Oddly enough, local electricity generation by businesses and homeowners exposes a key problem for electricity supplier economics. Traditional pricing assumes energy consumption is equal to grid usage.
But distributed generation breaks that assumption. Essentially, customers remove themselves, at least partially, from the system, but retain the optionality of using the grid for reliability, backup, and peak load balancing.
But fixed costs stay embedded in the price of per-kiloWatt hour charges, so rates will rise as sales fall. At the same time, new demand driven by high-performance computing and associated data centers increases the need for new investments in transmission infrastructure as well as generation, increasing the fixed costs.
The basic problem is a combination of high fixed costs; low marginal costs per additional kWh and the impact on ability to cover fixed costs when demand is reduced by local generation.
Since fixed costs do not decline proportionally with local generation, all remaining sales must cover more fixed cost per kWh consumed.
This pushes per-kWh rates upward for customers who still rely heavily on the grid.
But the network still must be designed for peak load, sized to serve customers when solar output drops (night, winter, clouds). So self-generation reduces energy delivered, not the need for the grid.
What’s really happening is a decoupling of value from volume, something that also happens in other infrastructure contexts.
The grid’s value is optionality and insurance, but it’s priced like a commodity pipeline. Distributed generation exposes that mismatch.
So what might be done to fix this problem? Fixed monthly connection charges are one way of “socializing” grid costs. Time-of-use pricing and demand charges also can help. But as with mobile and fixed telecom networks, “access” to the network might be more important than usage charges.
So reframing the product might be conceptually necessary. The “product” electrical utilities sell is reliability, capacity, and load balancing, not just energy.
Energy is a commodity that is part of the service, but grid access becomes the actual “product.”
Beyond all that, perhaps more explicitly cross subsidies are needed, as once was the case for communications services, where business user profits subsidized consumer usage. Perhaps business customers and self-generators must subsidize customers unable (for financial or physical reasons) to participate in self generation.
Until pricing reflects capacity and availability, not just kWh, rising self-generation will continue to raise rates for those most dependent on the grid.
This reminds me very much of how economics of the “telecom” business changed with competition.
Both electrical grids and telecom networks have the same core traits:
Extremely high fixed costs
Very low marginal cost per additional unit of usage
Peak demand, not average usage, drives capital investment
Universal-service expectations layered on top of commercial economics
Historically, both industries solved this with implicit cross-subsidies. But widespread technology changes and deregulation changed the telecom business model.
Traditionally, high prices for business customers (especially long distance calling) provided the profits that allowed affordable service for consumers.
This worked as long as high-margin users couldn’t easily bypass the network and suppliers had pricing power.
Self generation in the electricity business has the same dynamics. When high-value customers (commercial, industrial, affluent residential) can self-generate, electricity providers lose the profits that allow them to serve mass-market customers reliant on the grid with affordable rates.
The cross-subsidy that once flowed invisibly is exposed. The analogy with telecom after deregulation, mobile substitution for fixed voice, embrace of internet protocol and reliance on internet access as a core service for the fixed network illustrate the issues.
The problems are similar. Neither industry can simultaneously have volume-based pricing; high fixed costs; widespread abandonment of the core network and stable rates for mass-market customers.
The telecom industry adapted by shifting its revenue model. Today, customers do not primarily pay for minutes or megabytes anymore. They pay for “access to the network.” Think of it like Wi-Fi access. One pays to be connected, not for usage (bytes consumed or time connected or bandwidth provided).
The analogy is a mobile phone service plan offered at a flat fee per month that includes “unlimited” data usage; “unlimited” national calling and text message.
The customer pays for the ability to use the network, not consumption in a strict sense.
Today’s electrical energy service problem is that self generation reduced kWh sales while fixed costs remain. As rates rise to cover fixed costs borne by fewer customers, there is more incentive to defect.
So an access-fee model more effectively recovers shared fixed costs. So self generation no longer erodes fixed cost recovery. And the grid stays healthy.
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