kWhr in your reference space is a measure of the available work, or "exergy", which in "consumption" is lost, i.e., it reverts to a state (the dead state) where no further useful work can be extracted from it. Does it matter where it comes from? Only in terms of the externalities its use presents. Is an organic kWhr better than an inorganic kWhr? That depends entirely on your terms of reference. Ultimately, all of the energy used in the World today is either solar energy or nuclear energy. Legacy solar energy sources include coal, petroleum (oil and gas), and biomass. Legacy nuclear energy sources include uranium, thorium, radium, etc., which are all products of the decay of stars. The differentiation you write about simply reflects projected values you impose on the various sources of energy. Is biomass preferable to coal? Well, it depends. If the source of biomass is the Amazon forests, you might well prefer to use coal. Is energy from a solar thermal generating plant preferable to energy obtainable from a heavy-water CANDU thermal nuclear energy reactor? It may not be if the solar thermal generating plant is located in Arizona and presents extraordinary water use allocation issues for local and regional water resources. One size doesn't fit all. Is hydroelectric power as benign as it is touted to be? Not if your livelihood happened to be reliant on the Snake River and Columbia River salmon runs. "Renewable" is a wholly misleading label. But, as for the kilowatt-hour, and the erg, the joule, or the British thermal unit, each one is interchangeable with the other. 4,000 volts will kill you just as surely whether it is produced from a "renewable" or a non-renewable kWhr. Kilowatt-hours don't carry labels. And the consumer can't tell the difference anyway, even if they did. And when push comes to shove, the consumer will take whatever he/she can get -- organic or inorganic, renewable or non-renewable -- to keep body and soul together. Do you doubt it for an instant?


January 23, 2014

Residential solar or wind generated electricity replaces utility generated electricity, but has two advantages that I don't see mentioned often enough: Locally generated electricity radically reduces transmission costs and losses, and 2) Solar energy replaces utility generated electricity during peak time of use. Peaking power is the most expensive to generate, and avoiding transmission losses reduces utility's costs. So locally generated electricity should be priced, for the feed-in tariff, at a premium over the costs of peaking power, and since it "arrives locally" it should be priced at a premium over the residential customer's cost per kwh during peak times. Instead I see utilities presenting their regulators with arguments that minimize the value of residential generation, trying to price the feed-in at below any published tariff, for any time of day. I'm sure the utilities do not think I am feeding my solar electricity into the grid at 3:00AM, but that is how they seem to want to price it....


January 23, 2014

Peter:
Good analogy. Thanks for including it today. Two comments. First, some of your readers probably have already had experience with this in Colorado purchasing "Wind Source" - for a little bit more per kWh. We've never been able to get Xcel to expand to a similar "SolarSource".
Second - a friend is beginning an ad campaign to couple food purchase with carbon negativity - food grown in soil where the carbon content is increasing. A good future role for RMI to be leading the way on carbon negativity as you have for EE and RE.


January 24, 2014

Like food, power can be generated locally (or regionally) by far more cost-effective means than it can when it's national or international. Our local power plant is natural gas-fueled because that is what is most plentiful here. Our cost for electricity is far below the national average and our plant generally produces more than we use, exporting to neighboring states. Those states have higher rates than we do. Why? Because they have to import (at higher cost) much of their energy. Mostly thanks to regulation, but that's not my point. The point is that states like California that have boxed themselves into a situation where they must import or go without are paying for it at the meter whereas states like mine who are in the opposite situation have not. So your kWh prediction is already happening and has been for some time. Many people have been willing to pay more for "cleaner" or "locally-sourced" power, either through political policy or directly by choosing one source over another when they buy. When you choose to change habits to use off-peak power, when you choose the checkbox on your power bill to pay a few more dollars to use wind or solar energy, when you live in a place that has higher power costs because of legislation.. you have already moved the local market towards your choice.

All we need now is for the "national" grid to become "regional" instead and the change is complete.

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