ENTREPRENEURIAL ENERGY 2.0
Beyond the infrastructure: What’s next on the grid?
The first wave of investment in smart grid infrastructure will yield some of the earliest and biggest winners in energy venture investing. Where is the next wave of exciting opportunities on the smart grid?
We consider the smart grid to be both a network and a platform. The value of a network increases along with the number of nodes connected to it, while the value of a platform increases with the number of applications and services that are deployed on top of it. The smart grid’s value therefore increases as we integrate additional nodes and applications. This conception of the smart grid goes well beyond meters and modems -- it is a framework of interconnected operational systems, analytical tools, databases and energy markets. As this framework becomes more flexible, dynamic and open, entrepreneurs have the opportunity to create enormous value as they add to the value of the grid.
Behind the meter: Enterprise-side grid integration and monetization
Participation in the grid framework creates value through both expense savings and new revenues. How will enterprises participate, and who will capture the value?
Much of the industry discussion about smart grid focuses on the utility. However, there are important opportunities for energy users as well. As we think about new nodes to add to the grid network, large-scale energy loads and customer-owned energy assets quickly come to mind. If they can be “brought online” (i.e., monitored and managed by a grid-smart application) with a detailed awareness of costs, hard-dollar savings can be delivered. Further, if this management capability can be coupled with the ability to participate in the energy markets, monetization can be achieved and new revenues can be delivered to energy users. Simultaneous awareness of user costs, operational priorities and energy markets makes it possible to achieve an economic optimization of significant value to large energy users and grid system operators alike.
HVAC and EV charging loads appear to be prime candidates for grid integration, as they have a high degree of manipulability and also often present well-defined digital interfaces that can be utilized by control, optimization and monetization applications. There is a similar opportunity with distributed generation assets and of course, large industrial loads. Perhaps the most intriguing (albeit speculative) value proposition might relate to distributed energy storage assets, although the viability of these projects will depend a lot on the pace of innovation and cost reduction in the core storage technologies themselves, as well as the number of different use cases the storage system can be deployed against simultaneously. One of the exciting consequences of the intelligent integration of storage and generation assets into the energy market is that it vastly improves the business case for such investments, accelerating the adoption of renewables and energy storage.
Building automation and control incumbents have an interesting position in this emerging landscape. It will often be their systems that serve as the interfaces to key loads. How far will they extend their ambitions into optimization and monetization? Can they be used as a channel for new entrants seeking to play those roles? While some early moves have been made, such as the acquisition of Gridlogix by Johnson Controls, for the most part this powerful group of companies has been strangely quiet. A medium-term wave of acquisitions of next generation control/optimization companies by the BMS market leaders seems likely.
The Role of the Aggregator
Energy market structure and operational factors combine to create opportunities for technology-enabled, market-savvy intermediaries.
We expect to see some of the new entrants attempt to utilize an aggregator/service provider model, in which they gain control of a large collection of loads and assets, and monetize them in the energy markets in some optimized fashion. This model has already been put to work in its simplest form by the demand response aggregators, who no doubt will have ambition to elevate the sophistication of their offerings, increasing levels of automation, uplifting monetization potential and expanding the base of assets and loads they can target. We expect to see variations in terms of target market (C & I? Consumers?) and also target megawatts (EVs? Storage? Building systems?). Some aspirants will no doubt integrate all the way to outright asset ownership, a more capital-intensive version of the same basic economic play.
Looking at these aggregators, we are reminded somewhat of internet advertising networks. In the ad network model, small publishers work with a monetization partner -- the ad network -- that allows them to more effectively generate revenue from their assets -- their available advertising inventory. The ad network operates at a scale that allows them to better sell to major media buyers, offering critical mass and audience targeting. The network keeps a hefty percentage of the media sale, but the small publisher is still better off because of increased sell-through and uplifted unit pricing. We see a similar role in the energy market, where a partner can allow large energy users to monetize their consumption in a way that would be very difficult for even a sophisticated enterprise.
Other ventures will seek to enable utilities themselves to play the role of aggregator/service provider, allowing the utility to manage grid-integrated loads and assets according to their needs (and sharing some of the economic value created with their customers). These ventures will offer their products and services to utilities and/or grid system operators. It remains to be seen which approach will dominate -- utility-centric or user-centric -- or whether both schools can co-exist within the evolving market and regulatory frameworks. The user-centric approach benefits from the clearer economic motivations and more rapid adoption cycles of enterprise/C & I customers in particular, while the utility-centric approach has the obvious advantage of the utility’s scale and reach, if it can be harnessed effectively.
