- 1 Conceptual framework
- 2 Utility death spiral, electricity services but no supply shock
- 3 Platforms, subscriptions, and horizontal integration
- 4 Regulatory implications
Meeting climate change goals requires both the decarbonization of the electricity sector and the electrification of much of the rest of the economy (Farrow & Chen, 2018; Rockstro¨m, Sachs, O¨ hman, & Schmidt-Traub, 2013). However, the electricity sector is navigating major disruptions that are changing its regulatory and business landscape. New distributed energy resources (DERs), a combination of distributed generation, storage, and digitalization, allow households to generate, consume, shift, and reduce their electricity consumption, largely bypassing traditional utilities.
This is an interesting question because electricity and transportation, both traditional sectors, are experiencing deep transformations and could have an intertwined future: electricity could provide the basic ‘‘fuel’’ for transportation, while transportation could be the major engine for growth in electricity demand.
There could be a direct and/or an indirect transition from the use of fossil fuels in transportation to electricity. As Fouquet (2010) suggest, direct transition would occur if, thanks to new technologies, electricity ends up being cheaper, and with better qualities more flexible, more stable, or cleaner than the competing fuel. This direct effect would explain, in a first stage, a one-to-one transition from fossil fuels to electricity.
This effect could be compounded further as lower implicit service prices could lead to rebound effects that lead to increased consumption (Sorrell, 2009). An indirect effect could also drive electrification if there is a positive supply shock in complementary goods, that is, if the price of a good decreases, demand for the complementary good increases. Electricity and transport can be mutually complementary services, but the effect of electricity on transportation would be via prices while the effect of transportation on electricity would be via quantities.
If the electricity price fell relative to the price of gasoline or diesel as a result of technological disruption, this would lead to an increase in electric mobility. If technological changes in transportation lead to an increase in EV miles traveled, electricity use also increases as a result. The transition from transportation by horse to the motor car at the beginning of the 20th century illustrates this point. Travelers did not use cars to travel to the same places at the same frequency as they did when they traveled by horse.
Technological disruptions in the electricity and transportation sectors
In order to help understand the interconnections of technological disruptions, we first consider in this section each sector individually. We provide an overview of the technological changes in each sector, and then outline how they impact market structures, products, and services, and the extent to which they could create a supply shock. New technologies have the potential to disrupt these sectors as they challenge existing market structures and incumbent firms. They also have the potential to transform the nature of their industry products, possibly creating more intangible services without the need for physical goods (Fuentes-Bracamontes, 2016).
Utility death spiral, electricity services but no supply shock
The power industry faces major technological, economic, and institutional challenges. Significant shifts are taking place with the increased deployment of renewable technologies and the rapid development of on-site generation, information, and control technology. PV panels, batteries, and demand appliances, when combined, can help reduce the reliance on the grid and the utilities’ generation capacity.
Hypothetically, this could lead to households producing electricity independently. These technologies also reduce the barriers to entry for third parties, other than incumbent utilities, to participate in the industry. Such shifts challenge the dominant role of existing electricity supply companies and question the viability of the products currently offered by the utilities (Fuentes, 2016).
Capacity utilization, mobility as a service challenge: The car ownership model
There are three revolutions underway in the transport sector: ‘‘peer-to-peer’’ mobility, EVs, and automation; together, they have helped to create the concept of mobility as a service. Similar to the changes to the electricity sector, outlined above, the combination of these technologies threatens the dominant form of transport, car ownership. This section provides an overview of the implications of these new technologies individually and combined.
We then discuss the extent to which these technologies could create impacts similar to a supply shock and how they could impact the transportation industry. ‘‘Shared’’ mobility has always existed in the form of taxis, metro trains, buses, and so forth. This section focuses on ‘‘peer-to-peer’’ mobility: ride-sharing apps that match passengers with drivers for on-demand point to point transfers, like Uber or Lyft.
