The New Energy Economy

Why the Grid Will Look Like the Internet

In 1882, Thomas Edison formed the Edison Electric Illuminating Company of New York, bringing electric light to parts of Manhattan. The early days of the grid were slow moving, it was primarily for only the wealthiest. These elites owned their own sources of power, building their own grids, creating a landscape of haves and have nots. The industry needed to evolve to give broader access. To do that, we began producing power through central sources to reduce costs. We developed the utility structure to achieve economies of scale. This started taking place nearly a century ago and not much has changed since. Our power sources have gotten a bit cleaner, our meters a bit better and our appliances a bit more smarter, but the same basic workflow hasn’t changed. The grid has become industrial supply chain, pushing power down an assembly line at the cheapest cost possible (regardless of its consequences) without respect to what customers actually need.

For the first time in a long time, things are changing. The industrial supply chain of the power grid is being disassembled at a rate unlike anything we’ve ever seen. The grid’s increasing volatility (which is driven by advancements in renewable energy production and the slow demise of baseload sources like coal and nuclear) is creating new economic incentives that are inviting free market competition. Distributed Energy Resources (DERs) producing energy supply and controlling demand have come down significantly in costs, resulting in widespread adoption. These DERs lay the infrastructure for the new energy economy, much like the way that cloud servers provided for the internet economy.  While servers store, process and automate the flow of bits of information, these DERs do so for electrons. The market may be mangled with misincentives, but the tools are in place for something really compelling. The future of the grid is  approaching.

Tomorrow’s grid diverges away from centralized infrastructure to decentralized DERs operating as the primary power plants and control centers. With that, supply and demand are no longer universally managed in a siloed control tower with central planning, but in real-time across millions of power sources and billions of demand nodes. The grid of tomorrow doesn’t look like an industrial supply chain. It looks like the internet. 

Turning this opportunity into a reality is easier said than done. There are tremendous interdependency issues related to regulatory, technology and behavioral incentives that need to be addressed, but we believe there is a new energy tech stack emerging.

The New Energy Stack

While digital transformation is pressing forward at an accelerated rate, the hardest part of navigating this transition won’t be producing novel technology, but rather aligning business models to enable these products to achieve critical adoption. We’ve observed irrationally low willingness to pay for software across these market segments, despite the tremendous efficiency they can bring. For that reason, we generally feel a preference for business model innovation > technology innovation and feel that the most valuable companies will consume their advantages, rather than sell them to the broader market. These two principles were at the heart of our investment into David Energy, a startup that provides best-in-class energy management technology to customers to propel a network effect for their core business, operating as a power supply and grid services company. 

Like most industrial sectors, the grid of yesterday operated on economies of scale, producing as much power as possible at the lowest cost to drive marginal cost efficiencies over competitors. Like the internet, the grid of tomorrow won’t run on economies of scale, but rather will be dominated by network effects (customer network effects, data network effects, etc.). We spend a lot of time thinking through how to benefit from increasing returns to scale and generally speaking, network effects are superior to economies of scale in nearly every way. While the industry has traditionally been dominated by localized regulated monopolies, it's fully conceivable that we’ll see natural monopolies form as startups take advantage of the potential for network effects to dominate share in the flow of kilowatts, not unlike internet companies have naturally formed into monopolies for the flow of bits. These monopolies innovated at a blinding pace, disrupting costs structures and transforming consumer experiences – that is exactly the type of innovation our world needs from the energy industry today. 

The grid of tomorrow will look universally different from what it has for the last century - decentralized, data-driven and responsive in real-time. In truth, it will look more like the original Edison grid than that of yesterday. But unlike the Edison days when only the wealthy could afford access, distributed energy will be accessible to everyone. This is just one more way that the grid of tomorrow is starting to look more and more like the internet of today. 

NOTE: Thank you to James McGinniss from David Energy for his thoughtful feedback.