Grid Analytics
A flood tide of energy data requires advanced diagnostic and decision-making tools.
Most of the grid applications we’ve mentioned depend on a sophisticated analytic capability. Optimization systems will gather data from operators, the managed devices themselves, sensors and the energy markets, and then calculate a set of actions to deliver maximum benefit. This is but one example of the growing role of analytics on the grid. As more and more devices, customers and markets become grid-integrated, there is a need for enhanced data collection and analysis capability at multiple levels.
The utility itself will be a prime consumer of grid analytics. One obvious example relates to the large increases in data volume that will flow from AMI deployments. This data can be put to good use for operations, marketing and customer service purposes, to name a few. But first it must be collected, reduced, synthesized and eventually analyzed. These needs represent interesting opportunities for utility-centric technology businesses. IBM and others are already making the smart grid an important area of focus for their analytics practices. Of course, grid data can also be utilized by a range of others, including consumers, enterprises, financial institutions, energy companies and product vendors. Each will have different needs in terms of data type, analytical variant and representation, opening further opportunities for new ventures in this field.
AMI is not the only source of data on the grid. Behind-the-meter systems are also being instrumented. Emerging application areas like predictive analytics, continuous commissioning and demand charge management promise benefits in improved system performance and reduced energy supply expenses. In addition to customers using this data for their own purposes, one can imagine data aggregators delivering cross-enterprise and cross-system analytics. Who would be the customers for aggregated analysis? Perhaps those very same enterprises, seeking to benchmark their relative performance. Third parties like financial institutions, energy companies and product vendors may also be able to make use of it. A lot still has to play out in this space, but prior experience shows that this type of data might prove to be quite monetizeable.
The Energy Data Cloud
“Killer apps” may end up being a means to the end. Will the stewardship of the data itself be the real prize?
Applications that can achieve widespread adoption will occupy the potentially scarce interface sockets to key customer premise systems (such as the BMS). They will also become repositories of large amounts of customer data. Perhaps one of these applications might even become an authoritative repository, to which other applications must interface. It’s not too hard to imagine that this could prove to be quite valuable real estate indeed. Such a system would be the natural underpinning of a future “Energy Data Cloud,” home to the customer’s energy-related data, operational applications and analytics. Such a cloud would also be the obvious point of integration between the enterprise and the other systems of the grid, facilitating relationships with energy service aggregators, energy markets and market-facing intermediaries, grid system operators and even utilities.
However, there aren’t too many facilities managers who think they are in the market today for “energy data middleware”! They are interested in solutions to pressing problems with hard-dollar ROI justifications. Vendors that can garner footprint via rock-solid business cases will win the opportunity to contend for the Energy Data Cloud title. Already the race may be on, as aspiring “killer applications” seek to pull ahead in terms of adoption and position themselves for the coming data platform battle.
Bringing the Consumer into the Smart Grid Framework
Connecting households is only the beginning. Now what?
Many of the opportunities we’ve described thus far center on large corporate and institutional energy users, which is a natural place to start. They control large loads and usually have systems in place to control them. They have sizeable costs at stake and trained staff whose job it is to care about them. They are also much easier for vendor sales forces to find and more cost-effective for them to sell to. None of this is a secret, which is why demand management in the C&I segment has already become brutally competitive. EnerNOC seems to be doing the best job in this bloodsport, and by virtue of its success in “DR 1.0,” will have an advantage in their industrial/institutional customer base for what comes next.
Consumers are almost the total opposite. Their individual loads are small and generally lack digital control interfaces. Energy efficiency is not top of mind for most, and this market segment is hideously expensive to reach without some sort of massive channel leverage. But collectively, they constitute a large pool of megawatts, of great potential value to energy efficiency players and potentially monetizeable in energy markets.
Getting Engaged
Except for a few die-hard energy geeks, the general population is not all that interested in slicing and dicing their kilowatt-hours consumed. This explains why efforts focused on ever-more-granular presentation of raw data haven’t taken off.
