Last year, the Edison Electric Institute released a report titled, “Disruptive Challenges,” which identified current and future serious threats to the electric utility system. The report identified a number of factors causing the major changes in the electricity industry:
Recent technological and economic changes are expected to challenge and transform the electric utility industry. These changes (or “disruptive challenges”) arise due to a convergence of factors, including: falling costs of distributed generation and other distributed energy resources (DER); an enhanced focus on development of new DER technologies; increasing customer, regulatory, and political interest in demand side management technologies (DSM); government programs to incentivize selected technologies; the declining price of natural gas; slowing economic growth trends; and rising electricity prices in certain areas of the country.
Simultaneously, the amount of money invested via crowdfunding platforms exploded, tripling from $0.9 billion in 2010 to $2.7 billion in 2012, and nearly doubling again to $5.1 billion in 2013. In addition to funding, the number of crowdfunding platforms (CFPs) on which an individual can invest grew from 283 in 2010 to 536 in 2012. In 2012, crowdfunding platforms hosted over 1 million successful campaigns.
Enter Decentralization. Decentralization is the delegation of power from a central authority to regional and local authorities. Financial and energy markets are experiencing an unprecedented period of decentralization, in which large utility companies and banks no longer hold oligopolies over their respective markets. Rather, power (quite literally in the energy markets) is shifting more into the hands of the “masses.” In the movement towards decentralization, each industry faces its own hurdles to becoming economically competitive with traditional, centralized institutions.
Distributed Generation: Decentralization of the Energy Market
In a centralized energy system, large amounts of electricity are generated at central power plants and are transmitted and distributed to purchasers of the electricity (businesses, homes, etc.). In contrast, a distributed generation system is a system in which smaller amounts of electricity are generated at a larger number of sites. The energy is often used “on-site,” with 1) excess energy being fed back to the grid and 2) energy being taken from the grid when needed. Due to a range of concerns spanning the environmental, economic, and geopolitical spectrums, among others, governments are incentivizing both individuals and businesses to produce and use distributed generation technologies such as solar PVs and wind turbines, allowing them to achieve economies of scale and become competitive with traditional energy sources. The government incentives have helped to drive down the costs of distributed generation renewables such as solar PV panels as well as increase the market share that renewables have in the energy market.
Crowdfunding: Decentralization of the Financial Market
Crowdfunding is fundamentally changing the investment environment and how entrepreneurs gain access to seed money. Rather than turning to large banks for loans, individuals looking to start a business, support a social cause, or perform an array of other activities requiring financing are turning to the public, letting individuals express their opinions and approval through their dollar. Various types of crowdfunding exist, such as peer-to-peer (P2P) lending, equity crowdfunding, funding in return for some reward or tangible good, and donating money to a cause you believe in and want to help get started. The passage of the Jumpstart Our Business Startups, or JOBS Act, in 2012 has allowed entrepreneurs to seek money from an unlimited number of accredited investors. If all goes according to plan, investors who lack accreditation will also have the opportunity to invest later this year, with the implementation of another portion of the JOBS Act.
Banks and large energy utility companies still hold majority market share by a long shot. However, decentralization is seen as a viable threat in each market and is changing the way that the markets function. Wells Fargo has banned its employees from engaging in any type of peer-to-peer lending, but has no problem holding investors’ P2P money. As Helen Avery wrote for Euromoney.com, “The crowd is taking over from traditional sources of finance and it is here to stay. It’s the start of the big bank disintermediation. Unless banks join the revolution, consumer lending may no longer be their sole domain.” Concerning the energy industry, the Edison Electric Institute report discussed at the beginning of this article further warns (talking about the scale of the ‘disruptive challenges’), “…with the current level of lost load nationwide from DER being less than 1 percent, investors are not taking notice of this phenomenon, despite the fact that the pace of change is increasing and will likely increase further as costs of disruptive technologies benefit further from scale efficiencies.” In both these markets, it appears decentralization isn’t only here to stay; it’s here to grow.
Daniel Stevens is a Political Science graduate from the University of Colorado at Boulder. After working briefly for a tech start up company, Daniel became focused on reporting the news and working in the solar energy industry. After working as a staff writer for a New York based PR firm, Daniel came to Mosaic to focus his writing on advancements in green and solar technologies. He is passionate about social entrepreneurship and the power of new energy models to help alleviate many of the world’s problems. When not writing, Daniel can be found in the mountains, the ocean, or playing music. Follow him on twitter @dannystevens91.