Why Is Electricity So Weird?

DR2 convenes a board of advisors every month or so, a small group of thought leaders in retail energy. We met last week, and several questions are at the front of my mind.

First, electricity is a curious commodity. Most commodities are raw materials (copper, cotton, etc.). Rarely are they presented to the retail consumer. Instead, they enter a supply / distribution chain, where they’re turned into differentiated, value-added goods before reaching consumers. A company establishes profitability in these commodities by scaling in the supply function (ALCOA, ADM). But sales are overwhelmingly wholesale; most commodity providers are strictly B2B. This is even true for oil and natural gas. Although a few companies own production, refinement and retail functions (Exxon, Marathon), the B2B and B2C functions aren’t really vertically integrated.

But in electricity they very much are. Overwhelmingly, the same companies produce, distribute and deliver to consumers the electric commodity. This leads to economies of scale but also stagnation; it creates equality but not innovation, low prices but not choice. We can put water in the same bucket (and score the pun!). But is there anything else like electricity?

Second, in the last decade or two, deregulation has emerged to, among other things, separate the B2B and B2C functions. Companies that barely existed 15 years ago have certainly arisen, both large (Just Energy, Constellation, AES, Ambit) and small (MP2, Source Power & Gas, Xoom). But curiously little has changed for most retail consumers. Why is that?

DR2 will keep striving to answer these questions. We’re curious to hear what you think, too.

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