Disruptive Innovation and the Future of Energy

A "disruptive innovation" is one that uproots and replaces an existing technology. The term was coined by Clayton Christensen at Harvard Business School in 1995. [1] His goal was to explain why successful companies ran by intelligent people still end up going bankrupt or get displaced. He describes a process whereby new products or services initially take root in simple applications at the bottom of a market and then relentlessly move up market, eventually displacing established competitors.

While CEOs are intelligent people, they tend to operate within the same paradigm that allowed their company to become successful in the first place. Their infrastructure, mode of thinking, and commitment to the most reliable path to positive return on investment leads to what Christensen calls "sustainable innovations", which are slight improvements on already existing products or services. These innovations allow companies to maintain their corner of the market and to grow in the short term. However, this process of pushing the higher tier of the market through minor improvements unwittingly opens the door for "disruptive innovations" to enter at the bottom of the market. As established companies continue to push their "sustainable innovations", "disruptive innovations" are able to take root and grow. They eventually displace the old technologies and create entirely new markets and business models.

A classic example of a "disruptive innovation" is Henry Ford's Model T displacing the horse and carriage industry. Below is a picture of New York's Fifth Avenue Easter Parade in 1900, with perhaps one car on the road:

And here is the same parade in 1913. Cars had nearly completely taken over:

In just over a decade, the percentage of American households owning a car went from 8 to roughly 80 percent. Several new markets were born: the automobile industry, auto mechanic industry, auto oil and gas industry, and the auto loan industry. General Motors and Dupont invented a financial innovation for auto loans that financed three-fourths of the cost of the car, and consequently, the horse and carriage industry was reduced to a fraction of what it was before the disruption. Even 100 years ago, the disruption of a well-established industry took less than 15 years.

PCs displaced mainframe computers, cell phones displaced landline telephones, digital cameras displaced Kodak, Netflix displaced Blockbuster, digital media displaced newspapers, magazines and books, iTunes displaced CD-music stores, GPS displaced paper maps, etc.

Zero marginal cost

There are many reasons for the success of these new products and services -- they are less expensive, more accessible, more useful, or more appealing. Consider digital photography: No longer did photographers have to pay for film, film processing, or printing. They could simply upload images to their computer and erase the camera's memory. This process could be repeated 10 times or 10,000 times at no additional cost to the photographer. This is the concept of zero marginal cost.

Marginal cost is the cost to produce an additional unit after the fixed cost is paid for. [2] After the camera, memory card, and computer is paid for, each additional photograph is free. Since Kodak and the film photography industry made their money every time a picture was taken, the zero marginal cost of digital photography destroyed their business model. The "disruptive innovation" was due to the convergence of digital imaging and lithium-ion batteries that enabled zero marginal cost photography.

The future of energy and transportation

The fossil fuel energy and transportation industries have a business model similar to Kodak's. [3] The utility companies get paid every time a light is turned on, and the suppliers of coal, oil, natural gas, and uranium get paid for their services. When you drive your car, the oil industry gets a cut.

Tony Seba argues in his book Clean Disruption that distributed solar and wind plus battery storage changes the equation the same way that digital cameras changed the film camera equation. After you install solar panels and a battery, the marginal cost of each additional unit of energy drops to near zero. The ongoing need to pay fossil fuel companies and electric utilities for their products and services is significantly reduced.

With the cost of solar panels and batteries falling every year, renewable energy will eventually disrupt the competitive wholesale electricity markets. The day will come when personal solar and batteries are just as plentiful as cell phones are today. "Prosumers" will both produce and consume energy, and Internet-enabled energy networks will allow trading between homes, business, and electric vehicles.

Building out this new distributed energy infrastructure represents one of the largest wealth creation opportunities on the planet. Dozens of new markets will emerge, with the design, development, distribution, finance, installation, and maintenance of renewable energy systems. And consequently, the largest industries in the world -- the oil, gas, utility, nuclear, and automotive industries -- will be disrupted.

References

1. "What Is Disruptive Innovation?" Clayton M. Christensen, Michael E. Raynor, Rory McDonald. December 2015. https://hbr.org/2015/12/what-is-disruptive-innovation
2. Rifkin, Jeremy. The Zero Marginal Cost Society: The Internet of Things, The Collaborative Commons, and the Eclipse of Capitalism. Palgrave Macmillian, 2013.
3. Seba, Tony. Clean Disruption of Energy and Transportation: How Silicon Valley Will Make Oil, Nuclear, Natural Gas, Coal, Electric Utilities and Conventional Cars Obsolete by 2030. First Edition (2014). Page 5.