Energize & Revolutionize: Software sparks changes in the Power sector
If we wanted to point towards the single catalyst responsible for the civilisation we live within now, that would be energy. Progress in history can really be boiled down to step-changes in energy generation, due to shifts from less to more efficient energy sources, yielding exponentially more progress — in the form of quality of life, economic growth, population size, tech innovation … you name it. Humankind’s affair with energy sources started with nothing more than human muscle until we domesticated the first animals, whose kinetic energy peaked to make up about 90% of mechanical energy sources until the 1500s. However, nothing has been as crucial to explaining the advances of our modern civilisation as much as fossil fuels. Their use has increased 1500x over the past 220 years (3500x since 1800) and it’s been key to fulfilling our society’s addiction to economic growth. This is highlighted by the near-perfect correlation between GDP growth and primary energy consumption: between 1970 and 2010 the estimated total global extraction of natural resources grew 3.2x, whilst the world economy (inflation-adjusted) grew 3.4x.
Unfortunately, the very simple equation ‘more energy = more GDP growth’ can’t keep our civilisation growing indefinitely. The current levels of economic consumption aren’t sustainable without fossil carbon and hydrocarbon consumption, yet fossil fuel resources are large but not infinite, and their extraction costs are largely on the rise — not to mention the now well-documented adverse impacts on our planet. N. J. Hagens puts it best: ‘The 20th century experienced increasing energy quality and decreasing energy prices. The 21st century will be a story of decreasing energy quality and increasing energy cost’.
Here’s a no-news: accessing cheap unlimited energy whilst preserving the planet has been mostly technologically de-risked and it’s on the verge of becoming a core layer of our energy generation. Using modern technology to harness renewable energy dates back to the end of the 19th century, and specifically to two gentlemen both named Charles. In 1883, Charles Fritts invented the first solar cell and, swiftly after, Charles Brush developed the first practical wind turbine. By the mid-20th century the first commercial solar and wind projects went live but it wasn’t until the early 2000s that these technologies began to become mainstream, thanks to government subsidies, substantial cost reductions and a full-blown oil crisis.
We have now, finally, reached an inflection point from a hardware perspective. Since the 1950s, the LCOE (Levelised Cost of Energy) for solar has gone from $1 to below $0.05/kWh and from $0.30 to $0.03/kWh for onshore wind — enabling wind and solar to generate 12% of global power in 2022 and forecasts expect wind and solar to meet 41% of global demand by 2040.
Dropping hardware costs haven’t been limited to the generation side, though. Electric vehicles, heat pumps, thermostats, HVAC systems, small-scale batteries and PV panels are becoming more and more prevalent in households across the planet, this is also driven by drastic reductions in price coupled with stronger sustainability sentiment at a consumer level, government regulations and financial incentives. The residential DER (Distributed Energy Resources) market is poised to almost 4x from 2023 to 2032 as our households become ever more connected and dependent on electricity. While the electrification of our homes and workplaces is a net positive for the planet, the forecasted 3x increase in energy demand (in the US) alone potentially requires an even larger increase in energy supply — which comes with a price tag in the high $Tn in infrastructure costs.
For the first time in history, the entry window for energy customers is finally opening up. The sour, yet long-standing relationship customers have had with a single energy provider has never been more fragile. The rise of electricity prices, driven both by the macro-economical environment and general electrification, is pushing customers to question their energy supplier relationship. At the same time, DER penetration in the home is opening up spaces for new service providers — from installations to maintenance and flexibility. It is not hard to believe that a customer in the future could have multiple electricity-related service provider relationships, and this creates an array of opportunities for new players in the energy tech space.
We are on the cusp of achieving an infrastructure-level change to our energy systems that could single-handedly lower the cost of energy, increase the amount of energy, preserve our planet and enable the next generation of society-wide innovation. Yet, there is a huge disconnect between the potential of these new technologies and our current systems setup. We have officially entered the personal computing era of energy — we have affordable and mainstream hardware but what is missing is an Internet-like connective tissue that enhances the opportunities of these new hardware and lowers their risks. Hidden amongst the many challenges and complexities of the energy sector, there is a once-in-a-century opportunity for brave enough founders to build the changing infrastructure of the most critical system for our civilisation's progress and survival.
We see opportunities for value creation in three main areas within the ever-evolving energy space:
- Grid Digitisation & Flexibility
- The New Era of Clean Energy Procurement
- Enabling New Infrastructure Deployment
Grid Digitisation & Flexibility
The existing system connecting our energy supply to its demand isn’t fit for future-proof purposes. It needs to undergo its third structural revolution since 1882, when Edison Pearl Street Station, the first commercial power station of its kind, opened doors in the heart of NYC.
