Mission Report: Energy
“Energy Rules Everything Around Us”
– Matt Witkin
We are excited to finally be seeing our energy system changing at the speed and scale necessary to achieve our climate goals. For the first time in decades, electricity demand is growing in the United States thanks to increased vehicle electrification, data centers, and manufacturing. The electric grid is basically only adding renewable generation capacity. Distributed energy resources (DERs) are continuing to grow, with the market expected to double in the next five years.
With these changes come challenges – how can we build, manage, optimize, and balance this new grid in an efficient, cost-effective, and equitable manner? And yet, these challenges invite opportunities for innovation.
At M1C, we have the privilege to meet and learn from the founders solving these challenges. In this report, we share some of the most pressing challenges and exciting opportunities we are seeing within the energy sector.
Grid Technologies: addressing the challenges of transitioning our electric grid from controllable, centralized fossil fuels energy to intermittent, distributed, renewable energy.
Distributed Energy Resources: seizing the opportunities that arise when consumers gain increasing control of their electricity usage and production.
Energy Efficiency: finding pathways where the most efficient decarbonization strategies can be strong venture scalable businesses.
Note: This is by no means a comprehensive list – such a report would be impossibly long – but rather a slice of where we are excited to invest.
Grid Technologies
Transmission
Our transmission system and, by extension, the interconnection process is failing to adapt to an increasingly distributed and renewable world. While this issue has been widely reported, the data remains staggering. There is now over 2,000 GW of capacity in interconnection queues (the vast majority of which is solar, storage and wind), a truly mind boggling quantity greater than the entire active US generation fleet. While most of this capacity will never be built, developers are incentivized to place speculative bids to hold positions in face of ballooning interconnection times – average wait times have increased to over five years, up from just two in 2000. This is now the primary concern for renewable developers as transmission costs can now be 50-100% of the total project costs, up from 10% just years ago.
Source: Lawrence Berkeley National Lab.
It is clear that solving our transmission bottleneck is key to reaching our decarbonization goals, but it is less clear exactly how we can do so. The first (and often only discussed) option is building new transmission - according to Princeton’s Zero Lab, we would need 75,000 miles of new transmission by 2035, enough to stretch around the globe 3 times. Others have highlighted how instead of building new lines, we can upgrade use of our existing transmission infrastructure using advanced reconductoring to satisfy our transmission needs more cost effectively. Lastly, grid enhancing technologies, such as power flow control, dynamic line ratings, storage-as-transmission, and topology optimization can unlock more transmission capacity from existing lines without any construction. Realistically, we will likely use all of the above.
Investors are increasingly paying attention to the transmission space. We understand that fixing this transmission bottleneck will certainly require hardware improvements and modernized policies to properly aligned incentives for 21st energy developers. And also, given our focus here at M1C, we believe that software companies will also play a crucial role by:
Expediting the interconnection process - companies which leverage advanced modeling to efficiently conduct interconnection studies and/or manage the increasingly cumbersome interconnection queue
Unlocking additional transmission capacity - companies using largely software solutions, such as dynamic line ratings and transmission optimization, to get the most capacity out of the exiting transmission wires
Managing the grid - companies that help operators and developers better see, process, and optimize the grid
We understand that transmission solutions has not attracted significant venture investment historically - after all, it is tough to generate hockey-stick returns relying on notoriously conservative and slow utilities and system operators as customers. But we believe the scale and urgency of the problem will necessitate multiple successful transmission venture scale companies.
Grid Scale Energy Storage
Grid scale energy storage is finally taking off. The US is expected to add almost as much battery capacity in 2024 as it has installed in the previous ten years combined, essentially doubling capacity to reach 30 GW. By 2050, the National Renewables Energy Lab (NREL) predicts that storage capacity will grow more than 10x. The growth of batteries and incentives from the IRA has led to a boom in US based manufacturing.
This growth is certainly fueled by demand as these storage resources will play a crucial role in balancing an increasingly decarbonized and intermittent electric grid powered by solar and wind. And much of this growth is driven by just how cheap the supply of storage is becoming – after a brief pandemic supply chain disruption fueled uptick in 2022, batteries once again continued marching down the cost curve in 2023 to a record low $139/kWh (or 82% lower than prices in 2013).
