The current supply chain for electric energy is almost exclusively linear.
Fuel is extracted from the earth (usually coal or natural gas) and transported to large, centralized power plants. The plants burn fuel to turn huge turbines that drive electric generators pushing thousands of megawatts up onto the “grid.” A network of high-voltage “transmission lines” send the energy across states and regions to serve cities, towns, and industries. Once the electric power reaches a pocket of customers, it is distributed out to use it for everything from turning on a light to running large industrial machinery.
All if this is done 24 hours a day, every day, with enough reliability that people seldom think about it. The electric grid is possibly the one of the most impressive feats of engineering the world has ever seen.
And yet, the industry is standing on the cliff’s edge of drastic change.
To better understand this transformation, it’s best to consider the benefits and risks of a centralized, linear energy supply chain:
- Economies of scale – the larger the power generator, the cheaper the energy produced per unit of energy (kilowatt-hour).
- Easier control over the grid – bumps in customer load and power line outages can be compensated with relatively simple and intuitive power plant control systems.
- Easier accounting – traditional utilities sell power to consumers, consumers pay on the energy used.
- Easier regulation – most areas have a single electric company and regulators can more easily review the actions of this single utility to ensure fairness.
- Security – having centralized power generation creates potential for catastrophe in the event the central plant is attacked or suffers critical damage from weather or earthquakes etc.
- Fuel homogeneity – currently, natural gas prices have been low to the point that many areas are enjoying lower rates. However, in the event of fuel shortages, damage to fuel pipelines, or market issues, having homogenous energy generation can create a significant price risk.
- Long return on investment timelines – the cost of new power plants and transmission lines can be in the hundreds of millions of dollars and require decades to “pay itself off.” In a rapidly changing world, it is increasingly difficult to confidently invest in traditional power plants.
Up until now, the risks of centralized power plants has been accepted as part of the business. The cost efficiencies of centralized generation were so great that issues like security and fuel sourcing were handled as an afterthought rather than part of the actual grid design.
Yet, for the first time since the invention of the electric grid, distributed energy generation and energy storage is starting to become cost-competitive with grid power. Industry insiders and regulators are just starting to recognize the full implications of this reality. The major change is that the industry is moving away from a linear supply-chain to a “mesh” supply chain. For those of you using lateral thinking, this may look very similar to another industry… telecommunications.
If you are old enough to remember the world before the internet, you might remember the cable-bundle. It worked simply enough, you purchased cable service from your local cable monopoly and the cable monopoly would provide “packages” of entertainment from the content creators to your home. Customers would then supply money back to the cable providers and eventually the content creators in return. This was the linear telecommunications supply chain, and it worked well, until the internet came and disrupted the model completely.
Today, content can be created and consumed by anyone, transported across a network of nodes, and the exchange of value and money now occurs in both directions.
This is the future of the electric grid, sometimes referred to as “The Internet of Energy.” However, instead of content becoming decentralized, it will be energy. This should be exciting to any innovator out there for two reasons:
- The future of energy is collaborative. Customers will have greater choice of where they get their energy from, when they choose to use it, and whether or not they want to work together to generate their energy with their neighbors.
- The future of energy is innovative. New technology in energy generation, energy storage, and energy networks is being developed across the globe. Not only that, but new business models and investment opportunities will be born from this transition.
Imagine being transported back to 2002, and having the opportunity to be part of the tremendous transformation borne of the internet. This is the world we have today for energy. Will you be the one to create the next Facebook, twitter, YouTube, iPhone of the new energy internet?
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