Hardware strengthens positions of virtual power plant startups
Electricity networks are analogous to cellular networks. Software products scale faster, but the high switching costs of hardware products provide strength.
Background
Earlier this month the Department of Energy (DoE) published a report titled “Pathways to Commercial Liftoff: Virtual Power Plants (VPPs).” VPPs are “Aggregations of distributed energy resources (DERs) such as rooftop solar with behind-the-meter (BTM) batteries, electric vehicles (EVs) and chargers… and flexible commercial and industrial (C&I) loads that can… provide utility-scale and utility-grade grid services like a traditional power plant.” The report notes that “With electricity demand growing… and fossil assets retiring, deploying 80-160 GW of [VPPs]… by 2030 could support rapid electrification while redirecting grid spending from peaker plants to participants and reducing overall grid costs.” We can use cellular networks as an analogy to better analyze the product strategies of companies involved in the residential VPP market.
Cell networks as a residential VPP analogy
Cellular networks are ubiquitous (Fig. 1). Network operators AT&T, Verizon, and T-Mobile have a combined 475M US subscribers. A majority of the cell phones on these networks are Apple iPhones. Furthermore, each iPhone may connect to peripherals like Bose headphones or host dozens of applications made by companies like Google, Netflix, and Meta. The cellular model shows that successful products can exist at each level (network, device, and application) of the system. However, each level and type of product (software versus hardware) offers different strengths and weaknesses.
We can use cellular networks as an analogy to better understand the large number of companies active in the residential VPP space (Fig. 2). These companies operate at the network, household, and application levels. This analogy is particularly useful now that electricity moves bidirectionally between the grid and homes, and it can even be stored at home (in batteries or EVs), much like data can be stored in phones.
Weavegrid
Weavegrid helps utilities balance the load on their systems by managing the charging patterns of EVs on the grid. In this analogy, the utility plus Weavegrid is the equivalent of AT&T. Apoorv Bhargava is the CEO and co-founder of Weavegrid (full disclosure: I know Apoorv personally). As he explained on the MCJ podcast “You as an individual actor can do all the right things that you believe are the right things. And yet, at the same time, it may not actually tackle the system's problem.” The average US household uses 30 kWh of electricity in a single day. A Chevy Blazer EV has a battery capacity of 80 kWh, and the new Chevy Silverado EV has a battery capacity of 200 kWh! Adding EVs to the electric grid can increase demand by up to an order of magnitude, which is why Weavegrid has focused on mitigating this issue. In the cellular analogy, this work is the equivalent of managing video streaming at the network level, which accounts for 2/3 of web traffic.
SPAN
SPAN designs and builds smart electrical panels, which are increasingly required when homeowners add solar, battery storage, or EVs to their homes. The SPAN panel is the single point through which all electricity within the house flows, and where the exchange between the house and the grid takes place. SPAN has some features for adding resiliency to the household in case of a power outage, but it does not turn the house into a VPP. As I have argued before adding such a feature can not only act as a source of revenue but also act as a protective measure against encroachment from Tesla. I believe that SPAN can play nearly as big a role in the residential electricity network as the iPhone plays in cellular networks.
Lunar Energy
When I first heard of Lunar Energy, I was most fascinated by its fundraising model and product. The company raised $300M in two tranches from strategic investors Sunrun (solar) and SK Group (batteries) before exiting stealth mode with a product and hundreds of employees. Their physical product combines solar generation with battery storage. This combination is offered by other players like Generac, SunPower, and Qcells as well. However, Lunar also offers Gridshare, which is an “energy management platform, designed to optimize millions of DER.” Lunar simultaneously offers the hardware to turn millions of homes into VPPs, as well as the grid-management software to maximize the value of the VPPs for the grid and the homeowners. The fact that Lunar’s software product integrates with third-party storage, solar, EV charging, and HVAC makes it even more powerful.
General Motors (GM)
Just as Weavegrid has understood the importance of EV charging and approached it from the grid, many car companies have approached this problem from the EV. General Motors (GM) is one of those companies. An interview with Ty Jagerson, leader of V2X at GM, on the Catalyst podcast went viral when Jigar Shah of the DoE tweeted about it (Fig. 3). The episode explains that there is “managed charging, or V1G, and vehicle-to-grid, or V2G. There’s also a third technology called vehicle-to-home [V2H] that allows an EV battery to power a building, just like a home battery. Collectively these technologies are called V2X.” V2H can be used to add energy resiliency to the home, while V1G or V2G can reduce the strain on the grid or allow the home to act as a VPP. Once again, the large capacity of EV batteries is the key to their importance in this context, and why GM and other car companies are increasingly active in this area.
