July 20, 2015

The Lessons Coal and Electricity Markets of the Past Can Offer Solar+Storage Markets Today

By Lewis Milford

The path to scaling up clean energy technologies like solar+storage sometimes can seem like uncharted territory. It can be challenging to figure out the best strategies to develop large, mainstream markets for clean energy technologies. So, it’s good to know that we’ve been on this path before, and that energy transitions of the past can provide some lessons for the future.

This comforting conclusion is provided by Arizona State University professor, Christopher Jones, in his recently released book Routes of Power: Energy and Modern America. In it, Jones largely focuses on how various energy transportation routes, like pipelines and rail, were some of the most important reasons why fuels like oil and coal became cheap enough to create America’s major energy transitions in the 19th and 20th centuries. He writes about how the U.S. transitioned its power from wood to coal, for example, and then later from kerosene to electricity. In his book, Jones, and historians before him such as Thomas Parker Hughes in Networks of Power and David Nye in Electrifying America, also provides important lessons and insights for those who want to bring about the next energy transition to a clean energy world.

Here are some key historical takeaways that are likely to guide the energy revolution away from fossil fuels to cleaner technologies like solar+storage:

  • People don’t demand new energy solutions, businesses create the demand for them. Steve Jobs wasn’t the first entrepreneur to figure out that companies don’t wait for customers to demand new products. Instead, companies create innovative new products like iPhones and computers, and they then create consumer demand for the new technologies. It happened with coal, and it happened with electricity.

In 1820, companies had sunk huge investments into new ways to mine coal in Pennsylvania, but customers in major markets such as Philadelphia were happy burning wood for heat. So coal companies “needed to build demand if they were to pay off their debts and return dividends to investors,” writes Jones. At the time, coal was more expensive than wood. Company boosters took a different marketing tack by not promoting the cheap price of coal, but selling instead its convenience for home heating.

As strange as it might seem today, at that historical time and place, coal was the more convenient and cleaner choice for fuel. The companies pointed out how it was easier to use coal than cutting cords of wood, how it was cleaner than sooty wood burning, and how it would create more heat. Hundreds of new patents were issued for new coal stoves spurring a decade of technology innovation. In the end, the convenience of coal and its declining costs resulted in the displacement of wood as the fuel of choice for heating. In the first ten years of heavy coal marketing, ten percent of the Philadelphia’s population had converted to wood. In thirty years, the transition to coal for home heating was complete.

The same thing happened with electricity at the end of the 19th century. When it was first introduced, electric power lighting was more expensive than kerosene. It also required new wires and new equipment. Nobody wanted to convert to it.

New York Times article from that era said flatly that the incandescent bulb could not compete with the cost of gas, a fact which, they wrote, “Mr. Edison has repeatedly acknowledged.” To some, Edison’s choice to develop a central generating station for electricity was “an invitation to throw money down a rat hole.”

To gain market share and acceptance by the general public, Edison sold electric lighting at a loss that was subsidized by his more lucrative sales of electricity to power motors and new appliances. He knew that he faced the challenge of “market creation” – getting customers to demand a product they didn’t know they needed or wanted, and one that cost more than their current source of lighting. When it was first introduced, people did not at all appreciate the need or value of electricity. But over time, the safety features and the better illumination capabilities of electric power and light bulbs convinced people to switch from gas and kerosene lamps to electric lighting.

Just like solar+storage or other new cleaner energy technologies today, the introduction of electric power in its day presented problems that were substantially without precedent and that required new methods of deployment. One historian, who has chronicled the origins of the electric industry wrote, “Although today we consider electric lighting a necessity, we must remember that there was no obvious need for electricity lighting in the late nineteenth century, especially because it was more complex and more expensive than the existing alternatives of gas or kerosene…By emphasizing that electric light was scientific, modern and progressive [the early innovators] helped persuade businessmen that it would be appropriate to risk money on the new technology…They had to be educated to its use…Suitable manufacturing methods as well as adequate ways of distributing the manufactured product had to be devised…Customers did not exist; they had to be created.”

After enough customers were convinced of its value, electric power for lighting was adopted, but it was not truly cost competitive until well into the 1920s.

  • Cities Have Been the Early Adopters Driving Energy Transitions. Today, as we debate the role of public investment and public markets for clean energy as well as the role of cities and states to promote new technologies, it’s also useful to reexamine the actions that cities took in the early 20th century transition to expand markets for electricity. The first major adopters of cleaner energy during that time were public entities. They created the market momentum for electric power at the turn of the last century; based on that initial market push, the remaining segments of society then adopted electric power until it maintained a majority share of energy use by the 1920s.

There are two lessons from the past that are relevant today: First, cities converted to electricity over a hundred years ago not for cost savings but to promote public safety. Second, these new public markets, like those for street lighting and streetcars, were the principal drivers for electrification of the rest of society — the cities went first, along with big businesses, and then individual customers followed.

