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September 6, 2021
Gabriela Herculano and Jayhan Selvarajah
Power to the people, by the people
By Gabriela Herculano and Jayhan Selvarajah, August 2021
Distributed Renewable Generation and the rise of Prosumers
Our global power industry was built around large, centralized power stations, mostly coal and natural gas fired. Electricity is brought to users via long, high voltage transmission lines that are connected to substations that lower the voltage and connect to a distribution network. The US electric power grid, for example, is the world’s largest machine. Scale is needed for the very capital-intensive projects to achieve returns which usually happen in the long term. This complex machine is based on large scale power plants and the reality of these fossil fuel installations is that much of the energy content of fuel sources like coal, diesel or natural gas are wasted by inefficiencies in the conversion of energy and later on in losses in the transmission and distribution processes. According to Electropaedia, if we take domestic electric lighting as an example, “less than 1% of the energy consumed to provide the electricity is ultimately converted into light energy”.
Def: Behind the meter refers to electricity produced, stored or consumed onsite, at the energy user’s side of the meter
Consumers of electricity are often referred to as “behind the meter” users, referring to consumption that happens on site, on the energy user’s side of the meter. Generating electricity at point of consumption (Distributed Energy Resources, DER) has been challenging for technical and economic reasons until recently. Declines in cost of solar panels and batteries have made solutions that generate electricity at the point of consumption price competitive, so users embracing behind the meter products can reduce the kWh acquired from the grid.
The US National Renewable Energy Laboratory, NREL, has estimated the drop in installed cost for solar PV installations (as shown in the table below, for behind the meter residential and commercial as well as utility scale single and dual axis) since 2010. Capital cost reductions, combined with improvements in operation, better system designs, and technology have allowed for reductions in the Levelized Cost of Electricity (LCOE). For comparison, residential and commercial retail electricity rates in California in June 2020 were ca. $198/MWh and $192/MWh, respectively. In the same period NREL has summarized the Levelized Cost of Solar Plus Storage (LCOSS) as follows:
- Residential PV plus storage:
LCOSS is calculated to be $201/MWh (without the federal Investment Tax Credit,ITC) and $124/MWh (with the 30% ITC).
- Commercial PV-plus-storage:
LCOSS is calculated to be $113/MWh (without the ITC) and $73/MWh (with the 30% ITC).
- Utility-scale PV-plus-storage:
LCOSS is calculated to be $83/MWh (without the ITC) and $57/MWh (with the30% ITC).
NREL PV System Cost Benchmark Summary
(inflation adjusted), 2010 to 2020
The key reason behind the increasing adoption of distributed energy and self-production is cost. As the figures above show, behind the meter solar production + storage makes economic sense. A second benefit to users is security of supply. The term “prosumer” refers to users who can both produce and consume electricity. Prosumers become particularly relevant to the wider energy system when they start selling surplus generated by their distributed generating assets back to the grid and when using their clean energy battery storage (both stationary and mobile, as in the batteries inside electric vehicles) to the benefit of the grid. The European Parliament refers to an estimate that 83% of all EU households could become prosumers by 2050.
A residential consumer in California pays ~ $198/MWh for electricity, while LCOSS (with ITC) is at ~$124/MWh
The benefits of a decentralized electricity system are not exclusive to the owners of distributed generation assets. Battery storage for clean energy in behind the meter applications allows prosumers to mitigate renewable energy intermittency, storing excess energy or using the battery to store electricity from the grid when prices are low and discharge it when prices are high. Prosumers therefore support grid stabilisation by storing electricity and discharging it back into the grid at peak times, helping meet supply and demand. Although historically grid operators have focused on supply management, IoT and 5G technology enhance the reach of Demand Side Response (DSR). New interconnecting technologies like smart metering, smart thermostats, ultra-smart grid, and AI based software allows prosumers - larger ones in isolation and smaller ones in aggregation - to be involved by the grid operator in reducing electricity demand at peak times.
Moreover, DER is also being used to regulate frequency response, helping the grid to stay in a 50 Hz current (most EU countries) or 60 Hz (like in the US) including through the Firm Frequency Response (FFR) market. Larger battery owners (in front of the meter, utility scale storage) offer a fast and reliable frequency response, as does behind the meter storage via an aggregator.
The Relevant Solutions Decarbonize, Digitize and Decentralize
DERs which comprise the decentralized systems all must work in unison to unlock the maximum benefits associated with enhanced grid performance. The iClima Distributed Renewable Energy Index splits with relevant distributed solutions across seven distinct segments:
1. Distributed Power Sources: Producers of rooftopor ground mounted installations of solar PV, combined heat and power (CHP),microturbines, small wind power systems.