The first era of energy grids was the Wild West — the 40 years after Edison Pearl Street Station saw the number of power companies grow 70x in a truly disjointed fashion. Companies would build a power generation plant, connect to customers and sell electricity to their customers. Any equipment failure meant customers had no other choice than to wait for blackouts to be over. With energy becoming more of a necessity for functioning societies, this called for top-down centralisation of energy grids. This started in the UK in 1926 with the National Grid, merging local electrical networks in a nationwide synchronous AC grid running on 50 Hz lines. Network effects worked wonders — more customers meant smoother demand and higher load factors for the production of power plants. Countries across the globe swiftly moved towards building centralised electric grids governed by TSOs (Transmission System Operators), tasked with coordinating power producers to meet demand and keep frequency constant over time. The grid will keep evolving in a true centralised manner, leveraging economies of scale to meet relatively predictable demand even throughout the liberalisation of electricity markets from starting in Chile in the 1980s.
Our grid, however, is facing its biggest existential challenge yet. On one hand, the penetration of weather-dependent renewable generation mixed with large-scale battery storage is shifting generation from being predictable, steady, and quick to turn on and off to being intermittent and less easy to control. On the other hand, the forecasted 3x increase in electricity consumption at a domestic level, combined with the widespread rise of DERs is poised to put another strain on our 19th century grids. Add to this mix the growth in large-scale battery storage, the first non-energy generating grid player, with prices decreasing from above $1k/kWh of storage capacity in 2010 to $150/kWh in 2019 and are projected to be $75/kWh by 2024, and no wonder energy volatility dwarfs Bitcoin volatility.
This calls for a complete mindset shift in how the grid operates — in an era of intermittent supply and increasing demand we need to shift from flexing supply to match demand to flexing demand to match supply. We need to create the back-bones for an inherently dynamic system, where demand can respond in real-time to supply — to do that, the billions of new devices need to be connected, aggregated, optimised and managed to achieve seamless interoperability. Data needs to freely flow across generation and supply to enable large-scale, multi-nodal optimisation. Demand needs to become an active participant in the grid if we want to avoid spending $15Tn in infrastructure that will only accentuate the so-called ‘Duck Curve’.
The first big opportunity within digitising the grid is in building the infrastructure to enable full-scale bi-directional flexibility and demand response at the residential and SME levels. In practice that means enabling customers (Residential, Industrial, C&I) to automatically adjust their electricity usage in response to price signals or grid conditions and, in turn, enabling the grid to accommodate fluctuations in supply and demand. All the DERs coming online in the next decade, from EVs to heat pumps, smart thermostats and battery storage, have two main roles to play within the grid: their consumption patterns can be adjusted to match the availability of cheap supply and they can be used as battery storage systems for when energy is cheap and available to then dispatch it back to the grid when needed.
Smart charging is only the start: an EV could be charged when demand is not at its peak, from 3 to 5 am for example, rather than when at 7 pm; smart thermostats could be turned up and down a couple of degrees to ease load peaks and so on. The next step is enabling bi-directional market participation through Vehicle-2-Grid (V2X) technology — EVs spend 90% of their time parked with their 40kWh battery, enough to power a modern home for 2 days. By 2030, it’s forecasted that EVs on the road will provide around 4TWh of flexible storage capacity — quadrupling the forecasted capacity of battery storage. EVs and DERs will play a crucial role in the future of the grid as they have the potential to become de-facto batteries, storing energy when generation is cheap and abundant and releasing it to the grid when demand peaks supply.
Flexibility is crucial to the grid’s health and future — system operators’ job of maintaining the grid frequency stable is challenged by renewable generation volatility and demand increase, governments are pushing back on additional distribution and transmission costs passed onto customers to manage additional infrastructure being built, and black-outs are a costly and now more frequent accident. Up until recently, benefitting from flexibility’s economic rewards was limited to commercial and industrial operators (C&I) with large capacity and generation assets — large asset owners or manufacturers' facilities would get paid by the grid to turn their assets on or off to help balance the grid.
The distribution of DER at an SME and Residential level is giving birth to new opportunities for retail customers, OEMs and utility companies alike. The power here is in the network: while a single heat pump or EV on its own can do very little to balance a country’s grid, the cumulative load management capacity of these DERs is poised to grow to 125GW in the US alone — which is enough to meet the electricity needs of several large cities or a small country state.
Retail customers can finally become active participants in the electricity markets and be economically compensated for their role in keeping the grid frequency stable. A recent real-world study by Kaluza showed that, on average, customers save £470 on their yearly energy costs and the most engaged customers earned up to £800 per year. By 2030, the 350m EVs on the road have the potential to be worth $175Bn. Not only that but also V2X technology has the potential to save 10% in energy system infrastructure costs.
