How Customer-Generated Power Will Impact Power Companies’ Business

Definition of Customer-Generated Power

Module 5 Discussion:  Please reply to each student post.

Discuss: What impacts you foresee customer-generated power (e.g. using solar, wind, etc.) having on the power companies’ businesses. What trade-offs will these trends require in their operations and distribution strategies?

Customer-generated power is best defined as using non-traditional methods to generate power near the customer. This could be done by using solar panels, wind, water, etc. Traditionally, the power came from monopolized power companies which gave buyers very little power when choosing where to get electricity from. The growth of these customer-generated power consumption methods will lead to significant ramifications for the power companies' business.

"According to a report from Morgan Stanley Research, 1-in-3 homeowners worldwide are now interested in generating their own electricity within the next five years. As many as 80% believe that they will be able to sell the excess energy they generate"(Morgan Stanley 1). This means that buyers will no longer be dependent on getting their power from the power company, decreasing demand. For power companies to remain relevant in the marketplace, they must adapt to the changing market to meet customer needs.

A trade-off is defined as "the premise of compromise. Such a view states that operational systems cannot simultaneously excel on all dimensions of value" (Pagell, Melnyk, Handfield 69). For traditional power companies to keep their current business model and still compete, they must adopt the low-cost differentiation strategy as their competitive advantage. This will incur operations trade-offs to determine how to best cut costs. With all-new innovations, customer-generated power is currently expensive but will decrease in price as time goes on. Every activity in the power company activity chain must be evaluated to determine where costs can be cut.

An advantage that customer-generated power has over power companies is that power is generated near the customers, which reduces the costs associated with transmitting the energy. However, for traditional power companies, "it’s not produced in your neighborhood — most electricity travels quite the distance from where it’s generated across heavy-duty transmission lines to reach local distribution systems and, finally, your home" (Snew 1). Because of this, distribution trade-offs will be necessary to only provide power service to areas that can be cheaper than customer-generated power. This way, they can continue to be the market leader in areas while not competing in areas where they cannot compete on price.

The renewable energy sector displayed an unprecedented increase in wind and solar energy by 45% in 2020, making it the most significant annual rate increase since 1999 (Chappell, 2021). This increase caused major development shaping the global renewable market. Additionally, by signing the Paris Climate Agreement, countries pledged to reduce carbon dioxide (CO2) and other gas emissions by 2030.  What this means is that governments are developing plans to reduce fossil fuels and increase customer-generated power. This shift will impact power companies because now they have to strategize ways to reduce carbon emissions.

Impact of Customer-Generated Power on Power Companies’ Business

Power companies are now forced to change the fossil fuels they use to generate electricity and reduce emissions in other areas (Underwood, 2019). For example, utilities such as the national grid are educating their customers on using less energy. National Grid recently launched an energy-efficient and solar marketplace that allows residential customers to receive added discounts for installing energy-efficient heating and cooling equipment at their homes (Underwood, 2019).

The shift to renewable energy will cause the utility sector to shift its carbon or emission reduction strategy. In the US power sector, 65% of customer accounts are served by a utility provider with publicly stated carbon reduction goals (Porter & Hardin, 2020). The prices of wind and solar have dropped, which creates competition between renewable energy and power plants. The decrease in the cost of solar and wind caused a 77% increase in renewable energy within the last decade (Porter & Hardin, 2020). Lastly, there will be a shift from fossil fuels since the power sector has become less reliant. The decrease in fossil fuels will cause executives to push electrification and focus on helping customers ‘electrify’ regarding electric vehicles (EV’s).

The tradeoffs that the trends will require in their operations are to provide more robust power grids, more energy storage, hydrogen for renewable power, heat pumps, and faster uptake of electromobility (Power Sector Transformation, 2018). Additionally, utility companies should install more stable and effective operating systems to manage the power grid to ensure there aren’t blackouts like the state of Texas experienced in February 2021.  Additionally, utility companies will need to change the incentives to decrease fossil fuel technologies and implement more solar and wind technologies into their business models.

The utilities industry in the United States has a very unique business model. First and foremost, these industries do not provide a good or product in the way that most people consider. This is because power companies provide a product that is not tangible. They do not necessarily provide a service either though, in that they do not agree to perform a given task in exchange for compensation. The value they deliver to their customers comes in the form of something that resides in the gray area in between these two economic entities. 

Examples of utility companies include the local power company, the water board, telephone companies, and internet service providers. The one that is most often cited when discussing the utilities industry however is the power company. The recent advancements in power generating technologies may affect their historically stable position in the market soon. As access to power through alternative sources becomes more and more economically feasible and user friendly the power company is facing more competition than ever before. 

In order to remain a powerful force within the industry and protect their strategic position, power companies may need to invest some capital into researching the effects of these new technologies within their organization. They may need to start offering their services cheaper in order to compete with this new "homemade" energy. They may even need to seek ways to integrate new renewable energy sources into their organizational and distribution system. For example along with hydro electric, coal burning, and nuclear plants they could start utilizing tidal , geothermal, and solar power generating facilities. That is, of course, only if the balance sheet allows for such an endeavor. This would not only allow for a potentially cheaper product through alternate means of production but it may be a win from a PR standpoint as well. More people than ever are highly concerned with environmental issues and if a power company makes it a point to produce the cleanest form of energy possible they may be rewarded with a zealous new clientele.