Written by: Commissioner Scott Rupp, Missouri Public Service Commission
Do you like excitement? Then being in the telecom industry in the 1990’s would have been heaven for you. Ups, downs, turns, corkscrews… Between the dot-com crash, corporate scandals, and massive innovation, the industry went through some exciting and turbulent times.
The famed economist Joseph Schumpeter, in his work entitled Capitalism, Socialism and Democracy (1942), described a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. He called this process “Creative Destruction”. We saw this transformation happen in telecom during the rapid deregulation process as we watched the internet forever alter telecom as new consumer demands required the industry to change.
I wonder if the energy industry is on the verge of a similar evolution? The coal industry which had a long established dominance in the US power generation market is currently feeling bankrupting effects of government regulation, economic pressures, and technological innovations. Advances in the drilling industry have transformed the energy sector’s desire for more natural gas. And further yet even nuclear power plants are being scheduled for decommissioning due to economic pressure. A growing mix of renewables are becoming more economically viable thanks to government subsidies and new technology. Consumer demand for renewables is altering the generation mix, the economics of the energy sector as well as deliberations in regulatory bodies. To Schumpeter’s point, we are watching industrial mutation which is revolutionizing the energy industry’s structure from within. Some are being destroyed, while others are emerging from the ash pond.
One must then ask the question, are we creating a “green” bubble in the energy industry? Some analysts believe we are pointing to the fact that if you slap a green sticker on anything companies will want it and investors will buy in. In order for a bubble to exist there must be significant government involvement designed to focus attention and capital on the specific industry — and clearly that’s already happening. But other things need to come into play to create a financial bubble other than focus and capital spending on a specific industry. The creative destruction is usually technologically and/or policy driven, but does not always a bubble create. Successful companies have a history of creating business models that evolve and leverage technology, public policy and investment, and do it well to obtain long term growth and market share.
If we look at the telecom industry in the early 2000’s it was no longer an industry of rainbows and unicorns. To quote an article by Paul Star in the American Spectator (2002), “The dimensions of the collapse in the telecommunications industry during the past two years have been staggering. Half a million people have lost their jobs. In that time, the Dow Jones communication technology index has dropped 86 percent; the wireless communications index, 89 percent. These are declines in value worthy of comparison to the great crash of 1929.” In other words, there was a bubble, and it burst. Yet there were still companies that survived, and have balanced their business models and evolved to find long term growth. The most amazing thing about bubbles is that they can only be recognized in hindsight.
Technological advances and innovation happening on the periphery of the grid is exciting and full of promise. Greener energy is setting the stage for a massive transformation of the energy industry. It’s driving the train of financial investment, policy change and regulatory reform. Consumers want to take more active control in the management and use of energy inside their homes and businesses, and that level of consumer demand will continue to drive market forces in this industry. We will once again get to witness creative destruction in all of its destructive glory. Will a financial bubble be created? We won’t know until the party is over. So while it is happening, we should keep partying like it’s 1999.