the business model that eats itself

wednesday morning i interviewed an engineer who wants to store electricity in salt caverns on the gulf coast.

the technology is almost boring, and he likes it that way. pumped hydro, which has been around since the early 1900s, inside salt dome caverns, which have held oil and gas since the 1940s. two proven things put together. no miracle material. he's aiming for about twenty hours of storage at around eighty percent round trip efficiency.

but the reason this episode stuck with me isn't the caverns. it's a business model problem he walked me through, and i think every founder should hear it.

in texas, storage mostly gets paid through arbitrage. charge the battery when power is cheap, sell it back when power is expensive. the gap between the cheap hour and the expensive hour is your revenue.

here's what happened, by his numbers. a one megawatt hour battery doing that in 2023 would have made about ninety four thousand dollars. this year, he said, it'll probably land around twenty eight thousand. a drop of roughly seventy percent.

nothing broke. the batteries work fine. everyone saw the same opportunity and built storage. and more storage on the grid does exactly what storage is supposed to do. it smooths out the price swings.

which are the thing that was paying for the storage.

the better the industry gets at its job, the less each player gets paid for doing it. the business model eats itself.

he also pointed out that right now most of the swinging gets absorbed by natural gas plants that speed up and slow down. that works until gas gets tight. so the need for storage keeps growing at the same time the way storage gets paid keeps shrinking. a real need with a broken payment model is one of the most dangerous places a founder can stand.

his proposed fix is a small levy on wind and solar that flows into a fund paying storage a stable baseline. his logic is that renewables create the swings and storage removes them, so tie the two together. i'm not going to tell you whether that's the right policy. that's his fight, and he knows that grid far better than i do.

what i want you to take from it is the pattern, because it shows up everywhere.

any time your revenue depends on a gap... a price gap, an information gap, an inefficiency... you're in a business that gets worse the more people copy you. the first ones in make great money and teach everyone else it's possible. then the gap closes.

bitcoin taught me this early. the easy spreads between markets don't last. the companies that survive build something underneath the spread. trust. customers. a product people come back to.

ai is about to do this to a lot of businesses at once. if your edge is that you know something the customer can't easily find out, or you do something faster than they can, that gap is closing. fast.

so the question isn't whether your gap is real today. it's what you get paid for when the gap is gone.

for him, the answer is a market that pays for the service, stability, instead of the side effect. for you it might be a contract instead of a spread. a relationship instead of a transaction. an outcome the customer can point to, not an inefficiency they haven't noticed yet.

long term, the companies that last get paid for the value they create, not for the mess they clean up. once the mess is gone, so is the money.

if you're rethinking how your company gets paid as the market catches up, that's the kind of work i do in board advisory.

so be honest... if everyone copied you tomorrow, what would you still get paid for?