The De-Commoditization of the Kilowatt-Hour

For years, decades, even a century, retail residential electricity consumers like you and me have used kilowatt-hours as a commodity. We treat them as uniform and fully interchangeable. One kilowatt-hour is as good as the next. And within a respective geography and with some exceptions, we pay a single price per kWh without regard for where that kWh is generated (down the street or hundreds of transmission miles away), how it is generated (from coal, natural gas, nuclear, wind, or solar), the time of day or night at which we use it (and the relative supply and demand at that time), how much of it we use, and myriad other factors.

Those inside the electricity industry—regulators, utilities, grid operators, wholesale generators—of course know that every kWh is not created equal, though most customers consume them as if they are. But the days in which the kWh can be treated universally as a commodity on the retail-facing side of the industry are coming to a close. I’ve seen it happen in other industries.

Lessons from the world of supermarkets

Outside of my energy-related work at RMI, I’m a cookbook author and food writer/blogger. It’s there—in the world of food and supermarkets—that I see the writing on the wall for the electricity sector.

Not all that many years ago, supermarkets were to consumers what utilities are today: purveyors of commodities, whether produce such as fruits and vegetables in the case of the former or kilowatt-hours with the latter. Pick your produce—corn or tomatoes or apples or whatever. They each used to be, by and large, a commodity. Prices tended to be relatively uniform and stable, and no matter where you did your grocery shopping, an ear of corn was an ear of corn, a tomato was a tomato, and an apple was an apple.

But several consumer-driven movements changed all that. Concerns about pesticides and genetically modified crops (GMOs), coupled with growing interest in organic agriculture, made how the food was grown front and center. Similarly, the rise of the locavore and Slow Food movements made where a food was grown a matter of importance. These two developments fundamentally reshaped the produce department.

Nowadays, when I go to my local supermarket, any given piece of produce is much more likely to be labeled with its country, state, or even farm of origin; whether it was grown ‘conventionally’ with pesticides or organically; and whether it is GMO-free or not. The story is similarly true of eggs, and increasingly of meat and fish. And of course, the price can vary widely depending on those many factors.

Though food-as-commodity still exists in some circles, for many retail consumers—especially those buying primary whole foods such as produce, eggs, meat, and fish that have not been processed into food products like cereals and crackers—those days are over.

As fruits and vegetables go, so does electricity

The kilowatt-hour is well on its way down the same road traveled by supermarket produce. Concerns about climate change and carbon emissions, the rising cost of fossil-fueled energy (whether electricity or other sectors) and its economic impacts, and a desire for both energy independence and reliability are all fueling customer awareness, pulling back the veil on the kWh-as-commodity. Suddenly, how, where, and when a kilowatt-hour is generated matters.

The evolution of net metering, time-of-use pricing, third-party renewables monthly lease or PPA rates vs. utility-sourced energy, the ability to participate in interactive retail or wholesale energy and ancillary services markets, two-way power flows across the meter, deregulation in some markets (with consumers able to choose their generator), and many other factors are further driving the transition.

More than ever, consumers are increasingly knowledgeable, have values that ultimately differentiate one kWh from another, and are willing to pay a varying price for the differences between kWhs.

Responding to de-commoditization

As consumers gained knowledge, shifted their demands, and demonstrated their willingness to pay a varying price, supermarkets and producers/farmers had to adapt their offerings. ‘Incumbents’ that failed to do so lost market share. Disruptive start-ups that embraced these new trends profited handsomely. Think of the success of Whole Foods, which built its fortune on offering consumers organic, high-quality produce sourced from clearly identified local and regional farms. Produce that was once a commodity had become diverse, differentiated, and available at many price points, with consumers willing to pay a premium for produce that matched their values.

So, too, must utilities and generators adapt. It is no longer enough to sell naked kilowatt-hours at a flat per-kWh rate. Once upon a time, when the kilowatt-hour could still be considered a commodity, that was fine. But we live in a different era now. More than ever, we cannot ignore the highly differentiated merits and costs of each kilowatt-hour. Time-of-use pricing, unbundled retail electricity rates, value-of-solar tariffs, and other strategies are a start, but there’s more progress to be made. As we increasingly recognize, kilowatt-hours are far from created equal, and as our electricity system evolves toward even greater transparency and consumer empowerment, utilities, regulators, wholesale generators, and third-party developers must find a way to profitably deliver affordable electricity that honors—and values—the kilowatt-hour’s de-commoditization.