A Greener Energy Model: Selling Services Vs output

This month’s issue of HBR has an excellent proposal for conserving energy in future. Thought I will share it with you.

The proposal talks about utilizing "smart grid" sensor technology for shifting to an energy-services model that considers the impact of greenhouse gas mitigation and a lower consumption of electricity and gas. The business model talks about an energy model that is based on selling services rather than output.

To put it simply, customers would pay for each lumen of light generated rather than each watt of power consumed.

The cellular industry provides an analogy: Your mobile phone service charges you for minutes, text messages, and video download rather than for bits per second, which is the underlying commodity.

Another analogy is the business model adopted by many Indian IT services org. An Infosys (setting aside a Finacle and other products) or a TCS do not sell technology (the underlying commodity), rather they provide services – as in how these technologies can enable or align IT to core businesses of their customer.

In the new model, utilities would charge you for the amounts of light, computer time, heat, cooling, and so forth that you use. So, watching TV for 3 hours over the weekend would cost you Rs 10; vacuuming the carpet in 1 hour would set you back by Rs 2 and so on and so forth.

This business model would be a radical change with far-reaching consequences: Because the use of such energy services will continue to grow for the foreseeable future, power cos could expect rising rather than falling revenues. This would have a strong incentive to develop and market efficient new technologies.

At the same time, all customers would develop a much better understanding of how they use energy and would be better able to lower their costs and carbon emissions. With a more informed consumer, consumer durable orgs would invest more in creating energy smart devices. Samsungs and Philips of the world will be actively working on technology that gives the consumer better cost saving – which means a more effective utilization of energy, and its production.

Do let me know your thoughts about the same.

Interesting model. I am not sure whether it would be applicable for all the utilities.

For example our electric utilities are notorious for their transmission and distribution losses.

India currently has about 1.8 lakh Megawatts of power generation capacity. The transmission losses are about 30%. This amounts to 60,000 mega watts of power ie. Equivalent to 15 Ultra mega power projects of 4000 MW size each. If we consider that each MW of capacity creation costs about 4 crores of rupees, then to create an equivalent capacity of the energy lost we have to invest Rs. 240,000 crores.

According to the quoted Green Energy Model people are likely to pay for these inefficiencies, as they will pay for the power generated not received. That means the State electricity boards wont have any incentive to reduce these transmission and distribution costs. Am I right?

Cheers,
Sabyasachi

Interesting point, Sabyasachi. But just as TRAI has regned in service providers for dropped calls etc., can one envisage an authority that will pull up electricity transmission companies for losses to the consumer?

Just a thought.

Apana

Sabyasachi: fair observation!

Let me bring more clarity to the model: It would be more accurate describing it as "billing the way in which energy is consumed".

On the producer passing on the inefficiency cost to the consumer, lets not forget the very basis of economics. The principle of economics talks about a "point of rationality". Both the supplier and the consumer will try to counter balance each other till a mutually beneficial price point is reached. Ofcourse after seeing the financial meltdown, one might have to take economics with a pinch of salt!! Here Apana's example of a TRAI like body is deliciously interesting!

My confidence that this model (with a bit of tweak) should work is because the Indian consumer is highly price sensitive; hence we can be confident that the consumer would play an active role in rationalization of power tariff.

You rightly mentioned about the abysmal state of electricity distribution in India. And its also true that power leakage is an area of grave concern. Now let me put an interesting "hypothetical" scenario here:

In the new model, I would not be billed on how many watts I use, but how I utilize it - where I use it.

Pls recall the mobile phone example - I am not charged for the bandwidth - rather for services like sms, call, gprs etc. With the maturity and rationalization of prices, now we have a wide gamut of services to choose from - prepaid, post paid, top up plan of Rs 10 to Rs 1000, lifetime recharge plan, free sms, free reliance to reliance call etc etc. The bandwidth or radio waves used by an Airtel or a Vodafone is the same - the differentiator is the service provided.

Another example: On Old Airport Rd, bangalore is Nilgiris supermarket. It has an attached eatery; where you do not pay for one plate biryani or half plate palak paneer - rather you pay how much you want to eat; i.e. 100gm costs you Rs50 and so on. This model has proved to extremely popular amongst regulars - they now have better choice over retaining their price point of lets say Rs 50 and still play around with various combos - plus they eat as much as they want to eat and thus not throw the excess stuff. Now that's healthy habit - on a personal note I can vouch that I lost 3kg in a month by following this healthy eating habit!:D In all its optimal for all parties concerned.

In a similar way, if this model is evangelized, I would not be surprised if private players come into energy distribution in a major way and differentiate themselves on the services provided. We only have to use our imagination to think of the services that can be built on this!

With more players coming in the distribution end we can expect better price for the consumer + better power audit (upstream and downstream - using a oil exploration jargon here...sorry:)) - this would lead to investment in better control of energy leakage - because thats the cheapest way of getting excess energy in a short time - and this would lead to surplus of energy (sigh) - and surplus again drives down the prices.

The model is green - in terms of the bucks (profit) and its impact on enviroment. Lets not forget that cost effective renewable energy is still many years away. Each MW saved (plugging in the leakage by better distribution + smarter choice by consumer) ultimately negates the need to build one more mega hydel or thermal electricity project.

And thats always green!