Bringing this technology mainstream is no mean feat. Energy data is extremely fragmented, siloed, unstructured and often not even available. As our grid has been historically unilaterally built (from supply to demand), so has the underlying data structure, which needs to change to enable an interconnected, distributed grid. Real-time data is generally not easily available and most ‘time-sensitive’ grid balancing mechanisms are still extremely manual and complex. Controlling, orchestrating and aggregating all the small-scale DER installations requires building API connections with devices, establishing security protocols, navigating and integrating within the different flexibility energy markets (6 of them!) and incorporating billing data for flexible tariffs.
Data standardisation has been transformational for industries such as fintech and healthcare — becoming the underlying infrastructure standardising and controlling DERs' participation in the grid is an even bigger opportunity for companies to tackle. Ultimately, we think network effects will determine the winner in this category — the more DERs a company controls, the more relevant its market participation and the better optimisation systems it can build. The challenge for companies is achieving network penetration in a value chain which has on one hand the OEMs, who own the assets, and on the other hand, the energy retailers, who own billing. We believe that an API-first approach to building a network of connections is the best entry point to expand to a full suite of flexible products — aggregating DERs into Virtual Power Plants (VPPs), providing energy management systems and becoming active market participants, to start with. Some interesting companies building in this space include Enode, Texture Energy, Telematica, Fever Energy, GridX and Derapi. We believe that similarly to what happened to fintech and healthcare, a single source of truth API-level connectivity is key to kick-start an application layer ecosystem — the signs of which we are already seeing now with many companies emerging offering VPPs, micro-grids, algo-trading and more.
There are also opportunities for companies to leverage incumbents’ existing distribution channels, either enabling OEMs to become energy market participants (like Axle Energy) or helping retail energy providers establish fully functional flexible tariffs, as Kraken and Kaluza are doing in the UK with Octopus and Ovo respectively.
Large-scale energy storage assets are also relatively new participants in the grid. Li-Ion battery prices have deflated by 85% in the past decade and are projected another 50% reduction in prices, enabling the so-called Energy Singularity, the moment when batteries cost less than grid transmission. The rise in the number of large-scale batteries calls for a shift in how these assets participate in markets to be able to meet their revenue projections. We are nearing saturation in the more manual capacity markets where there are too many non-awarded bits for assets to remain profitable. Projects need to look at other markets and asset managers in the UK are already assuming they will need to trade in spot markets and other balancing mechanisms. However, this new market participation requires a more sophisticated data infrastructure. We see opportunities in companies building within the new large energy storage tech stack to enable trading at an asset owner level, such as Enspired Trading and Twig, or data streams for trading houses like Modo.
The New Era of Clean Energy Procurement
The future is exciting for companies building the infrastructure for the new era of clean energy procurement, pushing beyond the current static structure to democratise access to green energy and increase capital flows to renewable projects.
For a large majority of corporates out there, decarbonising pretty much means rethinking their energy consumption — once energy efficiency measures are implemented, the most important Net Zero driver is the switch to 100% renewable energy consumption. Unfortunately, this isn’t as straightforward as it sounds. This is mainly down to two issues that run in parallel: the availability of renewable generation, as a function of building more solar, wind and long-term storage infrastructure, and the ease of accessing these resources.
Governments and markets have created several market instruments to enable corporates to access clean energy whilst incentivising renewable infrastructure project finance — enter PPA, VPPA, REC, GO and REGO.
The most commonly used pre-generation instruments are Power Purchase Agreements. Companies keen to decarbonise their energy usage would enter into direct, long-term contracts with a specific renewable energy project, ensuring a stable and sustainable energy supply for themselves and working capital for renewable energy providers. The next evolution of PPAs is VPPAs (Virtual Power Purchase Agreements), which are a savvy way for businesses to embrace renewable energy without the complexities of physically integrating renewable infrastructure into their operations. In a VPPA, a company agrees to buy the output of a renewable energy project, often located offsite, at a predetermined price. While they don’t directly consume the electricity, the financial agreement supports the renewable project economically and allows them to tap into further debt financing instruments.
On the post-generation side, REC, GO and REGO are the most common instruments to verify the use and generation of clean energy. RECs (Renewable Energy Certificates) represent the environmental attributes of one megawatt-hour of renewable energy generated, predominantly used in the US. GO (Guarantee of Origin) certificates serve a similar purpose in the EU, certifying the renewable origin of energy and providing detailed information about the energy source. REGO (Renewable Energy Guarantee of Origin) certificates, more commonly used in the UK, also certify the renewable origin of energy, specifically guaranteeing the renewable characteristics of the energy. The three certificates play a role in promoting transparency and supporting renewable energy goals and their differences mainly lie in their regional usage and the specific details they provide about the origin of renewable energy.
