Is it time for an Amazon Healthcare Moment in the Utility Industry?
- August 1, 2018
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One upshot of the years-long healthcare debate is that it laid bare the industry’s troubles in plain English to millions of Americans. Having learned from the process, we are now more attuned to the details of ongoing policy clashes and industry news. It probably made sense to people when Amazon, JP Morgan, and Berkshire Hathaway announced plans to start a healthcare company with a mission to fix a system “riddled with inefficiencies and [poor] financial incentives” that is failing to provide satisfactory outcomes.
Would that Americans understood energy as well as we now understand healthcare. Even after “pre-existing condition” became a household word, at least half of Americans still couldn’t tell a kilowatt from a kilowatt-hour, or they simply didn’t care. This is a problem because our energy system is as broken as healthcare. Perhaps more so. Fixing it requires innovation and public will – both predicated on awareness of the problem.
To be fair, the nation’s electric grid is a fabulously ingenious and effective invention. The average electricity user enjoys 99.95% uptime – an outcome known as “reliability”. Electricity rates in the U.S. are among the lowest in the world (“affordability”).
And yet, every year close to 64 percent of the energy consumed in manufacturing and delivering electricity is wasted (“efficiency” – or lack thereof). Much of this is due to energy lost as heat from burning fossil fuels, and inefficiencies in moving energy around. Losses vanish as energy becomes more distributed, digital, and renewable. Energy waste is nearly invisible to end consumers, but has a devastating footprint. Electric power generation is the second-largest source of greenhouse gas emissions.
Chronic inefficiency isn’t the sector’s only problem. During the week of the Amazon healthcare announcement, the credit rating agency Moody’s downgraded the entire U.S. utility sector for the first time in history. The report cited a failure to manage debt loads and cash flow, sluggish revenue growth, and high capital spending. Utilities, it said, have not adjusted their business models and ‘financial policies’ to cope with changing business conditions. In other words, old habits are taking a toll.
Like healthcare companies, energy providers operate under a lot of regulation. And innovating in heavily regulated industries is a challenge. To spur innovations like solar and wind energy, regulators have tried to de-regulate parts of the industry and introduce competition. But many of these actions have been offset by regulations that walk that competition back. Utility companies are left in the middle of a game of regulatory ping-pong: threatened by competition, lured by the promise of higher profits, lulled by the security of regulatory crutches.
The Trump administration’s proposed coal and nuclear bailout is just the latest example. It would subsidize aging generating capacity, interfere with competition, and stifle investment in clean, “advanced” energy. This unnecessary market takeover is the policy equivalent of a child seeking a prophylactic dose of cough syrup just because it tastes great.
Regulatory limbo makes it tough for executives to prioritize and plan ahead. Wedged between regulation and markets, they are expected to deliver it all – reliability, affordability, and shareholder returns with low risk and volatility – a set of outcomes increasingly difficult to sustain.
Things are changing. To increase operational efficiency, utilities are investing in more software and information technology. To address flagging corporate growth, they are hiring new executives responsible for customer satisfaction, marketing, and sales. But they can’t act alone. In the words of one Fortune 500 utility CEO, “we need a new regulatory compact.”
To date, most utility regulators have been slow to change regulations that are aimed, above all else, at keeping America’s lights on. There are some exceptions. California, Illinois, and New York have implemented regulatory changes faster than average. Those states share a common ingredient: strong public pressure from energy users looking for better outcomes. Other states lack the same pressure and momentum. Public awareness matters.
Americans may not think of their local utility as either a company in crisis or a frustrated innovator. In fact, they may not think of their local utility much at all. But forestalling global climate change will require better alignment between energy users and energy providers. That is how to cut waste and improve outcomes more quickly.
At this stage, two paths seem possible. If the turning tide of popular interest produces more rapid regulatory evolution, utilities can innovate a path forward. Alternatively, a new market player akin to “Amazon healthcare” could jump into the $350 billion electricity market and rethink the problem.
This second scenario may be closer than we think. For years, companies outside the utility sector have built portfolios of power generation. More recently, Apple and Google acquired federal licenses to sell energy directly to other consumers. Startups are testing blockchain-based energy platforms that would power peer-to-peer energy trading. Other signs of innovation abound. Would your grandmother recognize the “utility” of the future – or its replacement? Perhaps as much as she would think of Lyft as a taxi company.
The Amazon healthcare CEO Atul Gawande, who reported to his new job last week, aspires to reinvent healthcare. In a press release he said, “I have the backing…to pursue this mission with even greater impact for more than a million people, and in doing so incubate better models of care for all. This work will take time but must be done. The system is broken, and better is possible.”
Better is possible in energy, too: cleaner, more efficient, more consumer-friendly. The building blocks are there. It could be anybody’s market.