The following was the article I included in the recently dispatched newsletter. Thought I’d include it in the blog as well.
How can renewable energy really become disruptive?
I was reading a classic paper on disruptive business ideas from Clayton Christensen “Six Keys to Building New Markets by Unleashing Disruptive Innovation”. A thought-provoking paper indeed.
The topic of disruptive business ideas has been hotly debated for the past few years, and deservedly so. Let’s look at some of the disruptive technologies and the ones they replaced:
- Desktop publishing <- Traditional publishing
- PCs <- Minicomputers and mainframes
- Telephones <- Telegraphy
- Cell phones <- fixed line telephony
- Retail medical clinics <- Traditional doctor’s offices
(For those who like to know more about disruptive technologies, here’s a nice reference from Wikipedia ).
I was trying to see how, using insights from this paper, one could create markets for renewable energy, which is considered to be a disruptive technology. While thinking along these linkes, I was specifically struck by one of the six key strategies provided in the paper: “Disruptive businesses either create new markets or take the low end of an established market.” Specifically, Prof Christensen says that it might be a good idea for a disruptive technology to attack an underserved market niche before expanding to other segments.
For renewable energy to become a truly disruptive technology, this could be a fairly effective idea.
Right now, many companies in renewable-based power production or fuel production are trying to attack mass markets for their products. And as a result, many of them are failing to impress. The key reason for failure is that most of these segments really might not need an alternative that costs more than the traditional.
A typical example is solar PV.
Power from solar PV costs a lot – heck of a lot. It costs about Rs 15 to produce one unit of power (coal produces it at Rs 2.5!). If you are looking at residences using solar PV, the payback period is 15 years or more, depending on the region of your residence. 15 years payback period is a very long time, and is unacceptable unless the product is critically required.
Governments all over the world want their people to adopt solar PV. So what do they do? Provide huge subsidies and incentives. The logic is, as more and more countries start using solar PV using these subsidies, there will be more investments in solar PV manufacturing and eventually, larger investments in R&D and economies of scale will bring the costs down. Everybody is happy.
This indeed is a possible scenario, and let’s all hope it happens.
My question is: Would it be better if producers and investors in renewable energy try to ensure that their products are targetted at segments underserved by the currently available options?
I’m not sure if it would be better, but I do think it is an attractive option.
Sticking to solar PV, let’s consider the following segments:
- Companies utilizing diesel gensets
- Telecom towers in remote areas
Currently, generating power using diesel generators costs about Rs 15 per kWh, and will only increase in future because diesel prices are unlikely to go down. This means that solar PV can produce power at a competitive price, today, and WITHOUT SUBSIDIES.
Similar is the case for remote telecom towers which do not have grid connectivity or have erratic grid power. In their cases, in addition to the cost of power using DG sets, there is an additional logistics cost involved in transporting diesel to such remote locations. Solar PV could win hands down over traditional solutions, with NO GOVERNMENT SUPPORT.
The above two segments face problems that require solutions. On the other hand, I do not understand what problem is being solved by providing electricity to urban consumers who in many parts of the world are getting uninterrupted power at costs that are only about a quarter of what solar power costs today.
Yesterday, I read about a rather unique area where solar PV is being used in the US. Here, the traditional trash cans have been dumped for trash cans with solar converters. Listen to the idea – The regular trash cans in the US are being replaced by solar compacters that compact the trash in the can, thus storing more in the same volume and requiring much less regular visits from the trash trucks. The cans sure cost a lot ($4000 a piece) but because of the compaction, there are cost reduction economics that could eventually justify the cost.
Yet another example of using renewable energy to underserved segments is the use of solar lanterns for unelectrified villages in India. To those folks who have no electricity, having access to electric light must be such a wonder that many of them might not mind the premium they pay for it.
It was a somewhat similar experience I had earlier today. I had a call early in the morning. The caller asked me if I could help him in getting solar panels set up in his house. I politely informed him it was an expensive idea and told him it could take close to twenty years for a break-even. He insisted that I still put him on to a dealer of solar panels. Intrigued, I asked him where he was calling from. He was calling from a village near Villupuram, a town in south India. He said he might not mind the long payback period because he wanted to get rid of the long hours of power cut he faces everyday.
In all the above examples, these are segments that have specific problems that can be solved by renewable energy. In addition, these segments have not been targetted by any specific business, at least not in a big way (though it is changing now in India, with a number of solar companies keen on targetting the telecom towers). Thus, most of these segments, being underserved by the traditional options, will more readily adopt renewable energy, and even be willing to pay a premium for the same.
In my opinion, entrepreneurs will do well to identify such underserved segments that have a real need for renewable energy. At the very least, they will not have to worry about depending on government dole-outs.