Unfortunately, these mechanisms fall short of a large part of the market looking to decarbonise its energy supply. To begin with, in the PPA and vPPA mechanism, the supply side is limited, and renewable energy generator partners’ selection comes mainly down to large volume consumption, closeness of sites and high credit ratings. In addition, the process of procuring renewable energy is costly and time-consuming. Large companies either have to rely on expensive traditional brokers, taking up to 30% in fees alone, or hire an in-house energy team to deal with wholesale markets and build a dynamic portfolio of clean energy. On top of this, the level of transparency given by utilities offering 100% renewable tariffs to their customers is murky at best. Reports quote that less than 5% of leading utilities actually fully disclosed the renewable energy sources behind their green offers last year. There is currently no widespread mechanism to verify that every consumption hour is, indeed, related to a production hour, nor there’s any way for companies to match their dynamic hourly energy consumption with an equally dynamic and certified hourly renewable energy production.
There are large opportunities for tech to step in. Companies like Tem, Verse and Ren are building in this space, leveraging AI to streamline the procurement process, bypass brokers and enabling direct transactions between generation and consumption, or building algorithms to expand access to renewable energy for smaller volumes of customers by joining supply and underwriting credit risks. Granular and Renewabl are working to bring transparency into the renewable market by creating mechanisms to dynamically certify renewable production and enable corporates to procure clean energy according to their consumption, on an hourly basis.
Enabling New Infrastructure Deployment
We mentioned several times the eye-watering amount of capital that’s needed for the energy transition — while the vast majority of it is eye-marked for infrastructure, we believe there are large opportunities for software companies to orchestrate and facilitate the infrastructure deployment critical to the electrification movement. Innovation in this space is happening both on the consumer-facing side as well as vertical software for grid participants.
360’ energy hubs
Energy consumption will drastically increase on the consumer side as consumers’ homes and workplaces will slowly fill up with solar panels, smart thermostats, heat pumps, EVs and batteries, as well as better windows and insulation. This service infrastructure to enable this transition is poor at best, with mom-and-pop manual installers dominating the long tail and technology being under-leveraged. Installing processes are complex and involve a variety of steps and stakeholders: quoting, validating, inspecting, permitting, procuring, installer management, customer services, maintenance and more. Software can play a crucial role in streamlining these processes, optimising them and even removing steps through digital inspection and permitting. On top of that, the current macro environment drives even more emphasis on unlocking potential financing avenues for these solutions. Customers are now more acutely aware of rising energy crises and sustainability implications of current energy consumption, but price is still the number one blocker for such purchases, so algorithms to facilitate financing transition between borrowers and lenders are key to unlocking the hardware penetration needed for Net Zero Target. This consumer electrification movement creates a new entry point into energy consumers and calls for the emergence of ‘Energy Brands’ offering a platform of services from hardware installation to financing, demand response, intelligent billing, renewable certificate and even clean energy procurement. Whether this space will be fully captured by existing, tech-forward utility companies (such as Ovo and Octopus in the UK and David Energy in the US) or by emerging geographical (Samara, Glowb, Station A, Metris Energy, Enpal) and vertical (Lunar Energy, Haven Energy) players is still to be seen.
Streamlining the next generation of renewable infrastructure
80 million km of power lines need to be built or upgraded globally by 2040. That’s more than half of the way from the Earth to the Sun. 350GW of solar and wind capacity needs to be built by 2050. 100GW battery storage needs to become an active part of the grid. Utilities are currently sitting on a backlogged queue of renewable capacity equal to the entire grid capacity as of 2021. TSOs and DSOs are under huge strains to manage the infrastructure add-on to the grid and lack the capacity, and the internal talent to build the software layer to smooth this transition and underpin the grid of the future. There’s unfortunately little benefit in having well-thought-through financial structures and incentives to unlock the initial project finance for renewable projects if the bottleneck ends up becoming the construction or the interconnection phase. This calls for a new cohort of software companies to build the nuts and bolts needed for fast and successful deployment and management of renewable infrastructure. Upstream, companies like Encoord, Neara and Noteworthy AI are developing crucial tools to help with the planning and building of new infrastructure. Further downstream, companies like Plexigrid and Cosmo Tech provide tools to TSOs and DSOs to manage, monitor and optimise distribution and transition grids at scale. There’s still a need for software to streamline digital permitting, interconnection, modelling and planning, if we are to try and meet the 2050 goals.
Conclusion
If founders are after building companies with transformational potential in our society, energy is the space to be. The move to a renewable-energy-enabled society is the key to single-handedly solving our planet's crisis whilst ensuring prosperity in our civilisation. Building in energy is very tough though. Entrepreneurs will be faced with complex regulatory structures, geographic differences, strong incumbents and price-sensitive customers. Winners in the space will be determined by creative business models, and founding teams that carefully bridge deep industry experience with a tech-first disruptive mentality and bold vision to become a long-term pillar of the future of energy infrastructure.
If you’re building this, I want to hear from you.