OhmConnect
OhmConnect was founded in 2013, and it precedes all of the other efforts mentioned. The company reduces stress on the utility by paying homeowners to lower their electricity usage during times of peak demand. They also sell smart plugs that can turn off power to homeowners’ appliances remotely to facilitate this process. OhmConnect has been an early proof of the success of VPPs in managing demand. However, the number of EVs and residential solar electricity production have increased by an order of magnitude since the company was founded (Fig. 4). The company’s tools address neither these components nor battery storage, which account for up to 80% of a modern household’s needs (Fig. 2). In the future, as more homes add solar, battery, and EV charging OhmConnect must either address these elements, or it will not be nearly as effective as competitors.
Software scales faster, but hardware gives strength
Facebook engineers commit new code continuously, which is released to Facebook’s 3B users within a few hours. Apple has sold 2.3B iPhones since their introduction in 2007, and each product cycle lasts two years. Venture funding poured into mobile software applications in the years following the launch of the iPhone. Many thought that it was easier to build high-margin software businesses than to develop cutting-edge hardware. However, access to users through a hardware platform has gained importance in recent years.
Apple’s changes to the iPhone’s privacy settings lowered Facebook’s advertising revenues by $10B last year. The company potentially made these changes to boost its own advertising revenues. Even companies primarily known for their software offerings have released hardware products that reduce their dependence on outside platforms (e.g. Microsoft Surface or Google Pixel). Between 2019 and 2022 Meta invested $36B into its VR headsets partly to create a new hardware route to its users. However, platform access is not an issue for hardware applications like headphones. Apple would never make it more difficult to connect Bose headphones to your iPhone just to promote its own AirPods.
In a residential electrification setting the impact of hardware can be even greater. Homeowners expect to keep their smart electrical panels or solar panels for decades. They also hold on to their cars on average for seven years. A stand-alone software offering may scale faster. However, a software product that is attached to a piece of hardware can lock in users for years as the switching costs will be significant. That is why I find Lunar Energy’s combined hardware and software product strategy so exciting. It is also why I think OhmConnect’s software-first strategy leaves it without a moat against SPAN.
A SPAN panel already can monitor and control every circuit in the house. Homeowners can get much more leverage out of a VPP software built by SPAN, than one built by OhmConnect that only affects the energy usage of appliances. If there was a VPP operating system for a house, the smart panel would be the logical host for it. The panel has an overview of all of the functions in the household. Would you rather fully charge your EV, change the thermostat, run your dishwasher, or sell electricity to the grid? The smart panel is the central place to store all of these preferences and tradeoffs.
What will the future look like?
The cellular network analogy breaks down at some point. For example, a single iPhone can host hundreds of applications, some of which represent trillions of dollars in market cap. Instead, there are a handful of applications in each home, and the market opportunity is also smaller. The truth is that we are in the proliferation phase of the home VPP and resiliency markets. There are dozens of companies with various hypotheses and product strategies working to solve roughly the same problem. In each market, after the proliferation phase comes the consolidation phase. The outlines of the user’s preferred product will gradually emerge. The companies with more resources will capture the market and acquire smaller competitors. The less successful companies will exit.
The successful companies will have a unique strength that can be sustained (a moat). SPAN’s unique strength is that it is at the center of the action, and this strength can be sustained because of high switching costs. Lunar Energy’s unique strength is that it combines the high switching costs of hardware with the fast scaling of software. Car companies like GM sit on top of the biggest storage component at the home, which is the EV battery. However, most people expect their car to work with their house, not the other way around. The VPP center of the home must remain in the house, so I doubt if GM will be able to capture much of the value here.
As I have mentioned before, OhmConnect is currently in a weak position compared to its competitors. It must strengthen its position in the coming years to remain competitive in this market. As for Weavegrid, if I were to summarize my understanding of Apoorv’s pitch, it would be: “It’s the transmission, stupid!” Many things can happen at individual homes to manage demand. However, the utility must still coordinate supply and demand at the network level. Network-level coordination is where companies like Weavegrid will be needed, and this function cannot be taken over by any products solely focused on the home.
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