These apps offer the flexibility for both sides of the transaction to easily enter and exit the market place at will, lowering information asymmetries, and entry barriers. These apps could challenge the car ownership model if consumers perceive that investing in a car is unnecessary, as they receive the same benefits of car ownership in a timely manner and at lower prices (Sprei, 2018). This shift would transform an upfront investment into a per ride expenditure. Of course, consumers acquire other indirect attributes when they buy cars, like status and independence from third-party providers.
Killing two birds with one stone!
Batteries are the common hardware components in new electricity and transportation technological disruptions. They are necessary for households to become energy independent and for EVs to be viable. As such, the more storage technologies improve, the more they enable a virtuous powertransport circle.
Improving battery storage capacities would allow EVs to travel longer distances with a single charge and would make it easier for more households to become independent from a utility. Reducing the cost of batteries would be welfare enhancing since it would also reduce the total cost of providing services in the transport and power sectors. This could also increase the use of batteries, leading to economies of scale.
EVs can also contribute to the development of the smart grid by charging during off-peak hours, providing back up power to the grid and helping to incorporate other clean, renewable, zero marginal cost technologies (D’Aprile et al., 2016; Knupfer et al., 2018; Frankel & Wagner, 2017). The extent to which synergies between the transport and power sectors could be forged would depend on the direction and type of batteries developed, and where firms position themselves along the storage value chain.
Platforms, subscriptions, and horizontal integration
This section argues that electricity and transportation business models would converge as a result of technological disruptions. Electricity and transportation services could, for example, be traded on platforms and offered as bundled subscriptions. Having this convergence in their business models would likely create synergies that might eventually lead to more vehicle miles traveled and more electricity consumed than if the services were offered independent of one another.
Since services are intangible and heterogeneous, service providers need to package services in a way that establishes the delivery unit and also the scope and number of actions that constitute a delivered service. Because of the cost structure of new technologies, we suggest that electricity could be traded in long-term fixed-price schemes, such as memberships or contracts, in which energy services could be combined. The economic intuition behind this change is as follows.
Renewable energy can generate power from abundant resources at zero marginal costs. Since fossil fuel generated electricity, the element of scarcity is clearly evident; the question is how to price a homogeneous product when an increasing share of it comes from an apparently unconstraint resource. We know that prices should reflect scarcity and that there is not such a thing as a free resource, therefore, the scarcity source of renewables lies elsewhere.
Data and predictability
Digitalization is another common technology in the disruption of the electricity and transportation sectors. Data generation can provide additional revenue streams for horizontally integrated firms, with the potential to generate more revenue than the actual revenue from the sale of electricity or rides (Foroohar, 2019; The Economist, 2017b). The consumption of electricity and transportation is highly habit dependent and therefore predictable.
Transacting these services on digital platforms and via subscriptions would generate behavioral data. Such data could help companies predict the aggregate household demand for power and transportation more accurately, which could lead to operational costs savings. For example, it would be possible to link information on the time consumers leave their places of work, the approximate time of their arrival at home, and the sequence of appliances they use when they arrive.
This could help transport and electricity companies plan for capacity expansion and utilization. Digital technologies can enhance the number of variables, frequency, and granularity of data companies can collect on their consumers. In the past, it was only possible to collect observed actions. For example, a few decades ago companies would only collect data on daily sales.
We argued that through the horizontal integration of these two sectors in a single platform, companies would obtain economies of scale, lower transaction costs, and obtain complementary data sets, potentially producing a rebound effect that could lead to increased demand for mobility and electrification. Assuming that these objectives are not at odds with other policy objectives, like reducing urban congestion, if renewable sources generated electricity, this could help address the aforementioned climate change problem.
How then can we make sure that these synergies occur? Should this be left entirely to markets? Does regulation play a role? One positive aspect of regulation could be the local focus of this transformation. How to regulate digital platforms infrastructure is an open question that would require innovative approaches. Local jurisdictions, rather than national or supranational entities, may have more flexibility to come up with new regulatory frameworks.
Author: Rolando Fuentes Lester C. Hunt Hector Lopez-Ruiz Baltasar Manzano