2. Distributed Energy Storage: Battery based stationary energy storage as well as fuel cells solutions.
3. V2G and EV Charging: Representing solutions based on use of mobile clean energy storage (i.e., batteries inside EVs) which include charging networks and net meters.
4. Virtual Power Plants: Aggregators of heterogeneous DER resources, both hardware and software solutions as well as key components, such as inverters.
5. Microgrid & Smart Grids: Multiple dispersed generation sources with ability to isolate such microgrids from larger networks. Solutions for voltage and frequency issues.
6. Smart Houses & Building Energy Management: Smart appliances for net zero energy homes. Building heating and cooling optimization devices, smart thermostats, sensors & data collection producers.
7. Software & Systems for Distributed Energy Resources: Blockchain as a service, demand response SaaS, remote monitoring software. Advanced analytics, advanced distribution management systems (ADMS), and Distributed Energy Resource Management Systems (DERMS).
Deployed effectively and on a wide scale, the potential cost savings from DER can be substantial. Vibrant Clean Energy estimates that through potential users investing in distributed energy resources, the US economy alone could cumulatively save $473 billion on electricity bills between 2020 and 2050. The economic benefit of electricity produced at point of consumption is a main reason for adoption of DER. Having said that, we are at the bottom of the so called “S shape” adoption curve. According to SunRun, only 3% of US homes have residential solar installations on their rooftops which equates to roughly 77 million potential beneficiaries of decentralised renewable energy systems. This is a massive opportunity for companies fulfilling the needs of this growing market.
To assess the companies leading this shift, we estimated the distributed renewable energy resource (DRER) revenue across the seven different segments listed above. This is a key tangible metric to evaluate a company’s alignment with the emerging trend of behind-the-meter solutions. The table below summarises the DRER and compares with the broader “green revenue” for each company. The ratio of DRER versus green revenue indicates if a company is a pure player in distributed generation.
Shades of Green & Yellow - Green/DRER revenues for the iClima Distributed Renewable Energy Index
The DRER revenues are considered a subset of green revenues: the highest the DRER revenue can be equal to is the total green revenue of a company. At current composition, companies with DRER representing over half of total green revenue represents ca. 70% of the index. The frequency distribution of the companies within the iClima Distributed Renewable Energy Index in terms of relevance of DRER is depicted in the histogram below:
Distribution of DRER/Green revenues
This analysis gives us key insights as to the extent to which certain companies are embracing the trend of decentralised energy systems through their share of green revenue. For example, Veritone (VERI) has relatively low green revenue however is considered a ‘pure player’ in this analysis as they have recently entered the energy market providing AI solutions which both optimize and empower smart grids (representing 100% of their green revenue). On the opposite end of the spectrum, we have Tesla (TSLA). Tesla’s green revenue, predominantly generated from the sale of electric vehicles, whilst considered green are not considered DRER revenue, whereas revenues from their energy generation and storage sales are considered DRER revenue hence justifying their classification as a minority player in the context of behind-the-meter solutions. Some companies are pure players in both respects. Nuvve’s (NVVE) core business involves selling vehicle-to-grid based on hardware & software which is completely in line with distributed generation and represents the totality of their green revenue.
The Shift Away From Centralized Power Systems Converges With Powerful Trends
Producing electricity from renewable sources at the point of consumption is impactful in itself. An additional force of disruption comes from integrating clean energy storage solutions into the DER assets like solar rooftops. There are two main types of storage at point of use that are likely to become very relevant in terms of grid management, notably mobile and stationary behind the meter batteries. Mobile storage comes in the form of so-called Vehicle to Grid (V2G) or Vehicle to Home (V2H) solutions. Stationary storage, such as Tesla’s Powerwall range, is achieved through the management of a network of installed batteries. The aggregation of these small-scale distributed assets into a dispatchable grid asset is referred to as a Virtual Power Plant (VPP). Both mobile and stationary behind the meter solutions are represented in the iClima Distributed Renewable Energy Index.
To understand the impact potential of V2Gs and VPPs it is important that we triangulate a few points. Firstly, the much talked about EV adoption forecast. BloombergNEF’s “Electric Vehicle Outlook” projections published in June 2021 set two scenarios for EV adoption.
New Zero Emission Vehicle Sales Forecast & Associated Increase in Electricity Needs
BNEF estimates that there were ca. 10 million passenger EVs on the planet at the end of 2020 and that passenger EV sales represented 4% of total passenger cars sold. New passenger EV sales reached 3.1 million in 2020. By contrast, they estimate that EV passenger car sales in 2025 will reach 14 million units, equating to 16% of all passenger vehicles sold. In 2030, passenger EV sales are forecast to reach between 32 million and 55 million units in annual sale. As a reference, the current global fleet of internal combustion engine cars is 1.2 billion.
