Two keys for DER deployment
Or, why smart thermostats are a side quest
I’ve previously argued that distributed energy resources like solar panels, batteries, and electric vehicles are going to have a huge impact on the way the electric grid works. These create the ability to generate electricity and shape loads at the edge of the grid, helping manage around grid peaks and better use existing distribution infrastructure.
This will save consumers and utilities billions of dollars, while unlocking faster electrification and decarbonization.
But! The technologies alone aren’t enough; getting the right regulatory and business models in place will be critical to deploying these tools.
In particular, I expect approaches that focus on large loads and minimize customer acquisition costs will win out in the long run. The unfortunate corollary: some existing approaches, and the companies pursuing them, will fail.
We can see this through two examples: smart thermostats, and managed EV charging.
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Load-at-stake: why smart thermostats are a sidequest
Smart thermostats were the first ‘smart’ devices that gained widespread adoption in US homes, and opened up the potential for space heating and cooling systems to provide grid services. Mostly these have been used for demand response (DR) programs, where a customer might allow the utility to turn off their A/C a couple times a year1 during peak load events in return for a fixed payment or bill reduction.
This was a big improvement from early residential demand-response programs that required special equipment from the utility, but the overall potential here isn’t that big. The loads at stake aren’t large relative to electric vehicles (EVs), and the ability to cycle them repeatedly is low (an A/C that shuts off every hot day is useless). People don’t like when someone messes with their thermostat.
As a result, customers expect disproportionately large payments to participate in these programs. This means that the value smart thermostats can provide as dispatchable grid assets gets eaten up by customer acquisition costs. This makes thermostat aggregation a low-margin, low impact business.
Renew Home, one of the leading thermostat aggregators in the country, is aiming to collect 1 gigawatt of capacity in Texas by 2035. By comparison, Texas will see more than 6 gigawatts of battery capacity installed this year alone.
Approaches that treat smart thermostats as an add-on piece to some broader energy management system, rather than a valuable load to be controlled on its own, will likely win out long-term. The loads are too small and the customer costs too high for anything else to make sense.
Customer acquisition costs: managed charging is a feature, not a company
For many electric utilities the rapid adoption of electric vehicles is a nightmare.
A single EV can increase a household’s annual load by ~50%. Worse, if drivers do the natural thing and plug-in to charge when they get home from work, that charging load will hit the grid at the worst time–during the evening peak.
It’s no surprise then that a number of companies like WeaveGrid, ev.energy, and Optiwatt have popped up to help.
Each seeks to leverage an EV’s (or in some cases the charger’s) APIs to control the charging behavior to avoid peak times. This can be done as part of either demand response programs (which shut off charging during peak events), or to optimize around time-of-use rates (where customers pay different rates depending on the time of day).
But these are Gen 1 solutions and have a lot of the same issues as thermostats. Where demand response is the main use case, the value gets eaten up by customer acquisition costs. Customers just don’t like their device’s behavior out of their control. For time-of-use customers, the savings can be more meaningful and direct (helping customer acquisition), but the algorithm is dead simple (just don’t charge during peak times) and leaves little room for the startups to monetize their offerings.
Instead, the end-state looks more like auto manufacturers2 working directly with software platforms like Leap and Axle Energy to provide managed charging as a feature to their customers, rather than as a standalone business.
This streamlines customer acquisition and the related costs, while boosting the overall controlled load by capturing a higher share of customers. This will create a much more effective tool for utilities to manage peak events, and for customers to save money.
It will take years for the grid of the future to take shape, but the outlines are increasingly clear.
Minimizing customer acquisition costs relative to load will be critical to winning as a DER provider or aggregator. This will require more consumer control (where they want it), and a focused customer acquisition funnel (likely by partnering with the original seller).
Getting this right will accelerate the deployment of these tools and increase their positive impact for the grid.
Thanks to Emma and Julius for reading an early version of this.
The specifics vary by program, but these tend to allow for ~10-20 DR events a year (with some flexibility for customer opt-out for specific events).
Potentially via a joint-venture like ChargeScape.