A new tack must be taken to gain consumer mindshare, and we think social media will be a large part of the equation. The work done by Accel portfolio company OPOWER with numerous utilities across the United States already shows the impact of accurately baselined neighbor comparisons in influencing consumer behavior. Rigorous studies by utilities themselves have shown significant, highly encouraging results and large aggregate reductions in energy consumption via the OPOWER programs. Our extensive work in the social media sphere, including our experience with portfolio companies Facebook (the dominant social platform), Groupon (which has leveraged the Facebook platform to achieve super-normal growth), Playfish (which pioneered the use of the Facebook platform for rapid distribution of social games) and others, leads us to believe that social media can propel energy efficiency to the next level, via a profound effect on consumer engagement.
The Consumer Energy Platform
Once the consumer is engaged, there is the opportunity to take further steps in relationship and demand management.
With the consumer finally paying attention, avenues are opened to a richer set of interactions and transactions. One such avenue lies in the field of active control, which would involve equipping the most engaged elements of the population with grid-connected devices (such as communicating thermostats or “smart plugs”) and enrolling them in consumer-friendly demand response programs. There is also the opportunity to leverage the engagement program to drive consumers towards additional energy efficiency offerings, utilizing modern online marketing techniques.
The engagement vehicle may eventually ascend to the role of full-fledged consumer-facing relationship management and demand management platform -- the “Consumer Energy Platform” -- representing both the inbound side of the demand funnel as well as the critical integration point for all residential energy initiatives and applications. Many utilities are already using the engagement platform as the front-end for their AMI deployments, for example. It seems likely that other consumer-facing efforts will also eventually take advantage of the reach and targeting capabilities of this new platform, bringing great economies and monetization potential to the previously unreachable consumer energy base for the first time.
Paths to Market, Paths to Scale
The utility offers scale, but can be a challenging partner for entrepreneurial innovators.
The utility casts such a long shadow in the energy world, they stand apart as the most obvious and attractive partner for Smart Grid ventures seeking large-scale distribution. However, working in harmony with the utility is typically not easy for fast-moving startups. Utilities have their own unique business models, policy goals, political considerations, regulatory obligations, operational priorities and cultural context. Most of these are foreign to free-wheeling entrepreneurs transplanted from other industries. Any startup seeking to leverage the scale benefits of the utility must learn to work effectively in this strange world.
OPOWER stands out as an entrepreneurial enterprise that has been unusually successful in synchronizing its model with that of its utility customers. As a result, OPOWER has the highly unusual opportunity to build an Enterprise SaaS company of mass-market scale.
Other consumer-grid companies are pursuing a direct-to-consumer strategy which will have its own benefits, such as the opportunity to create a lasting consumer brand in the energy sphere. But these companies will first need to crack a thorny distribution problem, and build a business model that does not rely on revenue from the utility. We are hopeful that certain applications will be able to solve this riddle for selected high-value consumer market segments, as we have already seen in the C&I world, but it is mostly still early days for such developments
ASSET-LIGHT AND INNOVATION-HEAVY: The Next Generation of Smart Grid Leaders
Accel has been looking closely at opportunities in the smart grid universe for quite a few years now. It is exciting to see a new generation of growing companies emerging in this space that fit well with our strategy for energy sector investing. That strategy focuses on opportunities where information technology and the internet can create value in large-scale energy markets while maintaining a high degree of capital efficiency. Entrepreneurial energy is already moving beyond the basic infrastructure of the smart grid, and beginning to reveal the next wave of applications and services that will extend the grid’s impact and increase its value. Their ranks are filled with internet, software, SaaS and cloud services -- asset-light and innovation-heavy. We expect to see category-defining market leaders born of these efforts, and look forward to working with them.
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ACCEL PARTNERS
Founded in 1983, Accel Partners is a leading venture capital and growth equity investment firm, working with outstanding entrepreneurs and management teams to build world-class businesses. Accel today manages over $6B globally using dedicated teams and market-specific strategies for local geographies, with offices in Palo Alto, London, New Delhi, Bangalore and China through our partnership with IDG-Accel.
Accel has helped entrepreneurs build over 300 successful companies, many of which have defined their categories, including Facebook, Groupon, ComScore, AdMob, Etsy, Kayak, Macromedia, MetroPCS, Playfish, QlikTech, Rapt, Real Networks, Redback Networks, Riverbed, SunRun, UUNet, Veritas, Walmart.com, and others. For more information, please visit the Accel Partners website at www.accel.com, or find us on Facebook at www.facebook.com/accel.