Global Electric Vehicle Fleet at End of 2020
The International Renewable Energy Agency, IRENA, also makes projections for a global EV fleet. In their Global Renewables Outlook issued in 2020 they estimate that EVs will become a fleet of between 269 million (a “where we are heading” scenario) and 379 million (a “where we need to be” scenario) by 2030, reaching a fleet between 627 million and 1.1 billion by 2050. Extrapolating from the number of EVs and the sizes of batteries, IRENA estimates the total GWh of mobile battery storage that will be needed. The batteries needed to run EVs is the second key figure in our triangulation (a great FAQ on grid scale battery storage can be found here).
We are at the bottom of the EV adoption curve and at current figures, 87% of the battery storage on the planet sits inside vehicles. Longterm and short term stationary clean energy storage will grow in size, but mobile storage inside EVs will still represent between 61% and 69% of total storage assets by 2050 according to IRENA.
In a previous article we shared our view that cars as we know them will cease to exist and are to become computerized power plants on wheels. EVs and clean energy storage clearly complement each other. That brings us to the third relevant figure for triangulation; the growth in electricity demand that will come from the electrification of transport. As seen above, BNEF estimates the additional MWh of electricity demand by 2040 to represent a 9% to 14% growth. EVs will increase the demand for electricity and may exacerbate the “duck curve” problem.
“Smart chargers that encourage consumers to charge outside of peak times will play a key role here, enabling drivers to access the cheapest and cleanest energy at the most convenient place”
UK Transport Decarbonisation Director, Mr. Graeme Cooper
The “duck curve” plots the gap between the electricity demand and the amount of MWh produced by solar installations during the day. Charging networks can help fill the valleys, with incentives for EV drivers to charge when grid power costs are at the lowest level (during hours of the day when solar and wind are being dispatched) and avoiding the peak hours (mostly after sunset) at the end of the day. EV charging companies will play a key role in managing the electricity demand curve as grids become more renewable energy based, helping minimize the misalignment problem presented by the “duck curve”.
A network of charging stations is being built to support the adoption of EVs. The inclusion of EV charging companies in iClima’s Distributed Renewable Energy Index is not due to the ability of public charging points to minimize EV range anxiety and promote EV adoption. The solution is part of our index because of i) the demand management capabilities of the charging networks, and ii) the potential for EV batteries to become mobile clean energy storage assets.
The Shifters Innovating, Inventing and Investing in a New Future
President Abraham Lincoln is credited with saying that “the best way to predict the future is to create it”. The future when the grid is much more decentralized and predominantly renewable based is within reach and the solutions are in place and being scaled up. Generating electricity at the point of consumption is a new concept; for example Sunrun (RUN), the US leader in residential solar rooftop solutions, still has only 3% market penetration. However, solid product offerings and operations indicate the vast growth potential ahead. Revenue prospects are also robust because Sunrun is simultaneously entering into the EV solutions arena. In 2Q21 the company announced a partnership with Ford to become the preferred installer for the Ford electric F-150 truck. The electric truck’s battery could be used as a back-up power source, sized to provide three days in a row of 30kWh electricity (the average daily consumption of an average US household).
Charging network players Blink (BLNK), ChargePoint Holdings (CHPT) and EVGo (EVGO) are suffering share price drops in the second and third quarters, as President Biden’s $1 trillion Infrastructure Package bill may not provide the support once expected to the roll out of charging network infrastructure. However, the fundamental case for the need for a charging network is very strong because public charging is a pre-requisite for EV adoption, which is a key element of all net zero plans. If we take some key figures for EVGo we make the point of the sizeable growth ahead. EVGo owns the largest public fast charging direct current network in the USA. In March 2021, it had over 800 charging sites, 220k active customers, was 100% renewable energy powered and had a charger less than 10 miles from 41% of the Americans. It has 12 million EV units of fleet commitments by 2040, from Uber, Lyft, Avis, Amazon, Fedex, DHL, and UPS. The company estimates its revenue will jump from $20 million in 2021 to $905 million in 2026 (when EBITDA is expected to reach $331 million). EVGo’s management refers to the EV charging network as 21st century infrastructure, similar to cell towers and data centres.
