1.1 The Inflection Point
The electricity industry is widely considered the highest-investment sector of the economy, and among the most important and mature. Electricity now enables a vast range of societal functions, from the most mundane to the most sophisticated. Yet as often happens in the history of technology, just as this industry seems to be at the pinnacle of its achievement, its own structure, design assumptions, and technological content are also becoming fundamentally obsolete.
Providing electricity is an almost unimaginably vast enterprise. In the United States alone, its half-trillion dollars' worth of net assets generates more than $220 billion of sales per year, or nearly 3% of GDP. It also consumes 38% of the nation's primary energy. By burning fossil fuels, which produce about 70% of U.S. electricity, the industry also releases more than one-third of the total oxides of carbon and nitrogen and two-thirds of the sulfur oxides emitted in the U.S. For many years until the late 1980s, the electricity industry's investments, plus roughly equal Federal subsidies (291–2), were about as large as those of the nation's durable-goods manufacturing industries, and today on a global scale it consumes for its expansion approximately one-fourth of all development capital.
By many measures, these prodigious commitments of resources have been successful. Although electricity is only 16% of all energy delivered to final users in the United States, it is such a high-quality, versatile, convenient, controllable, clean-to-use, and generally reliable form of energy that it has become a disproportionately pervasive and essential force in modern life. Though electricity has so far been beyond the reach of the two billion people who still lack it (except for costly batteries), widespread aspirations to get it symbolize the path to modernity. Its use in the United States has grown each year but three (1974, 1982, and 2001) for the past half-century. During the second half of the twentieth century, the U.S. population grew 86% while electricity usage grew by nearly tenfold, so average per-capita use of electricity more than quintupled (191, 200). (Remarkably, there are no government statistics for total U.S. generation or consumption of electricity before 1989, because previous records were not consistently kept on production or disposition by non-utility entities, and electricity industry statistics donÕt exactly match government data.)
Producing and delivering electricity is extremely capital-intensive—several times as capital-intensive as the average manufacturing industry. Per unit of delivered energy, the electricity system is about 10–100 times as capital-intensive as the traditional oil and gas systems on which modern econ-omies were largely built (414). Generating electricity by traditional means is also very fuel-intensive. Classical power stations that raise steam to turn turbines that run generators that ultimately deliver electricity through the grid necessarily consume 3–4 units of fuel per unit of electricity delivered, and even the most efficient combined-cycle plants decrease this ratio to only about 1.8. Electricity is therefore a far costlier form of energy than direct fuels: in 2000, for example, the average kilowatt-hour (kWh) of U.S. electricity was delivered at a price of $0.0666—the same price per unit of heat content as oil at $114 per barrel, about 3–6 times the recent world price of crude oil (not yet refined and delivered).
Electricity is only one-sixth of the quantity, but two-fifths of the cost, of all energy delivered to final users in the United States. This high price makes electricity an unjustifiably costly way of doing low-grade tasks like heating space or water. Yet the higher-quality services that electricity best provides, such as running motors and electronics, are a bargain. For example,1 the lifecycle cost of an electric motor per horsepower-hour is on the order of 5% that of equivalently powerful horses. It is thus not surprising that a modern American household, or even a car, may easily contain several dozen motors. Modern life without electric light, shaftpower, and electronic equipment would be very different—for most people, much worse. Ultimately, electricity's value depends entirely on how it is supplied and used. New approaches to both the supply and the use of electricity therefore offer enormous and rapidly expanding opportunities for innovation and improvement.
Despite this vast global industry's remarkable success, and because of its recent history, its competitive and regulatory structures are rapidly shifting in many countries. Meanwhile, an even more fundamental change is emerging largely unnoticed: a shift in the scale of electricity supply from doctrinaire gigantism to the right size for the job. As one industry team stated in 1992, "From the beginning of [the twentieth] century until the early 1970s, demand grew, plants grew, and the vertically integrated utilities' costs declined. There is evidence that this trend may be fundamentally reversing in the 1990s." (629) Looking back on the 1990s, it is now obvious that this reversal has actually occurred. In 1976, the concept of largely "distributed" or decentralized electricity production (412) was heretical; in the 1990s, it became important; by 2000, it was the subject of cover stories in such leading publications as The Wall Street Journal, The Economist, and The New York Times (229, 234); and by 2002, it was emerging as the marketplace winner.
This change is exactly the sort of "inflection point" described by Andrew Grove of Intel in his 1996 book Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company and Career (278). Grove describes an inflection point as a pivotal, wrenching transformation that sorts businesses between the quick and the dead. If properly understood and exploited, an inflection point is the key to making businesses survive and prosper. In the technical system that invisibly powers the modern world, the shift of scale now underway has profound implications, both in its own right and as a harbinger of similar shifts toward appropriate scale in many other technical and commercial systems.
The change of scale dissolves the old pattern of the electricity industry; yet a clear vision of the new pattern is still struggling to be born. The shift has so far been motivated less by an understanding of appropriate scale's opportunities than by unpleasant experience of inappropriate scale's dangers. But with a more balanced appreciation of the opportunities that spring from making electrical resources the right size, the transition could be far faster, smoother, and more profitable. This book explores the issues that will define the new pattern as they emerge from radical changes of technology, analytic methods, and institutional attitudes already well underway. Properly understood, these issues could greatly accelerate and intensify the shift of scale by revealing many unexpected forms of value waiting to be captured by alert practitioners.
1 A horse is about as powerful as seven strenuously exercising or twenty ordinarily laboring people. But a 50-horsepower motor might cost only ~$50/hp to buy and around $2/h to run, while 50 good draft horses with equivalent nominal total power and operating life might cost on the order of $1,500/hp to buy and $38 per working hour to feed (426). How one values the relative functionality, intelligence, feeding and waste characteristics, reliability, conviviality, self-reproducing and -repairing abilities, etc. of these options is a far more complex question.
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