Source: BNEF, Lithium-Ion Battery Pack Prices Hit Record Low of $139/kWh
While much of the success story of batteries is due to improvements in their physical characteristics, we are excited to see the wealth of software companies supporting this bourgeoning industry at seemingly every step of the battery lifecycle:
Design/R&D Analytics – companies that help battery manufacturers identify and test improved battery chemistries
Manufacturing Analytics – startups that help monitor and find efficiencies within the manufacturing process
In-field Analytics – companies that optimize battery performance and profitability
Battery Health and Optimization – companies that specifically collect data and monitor information to optimize battery health and improve longevity
We are excited to have invested in Third Polaris, which is a software platform using Machine Learning and Artificial Intelligence to optimize manufacturing lines for battery cell production. By accessing both structured and unstructured data from battery manufacturing facilities, the company can provide recommendations to engineering teams to improve its production parameters while saving companies time and money from wasted manufacturing runs.
Distributed Energy Resources
This influx of distributed, smart resources presents tremendous challenges and opportunities. Without proper consideration, these resources could exacerbate the stress of balancing an intermittent grid. Yet, with careful planning and integration, these resources can actually be the most dynamic and cost-effective solutions to balancing increasingly intermittent generation.
Virtual Power Plants (VPP)
VPPs aggregate DERs, such as EVs, rooftop solar, home batteries, smart home devices and more, to balance utility supply and demand. The definition is broad, which means VPPs can take many forms, including battery management programs, EV managed charging, and demand response, amongst others. DERs are projected to grow exponentially by 2030, which means VPPs can have a significant impact on helping to balance the grid.
The concept behind virtual power plants (VPPs) is painfully simple: more variable electricity generation from wind and solar means we need more variable demand. Yet, in reality, virtual power plants are painfully complicated. They operate in complex regulatory environments, needing authority from FERC, RTOs, utilities, and PUCs, while also needing to attract customers and operate profitable businesses. Virtual power plants are a key ingredient to an efficient decarbonized future, yet adoption has lagged in the United States.
The Department of Energy’s dedicated one of its six seminal Liftoff Reports to VPPs, which projects that VPP capacity will triple to 160GW by 2030. It highlights the crucial role VPPs will play in helping the grid maintain reliability in the face of projected load growth (~60GW) and forecasted generation retirements (~140GW). VPPs are a cost-effective way of meeting these necessary capacity additions – after all, it is cheaper to simply turn off or shift load via VPPs then to build costly peaker plants. A report by The Brattle Group estimates that VPPs can be up to 60% cheaper due to transmission, distribution, and generation savings. The pieces are falling into place for rapid VPP growth. On the regulatory side, FERC issued Order 2222 in September 2020 which opened the door for VPPs to participate in wholesale electricity markets. On the technology side, projects show continued exponential growth of VPPs.
Market design, policy support, regulatory framework, and technology adoption are creating an environment ripe for VPP companies to succeed. We believe the winning VPP companies are going to be those who not only have the software to reliably coordinate optimal usage across DERs, but also have innovative business models to efficiently acquire customers and achieve scale.
We are excited to have invested in Derapi, which is building the foundational architecture to make DERs more accessible. Instead of a VPP operator needing to create and mange dozen of bespoke integrations with individual DERs, Derapi offers a single API connection to unlock the full value of DERs.
Green Jobs
DERs provide a clear line of sight for how we can eliminate most of our household emissions. But, to achieve this decarbonized future, we need an entire new stock of devices and machines. Saul Griffith from Rewiring America estimates that we need to install or replace over one billion machines, including EVs, heat pumps, solar panels, batteries, induction stoves, circuit breakers, and more, over the next 25 years. That is more than 50 million devices per year.
We need to install more complex devices, at an unprecedented scale, faster than ever, and throughout the entire country. The success of this energy transition will be defined by how quickly we can get these devices installed.
We need a strong, skilled workforce to lead this energy transition. Unfortunately, we are facing an electrician shortage – estimates suggest that we will need at least a million more electricians over the next decade. This shortage is only expected to get tighter as more electricians retire every year than join. It can take 4-5 years it takes an electrician to complete their education and then apprenticeship to become a full electrician. In California, we are already seeing this tight labor market, where there is only 1 electrician for every 478 housing units – as evidence of this shortage, “help wanted” posts for electricians are skyrocketing.
