Electrification Is A Winner Because It Builds Economy of Scope
Published on January 29th, 2021 | by Jennifer Sensiba
January 29th, 2021 by Jennifer Sensiba
We are surrounded every day by mass-produced items. Cars, phones, and sometimes even our houses are built in great numbers. Companies do this because they can achieve economies of scale, or, in plain English, the cost of making each item is cheaper the more they can build. Buying raw materials and components is one way they save money, but the greater savings come from taking one-time costs and spreading them over millions or even billions of sales instead of just a few. This makes the per-unit costs a lot lower.
There’s another way to save money, and it’s called economy of scope. Instead of selling millions or billions of the same item, a company can spread its one-time or fixed costs out over a broader variety of items that people will want to buy.
Let’s look at some examples of both before we apply this to electricity (and prove that I’m not counting beans).
The mass production of cars is a great example of economy of scale. Design, factory, training, and facility costs are largely fixed. Before you build a single car at a factory, you have to pay mechanical engineers, designers, and a variety of other people to plan the car out. The, you need industrial engineers and others to get the factory set up to build cars. If you went through all that effort and only built one car, the cost of that one car would be astronomical, costing millions or perhaps billions of dollars.
The smart thing is to get that all going and build millions of them. That way, you’re diving those design and setup costs by a million instead of putting them all on one car that gets sold to one person. If you can sell enough cars, even the monthly cost of owning the factory can be spread out over three shifts of car building instead of just one or two. The more, the merrier.
Not all companies can run on that business model, though. Take the independent gas station owner down the street from your house, for example. Yes, the sign on the station has the name of a big oil company, but it’s a franchise. Some gas stations are owned by someone who just owns the one station, especially in small towns. The man, his wife, some of the older kids, and a few employees are holding down that fort. The corporate home office? It’s literally a home office up the street at someone’s home.
In my neighborhood, there’s just such a gas station. Every morning, the parking lot is always full of various commercial vehicles. Lots more people come and go pretty fast in their cars. A few people buy gas, but most of them are there for something else: the burritos.
I talked to the lady who runs it, and she says her husband used to only sell gas, drinks, cigarettes, and the usual things you’d find at a gas station. One day, she decided to experiment will selling some breakfast burritos to all the people coming and going, and it was a BIG hit. Now, the station mostly sells burritos, with all of the other items an afterthought.
The gas station still sells everything it used to, but the couple were able to figure out a way to get some more economy of scope out of the station with their existing customers by offering them something else they needed: breakfast. The mortgage payment on the commercial property didn’t go up, nor did the electricity, sewer, or any other fixed cost. But now, those costs are spread out over gas, snacks, and breakfast burritos.
Big Economies Of Scope
Big businesses do this, too. When I was a kid, Walmart didn’t sell very many groceries and the grocery stores didn’t sell very many non-grocery items. Later, things changed. Now, there’s the Walmart Supercenter, with the old Walmart’s variety of inventory plus a full-service grocery store. My hometown now has three of them. A few years ago, one end of the local Target closed for renovations. Now there’s a big grocery section and the sign says Super Target.
Walmart already went through all the hassle and expense of getting you in the door to buy cheap imported goods of all kinds, so why not spread those costs out over a broader variety of goods. As Freb said in Gone in 60 Seconds: “Hey, people gotta eat, right?” Freb was smart, though. He knew that to be useful in the group, he needed to do everything from intercepting keyless entry codes to handling canine bowel movements. The more you can do for somebody, the more valuable you’ll be.
Tesla is even getting in on the action. Sure, it will sell you a car, but it will also sell you solar panels and a battery pack for your house. Why? Because electric car buyers like green technology. Some people accuse Elon Musk of bailing his cousins out, but whether that’s true or not you have to admit it’s a smart way to build out Tesla’s economy of scope.
Electricity’s Growing Economy of Scope
Electricity has been around for a long time. Not counting natural phenomenon like lightning, humans have been using it for almost 200 years, and it’s been in most US houses for almost 100 years. What’s changed over time is all of the things we use it for.
Initially, electricity was primarily for lighting. It replaced the gas and oil lamps that were common for lighting homes in the evening. Next, it slowly spread throughout the home and did more and more things. It started toasting our bread, heating the oven and some stoves, washing our clothes, drying them, cooling the air down in the summer, heating it up in the winter, and many more things that help us take care of our basic needs. Next, it powered radios and then eventually TV sets to entertain us.
Many homes still have appliances that run on natural gas or heating oil, but many others do not. It’s entirely possible to run a home’s appliances and machines strictly on electricity today.
Now, electricity is creeping into many driveways globally. The electricity coming in over the wires or from home generation can now power our daily driving, and everything associated with it, like keeping the car’s cabin at a pleasant temperature and entertaining us.
Whether an electron is headed for your stove, your washing machine, your TV, or your car’s drive motor, an electron is an electron is an electron. Nobody needs to buy special electricity for their toaster. Everything powered by electricity is powered by the same stuff as long as your house has big enough electrical service to accommodate it all.
Even if a house needs higher voltages, we already have appliances using those higher voltages, so all that usually needs done is to add a circuit for the EV supply equipment. Many owners just charge on regular voltage and don’t need anything faster for their daily commute, so they don’t even need to hire an electrician.
Despite all this diversity of use, the electric company or co-op doesn’t really need to do anything different except maybe add generating capacity or run some power stations more. Recent improvements in home and business energy efficiency offset a lot of what EV drivers would use, anyway. Even when that’s not true, EVs largely charge at night when power companies had lots of spare capacity, so there’s no struggle.
Like the gas station that sold the burritos under the same roof as the normal gas station stuff, the power company is supplying yet another need without having to add a lot of cost.
Reverse Economy of Scope (Diversity)
The reverse is also true. Before home solar became more affordable and common, electricity already came from many places. There are natural gas plants, coal plants, nuclear plants, wind facilities, hydroelectric dams, geothermal, and large fields of solar panels. Everyone’s electricity comes from a mix of these sources that differs regionally.
This diverse mix of supply sources helps not only with costs, but gives the flexibility needed for the grid to be able to change and adapt to new circumstances without having to replace the whole system all at once.
It’s also possible to have distributed generation and storage now. This not only helps consumers get better pricing and control over their power, but aids us in being more resilient to disaster and other supply disruptions. These systems can still fail, but instead of failing drastically, they fail gracefully (resilience).
Competing energy sources don’t have any of these advantages.
A gas-powered car runs only on gasoline, and that gasoline only comes from oil. You can’t put in a well and pump the stuff out of the ground at home, and you can’t refine it into gasoline. The only real choice you have is what ethanol blend you buy.
You might also be able to run a lawnmower and chainsaw on gasoline, but you can’t use it for much else. Molotov cocktails seem to be more popular these days than they’ve been in a while, but even in 2020 they didn’t make up for the lost demand due to stay-at-home orders.
The oil industry doesn’t have a growing base of use for their product, and their single-source supply chains are more fragile.
Economically speaking, electrifying the automotive fleet is good public policy not only for environmental reasons, but because it’s got advantages going for it that oil and gas do not. Better resilience, better economics, and everything else lead to a stronger economy, not a weaker one.
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