Grid Tech – Analyzing The Decade of Deployment
David Groarke | September 2022
Grid Tech is a rapidly growing and evolving market. The decarbonization, economic and customer benefits derived from applying sensors, communications and software on power networks are enormous. The market, which is generation source agnostic in the main, is comprised of several stakeholders. On the one hand, you have a broad set of utilities, with various ownership structures and other buyers who have experienced decades of changing physical grid requirements and evolving regulatory frameworks. On the other hand, a range of suppliers ranging from conglomerates, specialized mid-sized companies and startups are innovating and integrating sophisticated solutions into new and existing product sets. This is all underpinned by a rapidly growing climate VC market, substantial amounts of public money and new standalone business models that are enabling new economic arrangements to quickly spread throughout the industry.
As we enter into the ‘Decade of Deployment’ for clean technologies and as public and private finance ramps up, analyzing this market as a whole becomes a necessity. The last round of significant public funding, over a decade ago, paved the way for a robust Smart Grid market while simultaneously an evolving regulatory structure enabled a bourgeoning Grid Edge market. The economic impact of that stimulus was significant and has formed the technical foundation for future upgrades.
At Indigo, we are launching a dedicated Grid Tech research program to focus on this market. This article is the first in an introductory three-part series that will overview the market, explain the submarket dynamics, and focus on the future of the market and how new technologies are enabling rapid change. This series is accompanied by a complementary Grid Tech introductory report.
Defining and Valuing the Grid Tech Market
The multibillion-dollar Grid Tech and software market enables utility decarbonization, investment deferral, and improved customer satisfaction. In terms of value, our initial analysis of submarkets and a refreshing older smart grid models suggest the Grid Tech market is forecasted to be worth $641 billion by 2030, with a CAGR of over 19%.
The Grid Tech Market is comprised of primarily software related solutions, sensors, and applications. The constituent submarkets are generation source agonistic and focus on grid performance and utility innovation. These submarkets enable new sources of generation both centrally and at the grid edge. Enabling these solutions are 1000's of startups, conglomerates, and tangential companies that are deploying software and hardware across the energy value chain.
Taken as a whole, the Grid Tech market represents the six key submarkets including Core Systems, Digital Asset Management, Robotics & Connected Worker, Optimization Technologies, Flexibility and eMobility. Across these markets, a range of vendors, use cases and deployments exist in the power industry and at various levels of maturity. The diagram below highlights some of the major applications we are tracking in each area.
Monitoring Grid Tech Capital Inflows
Traditionally, public investment in the grid has yielded positive outcomes. In 2009 The DOE maintains that the smart grid gross domestic product (GDP) multiplier is higher than many forms of government investment. For every $1 million of direct spending, which includes both government ARRA funds and private-sector matching, the GDP increased by $2.5 million to $2.6 million, which compares favorably against other potential government investments in general spending or other types of infrastructure. As a result, the recent swathe of announcements between the Inflation Reduction Act (IRA), Infrastructure Investment and Jobs Act (IIJA), Build Back Better Act (BBB), and DOE’s Build a Better Grid Initiative, equate to over $350 billion dollars in direct and indirect public funding allocated towards Grid Tech. The level of investment in the market is no surprise given that current national goals of 100% carbon-free electricity by 2035 will require new technologies, upgrades and markets.
In terms of private investment, recent activity in funds established to focus on Climate Tech have also seen a steady focus on purely grid related technologies. Our analysis finds that in the past 2 years, there has been over $23 billion in Grid Tech startup investment, M&A activity and SPACs.
Investing in the Grid Tech market is a complex undertaking, benefitting from a multi-disciplinary understanding of solutions from engineering, economic and technical perspectives. However, over the past decade both the supply side and demand side of the Grid Tech market has matured significantly.
Measuring the Grid Tech Market Impact
The justification for these healthy capital flows becomes apparent when key metrics are applied to the defined marketplace, namely the cost of power delivery, decarbonization objectives and the need to manage new business models requiring more complex grid management.
