Climate change is creating extreme weather events that are wreaking havoc on our power grids. In 2021, skyrocketing temperatures taxed Texas’s grid to the point where the entire state was just four minutes away from a total blackout that could have meant no power for weeks, or even months. California encountered a similar situation last year, when overuse of ‘dumb’ HVAC systems during record-breaking heat waves resulted in the state using double the energy of the UK despite only having half the population.

However, as the world transitions to renewable energy sources to slow extreme meteorological manifestations, the challenge of bringing power to the areas where they are needed, when they are needed, is becoming increasingly apparent.

The issue is compounded by the fact that renewables are often generated in locations distant from areas of high demand – for example, hydroelectric power in Scotland and demand in London. Even in cases where energy generation and demand are in proximity, they are often not in sync. Solar energy, for example, is produced during the day but peak demand occurs at night.

These factors highlight the importance of grid flexibility in our transition to renewable energy. In response, we see increased investment into a growing number of software-driven startups introducing new solutions that strengthen grid flexibility to maximise energy utilisation. In fact, investments in energy flexibility software startups quadrupled in 2021, reaching an impressive $10bn. This rate of growth surpasses that of the fintech sector’s two-fold increase to $10bn a decade ago. And this surge in investment happened before energy prices skyrocketed in the UK and Europe.

Smart Grids

New smart grid solutions are enabling Distribution System Operators (DSOs) to connect all their data sources, which until now have been siloed. They allow for granular energy usage and production monitoring minute by minute, and even ‘behind the metre’ (in residential locations) to enable the grid to respond more quickly.

One prominent example is Plexigrid which since being founded in 2020 has collaborated with EDP, a major Portuguese utility company, to create a groundbreaking grid-centric flexibility management system that allows DSOs to distribute more energy with their existing network capacity.[1]

The system applies intelligence to traditional grid systems, connecting data from grid planners, operations and retailers to flexibility pools across the grid. Implemented broadly, the solution can significantly strengthen grid flexibility and save electricity grid operators worldwide up to $300bn each year in capacity upgrades.[2]

Swiss startup DEPsys, is another major player in the smart grid space. The company’s core Grideye platform combines hardware and software components to produce and process high-precision, real-time data. The platform can monitor, operate, analyse, control and automate any low and medium-voltage power distribution grid, and larger energy players have recognised the necessity for deeper insights, with Octopus Energy snapping them at the end of 2022.

Dublin-based startup GridBeyond has built a platform that works with grid operators to balance the electricity network. The platform connects to energy-intensive assets and monitors them in real time. When the grid becomes imbalanced, the system automatically adjusts energy consumption for a short period.

The platform ensures that there is no interruption or impact to operations and enables users to earn revenues for helping to balance the grid. It helps reduce energy bills by shifting usage away from times of high charges or penalties and provides equipment optimization capabilities that identify areas where energy is not being used efficiently.

Finally, there is Cuculus, who is helping expand smart meter access for all energy providers. Utility companies typically have access to one type of meter on their system, but Cuculus homogenises the smart meter software and accelerates data collection from customers as more meters can be rolled out. Covering all types of utilities and collecting data such as power consumption, water flows, and temperatures, they process billions of datapoints per day and give providers unprecedented views into the grid network’s health.

Trading Platforms & Virtual Power Plants

A Virtual Power Plant (VPP) is a system of interconnected distributed energy resources (DERs) such as solar, battery storage and other renewable sources. These resources connect to a central control system managed as a single entity to provide grid services, optimise system performance, and reduce energy costs. This allows for generating electricity reliably from multiple sources, providing greater energy security for the grid and end-users and greater control over the energy mix.

Virtual Power Plants are helping distributed renewable energy resource producers, including small-scale electric generation and storage units such as rooftop solar photovoltaic units and biomass generators, to connect to the larger power grid.

Piclo is the UK’s leading independent marketplace for flexibility services. The company’s cloud-based platform enables electricity networks to buy flexibility services from flexibility providers at scale to support network resilience, defer grid reinforcement and advance network reliability. The Piclo Flex platform is paving the way for new low-carbon technologies, such as electric vehicles, energy storage and flexible demand to balance the grid at a lower cost.

Some VPPs such as Statkraft, are already contributing multiple traditional power plants’ worth of capacity. Statkraft operates the largest VPP in Europe and has more than 10 GW installed capacity from over 1,000 renewable energies power generators.[3] This is equivalent to 10 thermal power plants that could power a major city.

By connecting small producers virtually, Statkraft allows the connected DERs to work together as a single and virtual power plant by means of a centralised control system that can be used to reliably supply energy to the broader grid. The artificially created entity can be traded in the market but can also connect directly to small- and large-scale consumers such as storage and industrial consumers.

The next generation of VPPs will integrate electric vehicles and home solar systems as backup power sources for the electricity grid. They will also be made up of fleets of smart thermostats and other appliances that can adjust their power use to reduce stress on the grid. Some big names in smart homes, solar power, and electric vehicles recently launched a coalition called  Virtual Power Plant Partnership (VP3) to develop standards and policies for virtual power plants. Members include Google Nest, General Motors, Ford, SunPower and Sunrun.

Demand Response

Demand response solutions provide an opportunity for consumers to actively participate in the operation of the electric grid by reducing or shifting their electricity usage during peak periods. By responding to time-based rates and other financial incentives, consumers can reduce their electricity usage during peak demand periods, leading to lower costs and rates.

With demand response solutions, energy-intensive HVAC systems (for example) become more intelligent. They can manage energy consumption based on energy costs, user schedules and other environmental factors, reducing peak loads on the grid during extreme weather conditions.

Amsterdam-based Sympower – which recently secured €22 million for its proprietary software platform, is now working to enhance grid flexibility in many European countries.[4] The company partners with leading industry players and industrial consumers, leveraging its proprietary software platform to adjust the power of systems, machines, and processes in response to fluctuating grid conditions.

For example – the company’s solution can adjust the temperature of industrial freezers to match grid electricity levels. Such freezers can be programmed to consume more electricity when the sun is shining and there is plenty of power on the grid. The temperature can then be reduced in the evening when temperatures cool and there’s less electricity demand.

Grid operators pay Sympower for this functionality. The company then divides the profits with its customers (the owners of the flexible assets), whose electricity costs can be lowered by up to 15%.

Increasing strain on grids to fuel funding growth

While the transition to renewable energy resources promises a cleaner and more sustainable future, there is a pressing need to make our grids far more intelligent, efficient, and adaptable. The potential savings will be enormous. Smart flexible grids were initially anticipated to save up to £40bn in the UK alone over the next three decades.[5] We believe these savings are likely to be several times this number given the improvements seen over the last few years.

It’s still early days though. Smart grid projects are still small-scale and not yet viable for widespread deployment. Most energy distributors also have yet to invest significantly in the sector or use distributed energy management tools.

However, we’re starting to already see more DSOs participating in well-established smart grid pilot projects and regulatory sandboxes. Many are also preparing 10-year network investment plans that will spur investment and innovation in the coming years in addition to the VC investments flowing into the space.[6]

The return on investment for software powered flexibility solutions is already clear and compelling. This is particularly true with the sharp jump in energy costs during 2022. So much so that in our view we expect funding to grow 3x in the next couple of years to surpass $30bn by 2025. This puts flexibility software’s funding growth on a par with fin-tech a few years ago, and positions it as perhaps the hottest ‘hidden’ software sector in the market today.

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