VCs and the Power Grid

Tech Investor Adventures in The Power Grid  

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On January 11th, 2024, Sifted heralded the new year as “The Year of Grid Tech”. At the time, we as co-founders were wrestling with the idea of getting venture funding for our new grid flexibility software company, having bootstrapped Beebop to a dozen people and seeing good traction in the market. Now the inbound VC requests rose to a level I hadn’t ever experienced before. Most striking was that both generalist, traditional software and deeptech VCs alike seemed suddenly enamored by Virtual Power Plant software (perhaps most exemplified by a16z’s Ryan McEntush writing a thoughtful piece on grid decentralization).

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So is this hype, or are we, even in the wake of a painful cleantech 1.0 era and ZIRP hangover, finally entering an era of scalable software play in the power grid space?

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Regulatory Tail- and Headwinds

At a high level, there is more than room to be optimistic, at least if you believe that the energy transition will only gain momentum. From first principles, we’ll need Virtual Power Plants to keep the power system affordable. Landmark regulations such as FERC Order 2222 and increasingly concrete state regulations on grid are bringing significant policy tailwinds. But often these regulations are accompanied by long-term and vague implementation plans, hampered by painful gaps and hurdles between regional, state and federal level jurisdictions. Especially the lack of consistent distribution system smart metering and full market settlement (noticeable progress Article 14.a in Germany and P415 in the UK) keep full flexibility monetization away from regular consumers.  

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Scalability Smashers

Whatever peoplehope, the regulated Energy Market ain’t the Cloud. In the world of grid flexibility, what we learned over our 15 year journey is that among the many non-scalability aspects, two stand out. Upstream in the power system, flexibility markets look different regionally, and are still subject to frequent changes. If you then venture in the upstream system (say by monetizing as a trader or aggregator), you’ll need to be ready to absorb the overhead that comes with the maintenance of all these market interfaces (and year-to-year volatility driven by local market dynamics). Policy makers know that a lot of this lack of standardization on market design are self-inflicted wounds as from a physics and engineering perspective, the underlying problems these markets resolve (say energy imbalance, system inertia, grid capacity, congestion issues) are fundamentally the same.

A second scalability smasher has existed downstream in the device connectivity and UX layer. Years ago there were few manufacturers of devices offering connectivity and control cloud service, let alone doing that in a standardized way. Great progress is made by companies like Enode, DERAPI and others to make universal connectivity a reality. The consent flow approach and broad coverage of Enode stands out. The underlying implementation and actual level of power controls one can get are still not good enough to support full power system monetization of these devices.

While we yet have to see deeply integrated connectivity that works seamlessly for end-consumers and supports grid flexibility applications, we believe this will not remain a bottleneck. Standardization with an eye on the flexibility use case is key.

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Utility Sales Cycle

How do you execute sales motions that are tech VC-attractive in the notoriously difficult utility customer segment? While a lot of VCs remain understandably skeptical, we are cautiously optimistic. If you compare the digital and product innovation maturity of (even incumbent) utilities to what it was 10 years ago, there has been a real shift. In our world, expert teams on grid flexibility (or DER, VPPs…what’s in a name) now receive increasing executive support and drive velocity in traditionally inert organizations. Pressure from regulators on boards and executive teams helps here. As with much in energy, Europe and the UK lead. Indeed, in their unbundled markets, Octopus, Enpal and 1.5Grad present a growing breed of tech-savvy ‘neo utilities’ who are all about speed and customer obsession. Oftentimes their products involve an active role in the installation and energy management of DER. As the VPP value stack grows more complex, we’d hope that these companies operate effectively in ecosystems of specialized technology providers.

Utilities are also no longer the only customers. The role of OEMs (manufacturers of solar PV, home storage, HEMs, EVs) offers a new and exciting channel to end-consumers. Right now OEMs are still hampered by the regulatory challenges preventing full bulk system participation of individual consumers without utility involvement (again Ofgem’s P415 being a leading regulatory innovation on this front), but still they are taking a much more active role in the flexibility ecosystem towards the customer in order to increase their own margin and CLTV targets.

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Customer Acquisition

The historical reality is that consumers are just not that interested in their energy (an old report of 2016 estimated that customers spend all of 8 mins per year on their utility bill). When we were working on consumer flexibility with manufacturers of electric water boilers and home energy storage in 2016, we had to work with - meh - $100 per year kind of incentives, hardly the fuel needed to drive scale. However, as the power system comes under stress and households electrify, such incentives grow to be more material. The winning cocktail for scale then emerges: material incentives with truly seamless and simple user experiences for grid incentives.

Where do you then conclude? It’s early, it’s risky, it’s uncertain. It’ll take massive determination and collaboration between regulators and policymakers, utilities and OEMs, investors and start-ups. Our view at Beebop is that while it’s early days, there hasn’t been a better time to step into this space. And we’re thrilled to be united in our vision with our new early-stage US deeptech investor and European climate tech VC.