The Inefficiency Paradox of Monopolies

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Information about The Inefficiency Paradox of Monopolies
Business & Mgmt

Published on February 25, 2014

Author: jimkayalar



The world is faced with a new challenge of energy generation and transmission as individuals start to generate their own energy and seek energy sufficiency. What will the future hold?

The Inefficiency Paradox of Monopolies "Whosoever owns the river bank, owns the fish". Anonymous Russian Proverb 2/25/2014 Jim Kayalar

Power utility companies throughout the world are mostly monopolies or oligopolies. The whole human race is geared to using some form of energy whether it be in the form of fossil fuels, renewables, nuclear, coal, hydro etc. Most of these energy sources are piped into our homes in the form of electricity to feed our power-hungry dependence on technology. We all have gadgets that let us do complex tasks either to generate outputs, communicate or just entertain ourselves. The yearly electricity consumption of a smart phone equals that of a large fridge, a tablet computer consumes twice that. Utility companies around the world are enjoying the "mobile" age as per capita electricity consumption goes up. Electricity prices seem to only go in one direction. Up. Homeowners around the world are trying to go "off-grid" by generating their own energy mostly through solar power and save money. Some countries have systems in place whereby individuals may sell surplus electricity back to the power companies and even generate an income. On a sunny day there may be so much surplus energy generated by individuals and sold back to the power utility company that these may have to shut down their power generators and take them "off-grid". On a sunny day the monopoly becomes a monopsony as supply and demand curves shift. As more customers try to improve energy efficiencies and ultimately start to generate their own electricity power utilities are left with an uninspiring position. They own or lease large-scale power generators/distribution grids. As monopolies their long-term expectations are a gradual increase in the number of customers and increase in electricity consumption. Based on this business model they have invested hundreds of millions or even billions of dollars. But what happens when the number of customers starts to decline, therefore there are fewer customers to sell to and not only that but they are forced to buy electricity from the very same customers that have gone "off-grid"? They increase prices. They pass on the fixed cost of the business model to the remaining customers and try to justify this by illustrating that existing customers must make up for the cash shortfall. The price increases inevitably motivate more people to lower consumption or go "off-grid".

Chinese manufacturers of solar power systems are actively traveling the sunny spots of the world and proposing to set up a "zero percent down" build operate transfer business model to countries, islands, cities and towns. In return for building a system that would totally replace existing inefficient monopolies they propose to build solar power systems with certain buy back and time rights guarantees. A proposal to the American Pacific island of Saipan would have cut electricity costs from over 55 cents by at least a third if not more. Did it happen? Of course not. The Saipan government would have lost tax revenues from the new more efficient project. Governments need inefficiencies just as power utility companies do. "Our inputs are higher therefore you must pay more" was the message from a power utility company in the Philippines. We will pass on our inefficiencies to you the customers and the government will collect higher taxes from you as well. HOW DID WE GET TO THIS? Market forces will inevitably equilibrate the new energy supply & demand business model. But until then we will have to put up with our existing realities. If you enjoyed this article, please participate in a short 30 second anonymous survey of four multiple choice questions. Thank You!

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