Moving Electricity: Sometimes, Innovation Isn’t Enough

An old friend named Tim stopped by the office recently to talk about innovation in the electrical utility industry in the United States. Tim has spent 45 years in the business of generating and moving electrical power; he has spent the past 15 years consulting with entrepreneurial companies in the U.S. and abroad.

It turns out that Tim is very frustrated because there have been many amazing innovations in the transmission of electricity from where it is produced to the customer, and yet, the industry, for the most part, refuses to embrace these advances.

Sure, we have alternative ways to generate energy – such as solar and wind power – but the areas in greatest need of innovation lie in the transmission from the source to the customer. This is commonly referred to as the “smart grid.” Tim said, “Do you realize that in the next seven years, China will build a transmission and distribution system that it took the U.S. utility industry 100 years to build, and it will be a smart grid?”

What is a smart grid? Siemens AG (NYSE: SI) defines a smart grid as the convergence of “products, solutions, and services for the protection, automation, planning, monitoring, and diagnosis of grid infrastructure.”

So, we had to ask the obvious question: If there are important benefits to introducing smart grid technologies into the utility industry, why have the utilities ignored these obvious improvements? The answer is interesting.

Tim explained that “the electrical utilities in the U.S. are risk-averse.” He says, “Think of it this way: if the industry has over a 99.6% reliability rate and is highly regulated in every aspect of its business, why should executives risk their job security for a new innovation? Furthermore, it is very difficult to get paid for employing new technologies because the cost of these innovations – which include replacement of equipment, training and re-training, and documentation – is significant when you consider that the ability to recoup these costs do not exist in the utilities regulated rates. In other words, the cost plus the risk of change is huge.”

We asked Tim why the electrical utility industry hasn’t changed the way the telecommunications industry has changed. Both are regulated. The telecommunications industry went from analog to digital, went from copper to fiber, and is moving from largely hard-wired service to cellular. Tim’s response was simply that “in the case of telecommunications, the industry changed because the market forced the change.” That is not the case in the electrical utility business. For the most part, says Tim, “the customer is ambivalent. Why would the customer want to change any more than the utilities that serve them as long as they are getting their electricity with 99.6% reliability?”

This article was originally written in late 2012, well before the explosive growth in data centers that has resulted from the expansion of artificial intelligence. Around the globe, data centers currently account for about 1 to 1.5 percent of global electricity use, according to the International Energy Agency. And the world’s still-exploding boom in artificial intelligence could drive that number up a lot—and fast. A continuation of the current trends in AI capacity and adoption are set to lead to NVIDIA shipping 1.5 million AI server units per year by 2027. These 1.5 million servers, running at full capacity, would consume at least 85.4 terawatt-hours of electricity annually—more than what many small countries use in a year, according to the new assessment.

Energy industry CEO’s what are you doing about this? It appears that the electric utility industry has some big issues and our friend, Tim, has every right to be frustrated at the slow pace of change in the industry.

There may be some lessons to be learned for entrepreneurs. First of all, one thing that this article has taught us is that markets drive change. If the market does not see a problem and is not willing to pay for it, the change will be hard to come by. Our sense is that the demand created by data center development will force the market to change, and fast! Secondly, just because one market doesn’t see the need for change doesn’t mean that all markets will ignore innovation.