Electrification is a key theme of Energize’s investment thesis. We invest in software and business model innovations, many of which directly contribute solutions towards decarbonization by means of electrification. In this blog series, we’ll explore this critical transition and the technologies driving and enabling it.
The clean energy transition consists of many small-scale shifts in how we make, move, and use energy. In our Electrifying Everything series, we’ve walked through how software can be applied across the power value chain to achieve electrification at scale. One of the last links on the value chain is demand flexibility: How can we leverage technology to make electricity demand digital and efficient to embrace a modernized grid?
Today, the grid is primarily fueled by power plants that generate electricity from coal, oil, natural gas, and nuclear power. This electricity is produced at a few centralized locations and then transmitted across homes and businesses that consume energy. However, the grid is becoming markedly more distributed in nature – distributed energy resources, or DERs, are fundamentally changing how power is deployed and consumed. Rooftop solar, battery storage, electric vehicles, and energy management devices are all examples of DERs – numerous pockets of energy spread throughout the grid rather than concentrated in a single spot. Unlike centralized sources of power, DERs can make the grid flexible and enable control of both electricity supply and demand in real-time. However, in order for this flexibility to occur, we will need to ensure that DERs can do two things:
Distributed energy resources provide an exciting opportunity to unlock a flexible grid, ensuring that electricity supply meets demand. When demand for electricity is high, DERs can add electricity supply, store electricity supply, or shift electricity demand. Think of a house with rooftop solar panels. When the sun is out, rooftop solar directly adds electricity to the home, powering the residents’ air conditioning. Now, imagine the residents of this house also own an electric vehicle. The electric vehicle stores the electricity generated from their rooftop solar unit during the day. At night, when everyone comes home and wants to turn on the lights, the electric vehicle can provide electricity by pushing power back to your home to offset demand. Now, imagine the residents utilize managed charging. In application, managed charging just means that the electric vehicle can charge at times when electricity demand is low and prices are cheaper, rather than automatically charging whenever it’s plugged in. It indirectly adds electricity to your home by shifting demand to another time in the day. Essentially, DERs create a more flexible grid by forming new, creative mechanisms that help supply meet demand in a dynamic system. When packaged together, the combination of these three flavors of DERs, “distributed generation + storage + energy management devices,” is reshaping how the grid provides resiliency.
Importantly, DER deployment is rapidly increasing – according to Wood Mackenzie’s second annual U.S. DER Outlook, we’re expected to reach 253 GW of DER capacity and demand flexibility potential by 2026. The sheer mass of behind-the-meter renewable energy coming online will fundamentally alter the nature of our electricity supply. This growth not only requires us to rethink how to optimize DERs to power our individual homes, but also how we can best aggregate DER capacity to make the grid flexible as a whole.
To make the most of this overwhelming growth and support the grid at scale, DERs need to be available as a “grid resource” – meaning they must be able to access supply and demand across the grid. The best example of this is battery storage: batteries can store electricity but can also release that stored electricity when demand is high. If batteries can access demand across the grid, they are able to release this energy when the grid needs it the most. Today, the multibillion-dollar wholesale energy markets control the grid, buying and selling energy between generators and suppliers based on customer demand. However, due to regulatory barriers, DERs are currently not able to tap into this broader demand and therefore are vastly under-utilized. With limited ability to participate in these huge markets, DERs can’t maximize their potential. They have limited revenue opportunities and, as a result, limited incentive to develop technology to automate electricity dispatch.
On the upside, regulatory steps are already being taken to reform how DERs are integrated as a grid resource – though seeing the process through won’t be easy. In 2020, the Federal Energy Regulatory Commission introduced FERC Order No. 2222. This order requires grid operators across the U.S. to develop plans to provide DERs access to wholesale energy markets. However, it’s difficult and complex to reconstruct a system designed for big power plants to now include smaller resources. It involves reconfiguring a system designed for centralized one-way power flow to incorporate assets spread across the grid. A long list of logistical, jurisdictional, and technological questions will need to be resolved in order to move forward: What data requirements will be needed? Should DER aggregation be limited by geography or technology type? How much control should utilities have over DERs? Although many grid operators have already submitted initial plans, we are still years away from getting satisfactory answers to these questions, not to mention actually implementing these new processes.
While regulatory progress is a function of time, technology will still be needed in the short-term and long-term to enable DER flexibility. Moreover, core implementation challenges must be addressed to build a modernized grid:
Fortunately, DER software solutions are working to solve for these challenges – establishing paths for DER supply to access demand digitally and efficiently. These startups ensure that DERs secure monetization in a timely manner, communicate data across systems, automate DER activity, and respond in real-time to the macro environment. Several startups have emerged that allow DERs to monetize their flexibility within the current regulatory system. Three main types of companies have surfaced, each addressing demand flexibility from a different angle:
These technology solutions provide a platform for DER owners to monetize their own assets. Leap and Voltus are both good examples – they connect customers to relevant programs within wholesale energy markets. For example, a residential customer with rooftop solar can use a platform like Leap to participate in demand response programs and make money during periods of peak demand. The platform will virtually aggregate the customer’s rooftop solar unit with other DERs in order to bid the aggregated resource into the market. The platform automates data collection, settlements and authorizations so that customers can turn their energy resources into revenue.
These technology solutions provide a platform for local utilities to manage the grid and serve as “virtual power plants.” Camus and EnergyHub are examples of platforms that operate as DER management systems which utilities can use to control the grid and monetize DERs. For example, a grid operator can use Camus to monitor and manage customer-owned DERs. The platform provides a single interface for utilities to monitor local assets real-time, forecast peak-demand, and remotely control assets based on utilities’ needs. It helps coordinate DER activity to support local network constraints and improve grid resiliency.
Vertically integrated energy providers
These technology solutions serve as a digital utility for a modernized, distributed grid. For example, David Energy works as a vertically integrated platform and serves as a retail electricity supplier, connecting customer DERs to electricity markets. The platform bundles energy supply and grid services into a single platform. When demand decreases, it buys electricity at low prices. When demand increases again, it adjusts customer demand through DERs to avoid buying electricity at the newly high prices.
With the right mechanisms in place, DERs will create a flexible grid by helping supply meet demand in a dynamic system. This represents a very exciting opportunity for electrification, with several software companies already developing solutions to make electricity demand digital and efficient. But can they do this to support the grid at scale? At Energize, we are patiently waiting. Until regulatory changes go into effect and DERs can adequately participate in wholesale markets, DERs cannot access demand at scale. At this time, they cannot be fully monetized, providing less incentive for them to be used flexibly. Although there are a few startups in the space today, it will be a matter of time before DERs’ value can be maximized.
Nevertheless, we are developing a prepared mind in how software can make the grid flexible. As we continue following this space, capital efficiency (calculated as the ratio of annualized revenue divided by cumulative cash consumed) will be a key metric to track. At Energize, we typically like to see startups that consistently generate a cash efficiency ratio of 0.5x or greater. We believe that capital-efficient solutions that can maximize their runway will be best positioned to wait. These companies will be able to capture value when the time is right.