We know that the climate transition is full of new opportunities for green jobs - estimates suggest that the IRA alone will add between 200,000 and 400,000 jobs to the US economy, while estimates in Europe suggest over 1 million new climate jobs. To succeed in this labor transition, we need to find innovative solutions that can train and transition our workforce towards these climate solutions. This is why we are excited to invest in Solarock - they are using a software-enabled franchise model to rapidly train and empower electricians to install rooftop solar throughout France.
Energy Efficiency
Energy efficiency (EE) is often called the “first fuel” in our clean energy transition because it the quickest and most efficient way to cut CO2 emissions, while also lowering energy bills, strengthening energy security, even improvingequity. Unfortunately, the conversation around EE rarely extends beyond home EE efforts to switch out old lightbulbs or adding double paned windows. But here, we want to refocus on the core of energy efficiency: achieving the same output with fewer inputs, whether that is lighting a house using less electricity, traveling using less fuel, or creating steel with less energy.
Data Centers
One of the unsung efficiency success stories of the past decade is that of data centers. While internet users doubled and internet traffic grew 20-fold, electricity usage from data centers was largely able to stay in check. Today, data centers represent 1-1.5% of global electricity use and 1% of global emissions according to the IEA. The key has been incredible improvements in power usage effectiveness (PUE), a measure of how efficient a data center uses energy on actual computing, rather than ventilation and cooling for the equipment. Operators sought extensive efficiency improvements in the siting, design, heating/cooling, lighting, and IT equipment of data centers, leading to radical PUE improvements. Yet, its becoming clear that even tech leaders are approaching the limits of PUE efficiency improvement.
Source: Google PUE Efficiency.
In the next decade, data center energy use is projected to double (many estimate even higher growth). While past growth was driven from increased access and use of the internet, this projected growth is largely fueled by the increased energy intensity of computing applications. Generative AI requires orders of magnitude more energy than today’s technology. Crypto mining already consumes more electricity than all but roughly 30 nations, with annual consumption somewhere between Norway and Argentina.
Source: McKinsey, Investing in the rising data center economy.
While there is still potential to wring out a bit more PUE from data centers, we will need novel innovations to prepare for this increase in energy use.
Renewable energy procurement - even if data centers cannot slash usage, they can procure clean energy either through PPAs or actual siting near projects. Leaders such as Google and Microsoft have committed to 24/7 renewable energy matching, which is even better.
AI Co-Pilots - leveraging AI to improve data center ventilation, heating, and cooling can offer significant energy savings, especially for smaller data centers that have not been able to afford the most advanced systems used by the largest tech companies.
Embodied emissions - tackling the emissions from the materials and construction of data centers, including the computing equipment, will be crucial to fully decarbonizing this sector.
Industrial Energy Efficiency
Software is often omitted from the conversation around decarbonizing the hardest to abate sectors. Understandably, if we are going to achieve a net-zero future, we need trailblazing deep tech companies inventing new methods to reduce iron ore and reimagining how to produce concrete. Yet these revolutionary technologies will take years to prove viable and then decades to scale - all the while, there are tremendous carbon savings that can be unlocked in these sectors today by improving efficiency and reducing waste using software. While efficiency savings will never lead to a fully decarbonized future, they can represent significant near-term emissions reductions considering the scale of industrial emissions today (steel is ~8% of global emissions, cement is ~7%) while also improving margins in notoriously competitive commodities markets.
That is why we were excited to invest in Deep.Meta. They are leveraging machine learning to build optimization software to help steel makers save energy, reduce waste, and improve margins - cutting emissions from one of the largest carbon emitting industries in the world.
Conclusion
We are excited to be finally seeing our energy system changing at the speed and scale necessary to achieve our climate goals. Which is true. But, we are even more excited to get to meet and support the founders who are our leading these changes. In this piece, we described opportunities we are excited about across grid technologies, distributed energy resources, and energy efficiencies. We are honored to have invested in the great teams we highlighted here who we believe are going to make a serious impact.
We realize that this is just the tip of the iceberg. There are so many pressing challenges within the energy industry including developer tools to accelerate renewable permitting and deployment, grid integration with electric vehicles, and battery life-cycle optimization, to just a name a few. We are excited to continue to invest in and support these leaders who are spearheading the charge to the energy system of the future.
Onward!
