SFV Perspectives: The Grid of Tomorrow Part 2

Our take on the technologies vying to transform the grid, from VPPs to DERMS to flexibility marketplaces

By Reid Carroll and Matthew Chagan

In Part 1 of our Grid of Tomorrow series we broke down why the grid got our attention, how it ties to the built environment, and why we think it makes for a compelling venture capital opportunity.

In Part 2, we want to get into the nuts and bolts of the sector. There are hundreds of companies in the space — which companies are ushering in a new era for the grid, and where might the opportunities for investment lie?

Our process for sector deep dives involves mapping the market through conversations with founders, investors, and industry incumbents. By sharing the resulting maps, along with our thoughts on each segment, we hope to drive engagement and debate — let us know what you think!

The Grid of Tomorrow

Our analysis has centred on four segments that we view as the core of transforming the grid:

1. VPPs (short for virtual power plants): the companies that control and monetise flexible demand. You might also see phrases like aggregator, dispatch optimisation, or flexible service provider (FSP) to refer to companies under this umbrella.
2. Networking Monitoring and Controls: the software tools that grid operators use to keep their networks operational. This includes DERMS (defined below).
3. Flexibility Marketplaces: Two sided marketplaces that sit between VPPs and grid operators / DERMS.
4. Flexibility-enabled Suppliers: These companies are (i) rethinking the way that electricity is supplied or (ii) helping legacy electricity suppliers adopt to new grid arrangements and tenant demands.

A general note on market maps — we aren’t claiming that they are comprehensive, nor are they a list of our favourite companies. Some companies fit in more than one bucket.

Each of these segments come with a unique set of opportunities and challenges from a venture perspective.

1. VPPs

The VPP Value Chain

VPPs in a nutshell: Remember the duck curve we introduced in Part 1? One way to mitigate this growing mismatch of supply and demand is to modulate demand in response to supply (i.e. shift the time when you turn on a heat pump, charge an EV, or activate an industrial process).

Electrical grids are sized for their peak loads, meaning that shifting 1 MW of load away from evening peaks is worth just as much to a grid operator as adding 1MW to the network would be. The issue is that managing and incenting millions of distributed devices is far more complicated than turning a few power plants up and down. This is where VPPs come in — they aggregate flexible demand or storage and monetize it by (i) offering it to grid operators, or (ii) bringing it to wholesale electricity marketplaces (and often times both).

VPPs — SFV’s Observations

• This is a crowded space: Aggregation & trading companies compete to monetise flexibility assets in the most efficient way possible, while dispatch optimisation & control companies take price signals from aggregators or markets to directly control assets such as batteries, EV chargers, heat pumps, or even buildings (see diagram above). There are an increasing number of players in both spaces, but competitive pressures have been minimised due to the rapid deployment of new flexible assets.
• Integration to electricity markets is both a moat and a hurdle to scaling for control & dispatch optimisation companies: The time consuming nature of integrating with local grid operators (proving that you can provide the flexibility you say you can provide) sets up for there to be many local “winners” for control of each asset type in different geographies.
• Aggregation & trading companies play in a fluid space: There are minimal advantages with scale (a MW is worth the same to the grid no matter how many you can offer), and many electricity retailers are vying to disintermediate independent aggregators. Aggregators must continuously outperform competitors to grow. One way they are trying to do this is by optimising trading strategies in both wholesale and flexibility marketplaces (including complex stacking of simultaneous opportunities).

2. Network Monitoring and Controls

A subset of network monitoring and controls companies

Network Monitoring in a Nutshell: These are tools for giving grid operators visibility into their networks, allowing them to manage grid capacity while minimising capital expenditures.

A grid operator who is unsure of the exact demand in a particular area will need to significantly over-build their capacity to be sure that issues won’t arise. This is a problem when you consider that electrification of transportation and heating will require many new grid connections.

Many of the companies in this segment are referred to as DERMS (distributed energy resource management systems). In addition to providing network visibility, DERMS also are responsible for turning off distributed energy producers such as wind and solar when there isn’t sufficient demand to balance the grid (known as “curtailment”). Outside of DERMS, this sector also includes companies that provide physical monitoring capabilities or fault detection.

Network Monitoring — SFV’s Observations

• Competition from incumbents is significant: There are very large companies like ABB, GE, Siemens, and Schneider Electric with decades of history selling technology to grid operators who have their sights set on this space, so startups need a compelling “right-to-win” here.
• Focus is shifting to the distribution level of the grid: Recent acquisitions by large corporates who have traditionally sold software and hardware to transmission grid operators are a reflection of their effort to be players in the distribution side of the grid, which is going to become increasingly important.

3. Flexibility Marketplaces

A subset of companies that are helping grid operators leverage flexibility in their networks

Flexibility Marketplaces in a Nutshell: Software that sits between VPPs and grid operators.

VPPs bring flexibility to market, but they can only choose from the markets that are available to them. For the most part this consists of wholesale markets or transmission network reserves (the latter of which quickly reaches saturation). Notably, neither of these are locational, so VPPs have few opportunities to be compensated for solving distribution-level grid constraints.

On the other side, grid operators want to take advantage of flexible demand to minimise infrastructure upgrades, but managing thousands or millions of flexible assets is complicated and outside of their core competencies (particularly true for distribution network operators).

Flexibility marketplaces are a win-win proposition that solve these pain points:

• They enable grid operators to procure near real time flexibility from VPPs
• They give VPPs the option to monetise their value to local grids

Flexibility Marketplaces — SFV’s Observations

• The UK market is the furthest along: All of the UK distribution grid operators are mandated to use demand flexibility to minimise their infrastructure spending. Parts of the US and Europe will follow closely behind, but many sub-markets still lack a true forcing function and there are only a few post-pilot flexibility market deployments.
• There are a limited number of startups in this space: Because deployments require deep integrations with grid operators, the handful of companies who have completed several years of pilot projects are likely to stake claim to the bulk of this sector.

4. Flexibility-Enabled Electricity Suppliers

A subset of companies pushing the boundaries on how electricity is supplied

Flexibility-Enabled Suppliers in a Nutshell: In the legacy iteration of the grid, electricity suppliers had a relatively straightforward role — trade energy on wholesale markets, and market it to consumers. As energy generation becomes increasingly distributed, this model is no longer sufficient.

• Consumers want to buy and share renewable energy, which has resulted in things like energy communities (optimising local energy sharing before exchanging with the broader grid) and community solar (fractional ownership of local renewable generation).
• Business want more flexibility in their electricity procurement arrangements, and many are focused on purchasing 100% of their energy from renewable sources. This has resulted in peer-to-peer electricity procurement platforms that connect distributed generators with pools of demand.
• Existing suppliers are increasingly under pressure to (i) offer similar procurement options and (ii) report renewable allocations to customers on a granular level. A host of startups have emerged to help them do this.

Flexibility-Enabled Suppliers — SFV’s Observations

• The UN’s 24/7 Carbon-free Energy Compact will put further pressure on electricity suppliers to innovate: the compact, which has been signed by governments like Scotland and Ireland and corporations like Microsoft and Google, commits signatories to consuming carbon-free electricity sources every hour of every day. This will require the granular reporting and flexible procurement options offered by the startups above — something many existing suppliers can’t yet offer.
• Peer-to-peer platforms tend not to be integrated with grid operators: this means that they do not directly help with balancing supply and demand or adding more capacity to the grid.

We continue to actively speak with startups and investors in this space, and are more than happy to engage with anybody else thinking about the future of the grid. Thanks for reading — please let us know what you think!