Renewable Power: Does Success Kill the Industry?

An article on the 25th February in the Economist described how the increasingly greater supply of renewable power is causing issues for electricity companies. Due to the issue of climate change, developed governments are forcing renewable energy on existing electricity systems that have no need for new capacity. Coupled with a currently declining demand for electricity, and this extra supply has pushed down the price of electricity. For instance in Europe, wholesale electricity prices have “slumped from around €80 a megawatt-hour in 2008 to €30-50 nowadays.” This led to $120bn of assets being written off by various utility companies within the EU, such as E.ON.

It’s not just the extra supply that is causing issues. The energy industry is structured around marginal costs, with the market historically meeting demand by purchasing electricity from the cheapest supplier and working its way up the suppliers until demand is met. These are the costs incurred in a fossil-fuel dominated scenario. However, as renewable energy sources have no need to purchase fuel, they have very low marginal costs. This allows the renewable companies to push the more expensive suppliers of electricity out of the market, which brings about the lower wholesale prices. The problem for the industry here is the intermittent quality of renewable sources. Because there are times of the day where wind or solar availability will be low, the grid can’t rely on purely renewable energy to supply all the electricity to meet demand. A graph of this effect is shown below. Because of the unreliability of renewables, fossil-fuel generated power is still required to fill in the gaps. But with the lower energy prices, it’s hard for fuel companies to stay in business as their lower revenues makes it harder to attract investment. If they get pushed out the market, they will subsequently not be available to fill in the energy gaps when needed. 

An indicator of how an abundance of renewable energy supply can cause lower prices can be shown by comparing prices in Norway and the U.S. Norway generates 98% of its electricity from renewable sources, the U.S. was at around 13% in 2015. The cost of electricity in Norway is 28 øre per kWh, which is 3.26 cents. In contrast, the average U.S. cost is 12 cents per kWh. It’s a rough example, but the four times cheaper prices in Norway can certainly be explained in some part by their reliance on renewables.

Looking to the future, there’s talk of a third industrial revolution wherein there will be a decline in vertical power structures in favor of a “horizontal, distributed model” due to the expected lower marginal costs of the future. Instead of making their revenue through pure sales, cheap energy will force energy companies to “make their money through partnerships with their customers and clients to manage those distributed networks.” If energy companies can successfully accomplish this, then hopefully the successful integration of renewable energy won’t end up killing the industry.


Are Zero Marginal Costs Transforming the Energy Industry?

Microsoft establishing market dominance through aggressive bundling strategies

The foundation of Microsoft’s market dominance was born out of their bundling strategy. The company started by developing the early version of Windows as a disk based operating system (DOS) that proved to be very successful, and upon achieving an early monopoly with its operating system, Microsoft was able to offer discounts to its customers in a manner that priced out its competitors. For example, using the profits earned by the success of Windows, they could subsidize the bundling of the individual Microsoft Office products Word, Excel, and PowerPoint into one package, then priced the package at a low price other competitors could not compete with, thus ensuring market dominance of the Microsoft Office bundle.

This same strategy was used in establishing early market dominance over internet search browsers. In the mid 1990’s, Netscape was the dominant browser and considered a “superior product” to internet explorer. However, Microsoft decided to bundle internet explorer “free” with their Windows operating system, and since their operating system was so popular, Internet Explorer quickly gained 90% control of the market and Netscape collapsed. This is an aggressive ploy that is being reused currently with Windows 10. With this updated system, the new browser “Edge” is automatically installed as the default browser even if you originally had Chrome or Firefox etc. already set to default. This move from Microsoft angered the Mozilla CEO to the point where he wrote an open letter, complaining that, while it was possible to revert back to Firefox instead of Edge, the new Microsoft system’s interface does not make it “obvious or easy” to make this adjustment.

The theoretical benefits to bundling can be shown in the above two product example as part of the bundling notes on this site. As the theory states, when a company uses a bundling strategy, they expect to earn greater profits that if a company sold two individual products separately. An example of this process can be found through Nintendo and their attempts to sell platforms and games, with a catch that bundling is only profitable if you do it right. Research by a Harvard Business School professor showed that bundling only encourages consumers to purchase the bundled product if they also have the option to purchase the individual components of the bundle separately. For example, when a bundle was offered alongside individual products, a “mixed bundle,” Nintendo’s total hardware sales were “higher by approximately 100,000 units,” and “sales of video games jumped by over a million units.” In contrast, when the bundle was the only option for a consumer, a “pure-bundle,” revenues were 20% less than in the mixed-bundle scenario and total hardware and software units sold declined by 10s of millions. 

Back to Microsoft, one of their most ingenious moves was to create a bundle of bundles called an “Enterprise Agreement,” in which they combined Office, Windows, and ‘The Core CAL’ (a bundle of license rights). From this, Microsoft have manipulated these bundles in such a way as to be able to introduce new products originally as part of the bundle, before taking them out of the bundles. Because of this, consumers need to purchase the side product at great additional cost, allowing Microsoft to reap “enormous cash gains” to the point where these side products such as the “System Management Server” have become billion dollar businesses in their own right. 

Microsoft’s aggressive bundling strategy has obviously been hugely important in taking the company to its current position, and it will be interesting to see whether they can continue to use this strategy successfully.