First, let us take yet another look at a particular sector which we have already visited several times in this book: the energy sector. Conventionally, the energy sector has been conceived as an industry which supplies fuel to consumers. Accordingly, it tends to be structured around fuel suppliers who base their profitability on maximising the sale of fuels to consumers. This conception has made fuel supply a very profitable business. But it has also contributed significantly to some of our most serious environmental problems, and acted as a disincentive to investment in improved energy efficiency
Perversely, this sector is not even structured in such a way as to provide what people want. As I have suggested already, people do not want fuels for the sake of having fuels. Oil is no good to anyone, except in so far as it provides certain energy services such as thermal comfort and mobility. What seems to have happened with the energy industry, as with so many other industries, is that the force which drives corporate behaviour has somehow become misaligned with the needs of the individuals for whom we would ideally wish the system to provide.
What can be done about this? In the energy sector, this mismatch between the interests of suppliers and the interests of consumers has been the subject of considerable analysis over the last decade or so. Discussions have mainly focused on the best way to overcome the obstacles which stand in the way of improved energy efficiency (see Chapter 6).
The principal difficulty can be explained in the following way. Suppose that an electricity supply company is looking at the best way to meet the demand for electricity from its customers. One way of meeting a projected increase in demand would be to build a new generating station. Another way would be to reduce the demand for electricity by investing in more efficient electrical appliances in the home. Both ways would deliver the same level of energy services. But the second way would reduce the demand for fuel consumption associated with electricity generation. It is, from the national perspective, a more efficient means of providing the same service; it is also less environmentally damaging; and furthermore it turns out to be much cheaper to improve efficiency in the home than to invest in the new power station.9
But there is a problem. The electricity utility is responsible for building power stations, and even has an economic interest in doing so, provided that it can recoup its costs by selling electricity. But individual consumers are responsible for buying and installing their own electrical appliances. The utility has access to the capital needed to build power stations, and can profit from doing so. With the same amount of capital, consumers could buy all the efficient appliances they need, and still have money to spare. But, generally speaking, individuals do not have access to this sort of capital without incurring expensive debts. The interest rates on personal debt tend to be very much higher than those levied on the large utility investor.
The obvious solution to this dilemma—but one which has involved long complicated discussions and considerable wrangling10 and which even now is not widespread—is for the utility to invest in energy-efficient appliances for their customers, and for the profits of investing in a more cost-effective provision of energy services to be split between the utility and the customer. Under the new arrangement, the price of electricity rises to compensate the utility for its investment. But the number of units of electricity used by consumers falls. Both the utility and the consumers benefit economically from the more efficient provision of services. The same basic logic can be applied to other energy services: utility investments in thermal insulation, and in improved conversion efficiency in the home, in offices, and even in industry.
One of the reasons why this solution has been so difficult to arrive at is that it involves a fundamental revision of the basis of profitability of the utilities. Instead of basing their profits on revenues from the supply of electricity, they would now base some of their profits on investing in what is called demand-side management: reducing the demand for electricity by improving conversion efficiencies in the home and the workplace. Quite apart from the change in corporate thinking which this reorientation demands, institutional constraints have also prevented a smooth transition.
For example, many countries impose price regulations which govern rises in the unit costs of electricity. The structure of these regulations has tended to restrict the ability of the utilities to recover investments in demand-side measures. It has proved necessary to renegotiate those kinds of regulations to allow price increases which serve to reduce overall costs. But these difficulties are not insuperable given appropriate institutional will.
It is clear, however, that new arrangements imply new and different commercial relationships in the energy market. Under the conventional conception of the electricity supply industry, the trading arrangement between electricity utilities and customers is relatively straightforward. The utilities produce and distribute electricity to sell to their customers. The profitability of the utilities rests squarely on revenues from electricity sales to consumers. Under the new arrangements, it needs to be possible for utilities to raise revenue, in part, by investing in energy efficiency measures for participating customers. This means that the utilities now become energy service companies rather than electricity suppliers. The Sacramento Municipal Utility District in California is an example of the successful emergence of such an energy service company, selling energy efficiency to its customers as well as supplying fuels.
The service concept also presents opportunities for 'third-party' energy service companies—separate from consumers and from the utilities, but engaging commercially with both. One of the main advantages of these companies is to provide the independent expertise in
energy efficiency which is not necessarily inherent in the energy supply companies. Figure 26 illustrates how the revised commercial arrangements might operate.11
Was this article helpful?