Firstly, as the cost of delivering power is increasing, utilities can leverage Grid Tech to defer high fixed costs and improve grid efficiency. According to the EIA, the costs of the infrastructure needed to deliver power rose from 2.6 cents per kilowatt-hour in 2010 to 4.3 cents per kWh in 2020 — nearly equal to the cost of generating the power itself. Power Delivery includes maintaining, replacing, and building new transmission and distribution grids, plus the management of other equipment like transformers and meters. As we enter a new decade, keeping this cost increase in line will require a sophisticated and targeted investment. Indeed, utilities and equipment manufacturers have reported to NIST that their costs for integrating non-interoperable equipment and systems ranges from $140 million to $1 billion per year per firm.
Secondly, Grid Tech has both an enabling and direct impact on carbon abatement. To achieve net-zero in 2050, the Electricity & Heat sector must decarbonize by 7,700 MMT of CO2 by 2030 according to the EIA. This emission abatement schedule cannot occur without investment in Grid Tech solutions. For example, the grid suffers from technical losses each year which require utilities to produce more power to make up for inefficiencies. Investment in Grid Tech can solve these inefficiencies and directly avoid 500 MMT of CO2 emissions, approximately 6.5% of the total decarbonization effort needed for the Electricity & Heat sector by 2030. To provide perspective, the direct carbon reduction potential of Grid Tech is 12.5x more than the amount of carbon reduced by CCUS in 2020. In other words, the amount of carbon abated by CCUS in 2020 is about 8% of the direct carbon reduction potential of Grid Tech.
Thirdly, Grid Tech solutions are key enablers for new business models across the power sector. Across many verticals, from meters, to DERs, to eMobility assets, Grid Technologies are a critical and central investment point to enable deployment by providing situational awareness and control solutions to enable grid edge markets. Across the board we are seeing an increase in devices, new generating assets and bi-directional capabilties become embedded at the grid edge.
The Regulatory Imperative
Central to the growth of the Grid Tech market is a conducive regulatory environment. In the US, State legislatures and utility commissions play an important role in modernizing the grid and through years of coordinated modernization plans, utilities, in the main, have the technical foundations in place adopt new solutions. Indeed, the regulatory approach to Grid Tech is changing. While several states require utilities to submit integrated resource plans (IRPs) for approval by state regulators, there is a trend to expand this concept to integrated distribution system planning with the overarching goal to establish a process that will allow the system to adopt new technologies more seamlessly. In addition, several states are adopting Next Generation Distribution System Platform (DSPx), using DOE grid architecture principles to develop holistic plans that can guide grid modernization efforts. The goal is to help plan and facilitate grid modernization decision processes, so they better align the expectations of regulators, utilities, and technology developers. These efforts have been initiated by state public utility commissions in several states, including California, Hawaii, Minnesota, New York, and Ohio. What is evident across these areas is a significant imperative to devise a more comprehensive understanding of Grid Tech innovation and how to best integrate market developments from a product and service perspective.
In terms of empirical activity, analysis of NC Clean Energy Technology Center who track Grid Modernization Actions by State annually suggests that, nationally, the pace and focus of regulatory actions are increasing significantly year over year for power companies.
In addition, new regulatory models are emerging that are accelerating the pace of change in the industry. Traditional regulation has often involved rate basing technology investment over long periods of time and as such allowing for accounting certainty and stable customer costs. However, with new investment in, for example, cloud-based technologies (over three quarter of utilities use cloud-based solutions) this paradigm is changing as grid tech accounting matures. For example, Pennsylvanian regulators allowed Duquesne Light to treat cloud implementation costs as a regulatory asset, New York regulators allowed utilities to prepay for cloud services and treat that expense as part of their rate of return, and Alabama Power PUC established a regulatory asset to amortize and earn a regulated rate of return on software investments that include the cloud.