Hundreds of cities at the turn of the 20th century converted to electricity largely for public safety purposes. Cheaper cost was not the reason. For businesses such as department stores and for shows in New York City (it’s still called the Great White Way, due to the white arc light), electric lighting was used to attract customers to the newly emerging downtowns and to make those public places safer—a public protection and business development strategy. The cities invested in street lights powered by electricity to keep the streets safe. And they invested in electric street cars to replace horse-drawn transit, with its detrimental manure pollution problem, to move people around the city using a cleaner technology—an environmental protection strategy.

To get a sense of the impact of public investment in electricity by cities, the streetcar industry represented nearly half of all electricity used in the entire country in 1902, in over two hundred cities that built electrified systems. This was at a time when only one in ten people had electricity in their homes. This is a similar market to where clean energy is today.

  • Philanthropies Help Provide Access to Energy Technologies for the Poor. We tend to think that non-profit work in the energy area, helping the poor adapt to new technologies, is a new concept; but it’s not. It all started in Philadelphia in the 19th century, when the city was the epicenter of the emerging fossil fuel industry.

In the 1820s, a local philanthropy in Philadelphia, the Fuel Savings Society, was set up to reduce the fuel costs, first for wood and then coal, to help the city’s poor. First, acting as a coop or bulk purchaser, it bought cords of wood at wholesale prices and then sold it back to the poor at half the market price.

As for coal a decade later in the 1830s, the Society acted similarly as a bulk purchaser and then sold coal to the poor for a dollar less per ton than the retail rate. At the same time, it also subsidized the cost of new coal stoves, and it contracted to build cheaper coal stoves for the poor, since the upfront capital cost of conversion from wood to coal was the primary barrier to adoption of what was then considered a cheaper and cleaner energy source.

In effect, the Fuel Savings Society is an early example of a nonprofit helping to advance energy technology innovation and adoption in disadvantaged communities, and helping to alleviate some of the upfront cost barriers to encourage the adoption of a new, disruptive technology.

  • Transitions Can Be Swift but Full Turnover Takes Times. People bemoan the fact that the penetration of solar electric generation by homes and businesses is now about 1 percent of national energy production. That’s true, although the statewide numbers in solar-rich states show much higher percentages of market penetration. Nevertheless, those small numbers tend to ramp up very quickly in energy transitions after the first decade.

As noted, the turnover from wood heat to coal was about ten percent in the first decade after the push for adoption of coal burning technologies. A complete turnover to coal power took a few more decades, about thirty years. Electricity also had only about a ten percent penetration rate in the first two decades of use. The wholesale turnover from older forms of local power to centralized electricity took thirty to forty years. In each transition, the first decade saw slower growth, and then scale up occurred exponentially over the next few decades.

So how do these lessons play out today, when we are making another energy transition to cleaner, solar+storage technologies for power resiliency, for reducing demand charges, and to provide clean electric power 24×7, 365?

It goes without saying that history is never repeated, but the lessons from these transitions should be studied for how we shape and direct our 21st century clean energy transition. It is very likely that new technologies like solar+storage will follow the same path.

For resilient power — clean energy power that is continuously supplied and is independent from the grid—we are in the very early stages, the first decade of adoption of this new technology hybrid that has to potential to offer immense environmental, public safety, and economic  benefits. The initial push is happening now, with states pouring money into solar+storage and other resilient power technologies, solar companies teaming with battery vendors to offer complete systems, FERC orders transforming electricity markets, and a growing state movement toward grid modernization that relies heavily on distributed energy resources.

Because we see that renewables and storage are superior to carbon-based electricity generation technologies in many ways, we sometimes think that adoption should be a no-brainer, and this can cause frustration when the market transformation does not happen quickly. The historical lesson is that regardless of how good a new technology is, wholesale turnover from the preceding, entrenched technology relies on certain forces to give it the initial push — but once a tipping point is reached, a complete turnover can happen quickly.

As history shows, the cost barrier of solar+storage systems will be overcome by the benefits of convenience, safety, and other environmental benefits that this new technology will bring. In the case of resilient power, key benefits will be greater power reliability and the ability distributed energy systems to operate in times of grid outages. Energy storage will bring in other revenues as solar+storage systems provide other revenue streams and reductions in utility demand and capacity charges. As the market develops and costs come down, a more widespread transition will occur. That transition should be helped by greater public investment at the community level, which as we saw with electricity, was critical to development of widespread electric power throughout society.

In the end, if history is a guide, cities, public investment, technology innovation, philanthropies, new business models and patience will win out, and we will usher in a new energy transition as complete and cleaner than those that have come before.

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Associated CEG Initiative(s)

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