Nuvve (NVVE) is a 10-year-old California based company, a pure player in V2G and already a global one. The company sees their services lowering the cost of EV ownership, while supporting the integration of renewable energy sources. Nuvve’s first customers are fleet owners, building managers, municipalities, and public organizations such as school districts. When EVs are plugged in, clients transform their EV units into grid-integrated energy storage resources (while guaranteeing the expected level of charge for when the vehicle is needed for transportation). Nuvve manages the assets as a VPP and revenue is generated from Nuvve’s bids onto energy markets, using their Grid Integrated Platform called GIVe. Energy revenue at a project in Denmark that has been in operation for over 3.5 years has been $2,000 per car per year.
“By 2040, ~560million electric vehicles estimated to be on the road globally with batteries that could provide enough to power all homes in the U.S. for 1.2 years”
Source: Nuvve 1Q21 Earnings Presentation
Another California based company with a focus on electrifying commercial vehicles is Proterra (PTRA). Founded in 2004, the company is structured across three businesses: Proterra Powered (selling electric powertrains to commercial vehicles OEMs; over 375 MWh of batteries produced), Proterra Transit (company is the leading maker of electric transit buses, over 700 units delivered) and Proterra Energy Fleet Solutions (fleet level chargers and energy management, combining hardware & software turnkey solutions; over 55 MW installed across 600 charge points in North America). Proterra Energy is the business inline with DRE.
With an "energy storage-as-a-service" business model, the company’s formula, like its name, is rooted in science, technology, engineering and mathematics. Stem (STEM) sees the storage market as a $1.2 trillion opportunity to 2050, growing 25x until 2030. Increasing cost reduction in solar and wind installations, combined with further cost reductions in battery hardware, will enable such growth. Stem expects its revenue to grow at 50% CAGR from 2021 to 2026. The company is a player in both the Behind the Meter (“BTM”) and Front of the Meter (“FTM”) applications. Both BTM and FTM are distributed renewable resources, but the solutions at the point of consumption are the BTM ones. The graphs below are very relevant to showcase the size of the segments. Stem’s FTM projects are ca. 27 MWh in size and $10 MM in value, while BTM are ca. 2.2 MWh in size and $1 MM in value.
No article on EVs and clean energy would do justice to the words “impact” and “innovation” if not mentioning Tesla (TSLA). The company has many fans, including Ark Invest’s CEO who is openly bullish on the company. For example, Ark assigns a 50% change for the probability of Tesla delivering fully autonomous driving by 2025, a technology never applied before. In its March 2021 update on the company, Ark forecasts Tesla’s revenue for four business lines, as shown below.
Ark’s forecasts that Tesla will reach $507 billion of revenue in 2025, up from $31.5 billion in 2020 sales. Ark estimates sales for four business lines and does not show sales derived from their energy solutions. Tesla’s energy solutions encompass energy storage products and solar energy offerings. The Powerwall is designed to store energy for residential or small commercial users. The Megapack and Powerpack are energy storage solutions for commercial, industrial, utility and energy generation customers. The solar solutions are retrofit solar energy systems and premium glass solar roof tiles for energy generation. In 2020, the energy generation and storage segment revenue reached ca. $2 billion.
In its 2020 Impact Report Tesla said it aims to sell 20 million EVs per year by 2030, 40x more than the 0.5 million units sold in 2020, while its energy storage volume forecast is 1,500 GWh sold per year by 2030, 500x more than the 3 GWh of energy storage sold in 2020. As we have seen above, IRENA expects the whole stationary energy storage market to get to 745 GWh in 2030 in a positive scenario. STEM, using figures from Wood Mackenzie and EEI, expects the global energy storage market to add 164 GWh of capacity in 2030 (reaching a cumulative battery storage of ca. 650 GWh until the end of the decade). Tesla’s stationary battery sale forecast is a very ambitious one, but the company’s innovation and drive are proven, so Tesla’s energy business is not one to be neglected.
The 4th D is for Disruption
Elon Musk allegedly often tells his team “let’s go back to the physics”. The physics are not in favour of centralized fossil fuel generation. We add to that the “let’s go back to the economics”. DER makes economic sense, both for Prosumers and for the whole economy. That is why we believe that the adoption of decentralized solutions will be fast.
As more renewable generation gets added to the mix, both in front and behind the meter, the more that distributed resources will add complexity to the system. That is why we see DER as a trend enabled by digitalization. Artificial Intelligence tools and the Internet of Things are modernizing grid infrastructure. The volume of real time data being generated and processed by automated devices enables energy efficiency. Smart meters, thermostats and controlling devices add flexibility to the grid. Demand management can be done in ways never seen before. As the generating resources are renewable based, distributed energy also has the positive externality of decarbonizing our global economy.
DER is changing the way we get our electricity. It disrupts what has been seen as a natural monopoly until recently. The 4th D is no doubt for Disruption.