SFV Perspectives: The Grid of Tomorrow Part 1
By Reid Carroll and Matthew Chagan
Note: Our market insights in Part 2 can be accessed here.
At SFV, much of our investment philosophy is rooted in the importance of deeply understanding every sector that we invest in. When we decide that macro tailwinds or new technologies are likely to create venture-scale opportunities, we roll up our sleeves and dig in. This means dissecting the industry value chain, mapping the startup ecosystem, speaking to as many startups as possible, and trading notes with investors and industry experts.
As a built environment focused fund, our 2022 list of deep dives centred, unsurprisingly, around building-centric topics like rooftop solar, heat pumps, and EV charging infrastructure.
These deep dives introduced us to impressive founders, led to exciting investment opportunities, and shaped our theses on the future of buildings — just as we hoped they would.
What we didn’t plan on, however, was the degree to which they would push us towards a sector that we didn’t originally set out to focus on — the electricity grid. The more we looked at the electrification of sectors like heating, the more clear it became that the built environment can’t transform without a parallel transformation in the grid.
SFV’s Deep Dive on the Grid
The electrical grid is of course an incredibly broad sector, and made more complicated by the fact that each geography has its own configuration, set of regulations, and constraints. But rather than dissuading us, we viewed its complexity and scope as a reason to dig in.
From hearing “demand response”, “VPP”, and “aggregator” for the first time to mapping the intricacies of grid configurations in the US, UK, and Europe (DSOs, DNOs, TSOs, ISOs, RTOs, CCAs…no more acronyms, please), we’ve come a long way.
As we come up for air after months of conversations with startups and investors focused on the space (not to mention the infrastructure team of our founding limited partner PATRIZIA), we wanted to publish a 10,000 foot view of how we view the “Grid of Tomorrow” sector.
We’ve decided to publish a two-part series on our findings, through which we hope to stimulate conversations with founders, other investors, and industry veterans who might have alternate perspectives. Part 1 frames the the reasons we are so interested in the sector, and Part 2 lays out our market mapping and perspectives, from VPPs to DERMS to flexibility marketplaces.
Our aim in publishing is to drive engagement and debate, so please comment, share, or tell us what you disagree with!
The Intersection of the Grid and the Built Environment
In the grid, supply and demand of electricity must be in balance. When they aren’t, brown-outs or black-outs result. This has historically been managed by modulating supply to match demand — gas fired power plants would be scheduled to ramp up and down to match the demand curve.
Unfortunately, this won’t work for a grid powered by intermittent renewables — the sun shines when it shines, and its typical output profile looks like this:
Meanwhile, as industries like heating and transportation electrify, electricity loads are going up in the evenings when solar is not available (this is when most households will turn up their heat pumps, switch on their induction stovetops, and plug in their EVs). The result is the so-called “Duck Curve”, which shows that net demand is increasingly out of sync with renewable power generation:
Adding solar to rooftops and swapping out natural gas boilers for heat pumps are unequivocally good things for the environment, but, as the duck curve shows, are also big problems for the grid.
This grid strain will directly inhibit faster deployments of heat pumps and solar exactly when we need them most. It will also fundamentally change the options available to real estate professionals. In London, for example, the construction of new homes will potentially be banned for more than a decade because the electrical grid has run out of capacity.
Furthermore, constraints in the grid are increasingly moving to the “distribution” (local) levels of the grid, because this is where buildings and most new renewable assets are connecting. And because new building loads are driving constraints in the grid, shifting those loads (called “demand response”) will be a major part of any net zero scenario.
Never before have the future of buildings and the future of the grid been so closely linked.
This is a Market We Couldn’t Afford to Overlook
EVs, electrified heating, and rising cooling demands all contribute to a projected tripling in global electricity demand by 2050.
To cope with this, and the unevenness of intermittent renewable energy supply, the world will need an estimated $14T in grid spending by 2050 — a big market by any definition!
While much of that $14T will be infrastructure spending, a meaningful portion will be technology too:
- BNEF has estimated that the power sector will spend $5.2B on software by 2025, and that 42% of annual grid spending by 2050 will be in digitisation.
- It is faster and cheaper for grid operators to leverage flexible demand than to add an equivalent level of capacity to their grids, and regulators like Ofgem in the UK are governing accordingly.
- Batteries are great, but they will only be deployed at the scale we need if there are new market mechanisms in place to monetise them.
Putting this all together gave us conviction that the Grid of Tomorrow presents a compelling venture capital opportunity: a large market, extreme complexity that can only be managed by technology, and forcing functions that mean deployments cannot wait.
But what are the specific technologies that could usher in the next generation of the grid, and how do they fit together? That’s the topic of exploration in Part 2 of our series.