Electricity: Commodity or Service?
Over at Knowledge Problem, Lynne Kiesling argues that electricity is not a commodity, but rather a highly differentiated technology service:
[warning: vast overgeneralization ahead] Engineers and so-called consumer advocates like to call electricity a commodity, because thinking of it as such serves their interests. Thinking of electricity as a commodity maintains the focus on the physical assets of a closed system that requires real-time balancing. It also provides the impetus for an argument that prices should stay low and stable, preferably through some top-down regulatory mechanism.
That’s what is potentially threatening about the more modern, more empowering view of electricity as highly differentiated technology products bundled with a commodity. Such a concept of electricity opens up the system to be the union of the physical assets, and the physical reality of their operation, with the human preferences and human cognition that creates value through the consumption of highly differentiated technology products. It also means that the value proposition to customers becomes much, much richer than price level and stability. It becomes “we want to sell you things you can do with this commodity”, not “we have a monopoly to sell you a commodity at a regulated price”.
So here’s my question to you: is electricity a commodity? I say no. Electrons are a commodity. Electricity is a highly differentiated technology service, if we would only let it happen.
Below is my take on the suggestion:
It’s not clear to me where you’re suggesting that the differentiation occurs, which would seem to be important to the definition of electricity as a commodity or a differentiated set of services. If the differentiation occurs at the generation end, that results in a highly differentiated service, whereas if the differentiation occurs after the electricity reaches the consumer, I’d argue that it is most certainly a commodity.
The reason I see differentiation in generation is that electricity providers are providing (from what I can see) essentially three different services. The first is a base load service, which relatively low-cost, but inelastic; a nuclear power plant is the perhaps the perfect example of this. The second is a peak load service, which is highly elastic, but comes at a relatively high marginal cost; a diesel generator would be a good example of this. The third is a broad umbrella of niche services, like wind power generation, many of which can only supply a small percentage of grid demand due to their constant output fluctuations. In this sense, electricity is a differentiated service-and through the purchase of green certificates, for example, even individual consumers can select which service they wish to purchase. Further, under even fairly crude variable-rate pricing schemes, consumers can select between purchasing peak and base load services.
But I don’t really see differentiation at the consumer end-what the consumer chooses to do with the electricity-as sufficient justification to view electricity as a differentiated service, rather than as a commodity. If we consider two possible analogies, I think this point becomes clear. If we consider Jonathan’s point that different companies’ mobile handsets are differentiated, despite the fact that they are bundled with a homogenous commodity (bandwidth), this provides one analogy-the whole package is a differentiated technology service, with a commodity as a part of the bundle. Another analogy can be found in any generic commodity-let’s choose wheat. I’d argue that electricity is more like wheat. It’s not actually bundled with anything that differentiates it like the mobile handset/service is. Since all electricity has to meet basic standards (waveform, voltage, amperage), much like wheat does, there’s not much to differentiate what the consumer receives from what the consumer would receive from another producer. And, perhaps most importantly, we can look at wheat from the perspective of selling “things you can do with this commodity” as well, but it’s still a commodity. With wheat, it might become a loaf of bread or a hefeweizen (highly differentiated!), but the end product’s differentiation doesn’t affect the commodity-nature of the intermediate product. In the same vein, electricity be used might run my computer or my Big Mouth Billy Bass, but the power company is selling me the electricity, not these highly differentiated services.
I should probably note, though, that even if electricity is a commodity, I don’t think that makes the top-down approach any more justifiable.