The Strategic Challenge of Grid Defection
When your business model depends on scale, how do you manage a shrinking market for your product?
The energy transition is forcing – or will force – leaders to address this question as renewable energy continues to replace fossil fuels. For instance, as consumers buy more EVs, the market for gasoline will shrink, making the gas station business unattractive.
In this example, station owners have the option of becoming distributors of other sources of energy such as electricity or hydrogen.
Consider the company that mines and refines the gasoline, however. Finding a replacement for lost revenue from declining demand for gas is more challenging but still somewhat straightforward. An oil & gas company could pivot to mining and refining chemicals used in batteries and other technologies. Chemical extraction could remain at the core of the organization even if the resource pulled from the ground is different.
Electric utilities, however, face a more existential threat. The culprit is “grid defection.”
Grid defection occurs when a ratepayer installs solar or other energy generation capabilities along with storage and backup to have an independent energy supply.
Defection represents a challenge for two reasons. First, when defection occurs, there are fewer ratepayers among whom to spread investment costs that already require decades to pay off. Second, those most likely to defect are those most able to pay, meaning that only those with less ability to pay remain on the network.
With grid defection, utilities face a situation where customers are not replacing their electricity service product with a substitute service product into which the utility company could pivot. Instead, defectors are deciding to become their own supplier.
What strategic options are there for the leadership team at an electric utility? Conceptually, there are a few options:
➤ Fight it. Do everything you can to make it as financially unattractive as possible to defect from the grid.
➤ Ignore the problem. Financial ruin due to grid defection is still years away. Cut costs and prop up profits to make as much money for oneself now as possible and leave the problem to the next leaders to solve.
➤ Accept and adapt v1. Adjust the service to match the new economics, focusing on commodity, low-cost electricity delivery and dropping high cost extensions to the basic service.
➤ Accept and adapt v2. Adjust the service product to become highly value-added, incorporating benefits of grid defection into the service offering.
➤ Re-invent the company by creating a division that profits from grid defection by helping ratepayers make the leap.
None of these paths are easy, and this list of options certainly isn’t complete.
At Tilt Global, we help leaders faced with disruption caused by the energy transition come to grips with obstacles and opportunities of their specific strategic context, identify their options, and make better decisions to build resiliency and alignment.