A Thriving Vendor Market
At Indigo, we are tracking 1000’s of vendors across our defined submarkets. The vendor landscape has evolved considerably over the past decade. While investments in communication technology companies and advanced metering firms once saw the lion’s share of capital attraction, we are now seeing a shift in financing to frontier areas such as robotics, AI, and distributed generation managemnt platforms. This is largely in sync with the initial vision for smart grid technologies, where investment in foundational infrastructure, enabling situational awareness was the first step in modernization. The steep rise of software firms across the industry is a testament to an initial wave of successful deployments in the US and globally. Vendor teams have also matured. Digital partners in this space have a greater understanding of a utility’s technology stack and often engage cross functional teams of engineers, operators and customer facing staff.
In terms of inward investment, over the past 24 months we have seen over $7 billion invested in a host of Grid Tech firms. Our introductory report highlights the most capitalized vendors and active vendors in this global marketplace.
Indeed, it’s not just a thriving vendor marketplace that is emerging; utilities themselves are innovating at a rapid clip. Utilities in the US are averaging over 20 patents filed per year over the past 10 years, with some utilities such as Con Edison in New York leading the way with over 50 patents. Ultimately, there is a better handshake between the supply and demand side in the Grid Tech market than a decade ago which will speed up deployments across the value chain.
Benefits of Tracking the Grid Tech Market
For utilities, there are a myriad of benefits that arise when teams develop a more sophisticated understanding of the Grid Tech market. A more seamless interaction with the market can have a direct impact on utility profits, investment deferral and O&M costs.
Indeed, the business case for flexibility supported by digitization could save $270 billion of investment in new electricity infrastructure that would otherwise have been needed to ensure security of supply according to the IEA by 2040. Other significant benefits in this category include the benefits to be accrued from digital data and analytics where the reduction in O&M costs, improvement in power plant and network efficiency, the reduction in unplanned outages and downtime and the extension in the operational lifetime of assets presents a large opportunity for utilities. The IEA estimates that the overall savings from these digitally enabled measures could be in the order of $80 billion per year from 2016 - 2040, or about 5% of total annual power generation costs based on the enhanced global deployment of available digital technologies to all power plants and network infrastructure.
As such, utilities will benefit enormously from understanding the suite of solutions that are available in the Grid Tech market. The figure below highlights solutions that can be adopted by utilities across the physical infrastructure and customer layers.
There are many factors that impact a power companies business model, however; building a digital strategy and implementing it effectively is perhaps the greatest opportunity that utilities can control. By taking a holistic value chain approach backed by a robust business case and evolving view of the future, utilities can ensure they future proof digital investments. The greatest transformational potential for utility digitization is the ability to break down boundaries between energy sectors, increasing flexibility and enabling integration across entire systems. One thing is for certain: those utilities that lead in digital transformation will be the ones best placed for future challenges and opportunities.
Looking forward
Indigo has complied comprehensive data across the Grid Tech market. We are tracking vendors, use cases, and deployment results. By growing our coverage of this market our aim is to highlight innovators, vendors, and solutions that can be commercially deployed at scale.
Post 2008, there was a surge of activity in the Grid Tech market. There are many lessons learned from the allocation of public capital from 2009’s ARRA into the utility market. There are also many lessons learned from private markets and the last boom in inward investment such as with the closure of Energy Technology Ventures, a venture capital firm between General Electric, NRG Energy, and ConocoPhillips, in 2011, after only 3 years of operation and a promise of injecting $300 million into startups. What is clear this time around is that the singular focus on decarbonization is creating a clear set of guiding metrics for the industry. The evolving maturity of how utilities acquire technologies from the marketplace has also become more streamlined. In part two of this Grid Tech market series, we conduct a deeper dive into submarkets and cover successful Grid Tech applications. In part three we will examine some of the major frontier technologies that are emerging across the sector. We invite readers to visit our research hub and discover analysis, data sets, and evaluations of what is a fast moving, high impact market. We also invite readers to download our complementary introductory Grid Tech report “The Decade of Deployment”.