Utilities be warned... Silicon Valley is coming for you

This week I caught up with Paul Nahi, the global chief executive of Enphase, a Silicon Valley company that is shaking up the global solar PV inverter business.

But don’t worry, this is not some boring story about inverters (they manage the power output of solar panels), it’s a story about how the Silicon Valley is taking what it's learnt in personal computing and the internet and planning to use it to unleash a full scale attack on the global utilities industry.  

Nahi’s message was simple: the power companies can either jump on board the household solar revolution or get blown away, just as Silicon Valley has vanquished plenty of other previously dominant but too-slow incumbents.  

We’re already seeing this take place in Germany, driven by a groundswell of community and therefore government policy support for renewable energy. The major power companies of RWE, EnBW and E.ON are haemorrhaging red ink, as their power plants have been squeezed out by renewable energy supported by government mandated feed-in tariffs. Climate Spectator has reported extensively on how these utilities now face a power market where prices have plummeted, illustrated below, as renewable energy installations – particularly solar – have surged (see here and here for some examples). On Friday, we reported that E.ON plans to shut more than a quarter of its power plants in Europe in response to the rise in renewables.

Politically conservative voices like Oliver Marc Hartwich, who’s take on RWE’s poor plight we ran yesterday, seem to feel sorry for these companies and that they are not to blame. But the writing was on the wall a long time ago that Germany would aggressively grow its use of renewable energy in an attempt to dramatically reduce greenhouse gas emissions and become less dependent on fuel imports. They even coined a term for this transformation with its roots in a book from 1980 – energiewende.


Source: EnBW 2020 strategy document

The horrible financial plight of these big utilities is a function of the fact that they made strategic choices which read the future incorrectly. These utilities, for the most part, chose to not to grow their renewable energy businesses, something they now openly acknowledge was a mistake. They underestimated the will of the German people to transform their energy system, and they underestimated the capability of renewable energy and energy efficiency technologies to deliver. This was not sprung on them, the warning signs were there for all to see.

Now the question on every power executive’s lips is whether Germany represents an anomaly or a sign of things to come.

Most other countries don’t have the same degree of community concern and political support for cleaning up their energy supplies, which provides cause for comfort for power industry incumbents.

But the other side of the equation is technological advancement of solar, batteries and energy management tools. As these drop in cost and improve their performance then it may not take much of a policy leg-up for them to grow. This is where Silicon Valley is mobilising its formidable human talents and financial firepower.

One can’t help but get swept away with Nahi’s confidence, his belief in the inevitable technological and economic superiority of solar technology plus battery storage over the existing alternatives. But the thing is that Nahi and a range of other co-conspirators in Silicon Valley, including the venture capital firms that allow great ideas to take flight, as well as giants like Google and Apple, are plotting a plan for creative destruction which Silicon Valley has executed time and time again in the past.

Solar cells are a silicon-based technology, just like computer chips, and they’ve seen what’s happened with the cost and performance of computer chips. When it comes to batteries they’ve just made mobile computers ubiquitous at low cost while lasting nearly a day between charges. Also, the management and shifting of household electrical loads as well as power supplies from batteries and solar cells is a software and networking challenge – and they know how to do that, too. In addition they’ll achieve vast economies of scale while maintaining competitive discipline and flexibility via utilising contract manufacturers out of Asia. 

As the defiant and angry response of Apple’s chief executive to questioning over the company's involvement in clean energy illustrates (he told the meeting that if an investor didn’t believe in global warming then they shouldn’t buy Apple stock) the senior levels of the Silicon Valley community are energised by the challenge of decarbonising energy supply.

The task is massive and there’s no certainty that Silicon Valley will succeed. But a power company that ignores the threat would be foolhardy in the extreme.