One hundred years ago, just over a third of American households had electricity – a figure that would double within a decade amid a dramatic shift in post-war demand. A century later, new changes are unfolding with the goal of driving towards net zero.
A public desire to decarbonize large swaths of our economy and the increasing economic viability of these advancements are leading to new technologies which are disrupting the way we consume, distribute, and store electricity.
Amid this backdrop, supportive legislative policies are expected to accelerate the global transition towards clean energy. Proponents of the sweeping new Inflation Reduction Act in the U.S., signed into law in August 2022, say the bill’s environmental credits and subsidies are transformative, and have the capacity to meaningfully hasten decarbonization efforts.
The bill allots $369 billion to renewable energy through grants and tax credits, aiming to cut U.S. emissions by 40 per cent below 2005 levels1 by the end of this decade and create more than half a million clean energy jobs. Boston Consulting Group anticipates these types of legislative incentives could result in as much as $1.3 trillion2 in total investments in areas including solar, wind, nuclear, storage, power grid resilience, electric vehicles (“EVs”) and EV infrastructure by 20303.
These elements – growth in renewable resources (both large scale and distributed), landmark laws, and falling costs – are fueling rising demand for localized power and battery storage, especially as a provider of resiliency. This is especially true in regions like California and Texas where natural disasters and climate-driven blackouts are becoming increasingly prevalent. At the same time, the economics of distributed generation is becoming more competitive and transforming the U.S. power grid.
Technology and digitization is another key enabler of this disruption, helping to make distributed assets, whether it is generation or storage, controllable, efficient, economical, and competitive. Our devices can tell us in real-time how much battery is left in our storage system, if the panel on our roof is generating electricity (and how much) and give the user control over the asset’s use. These were all once just concepts on the drawing board and challenging to implement, but technological advances and cost declines have made them reality.
The market for clean renewable power generation is still in its early innings in many states, but the potential is enormous. As these factors disrupt the status quo and shift when, where and how we consume electricity, it is not too soon to consider what this could mean for businesses and investors looking to the future. What, how and where is this disruption and what are the opportunities?
The Future of Distributed Generation
Across the U.S., centralized electrical power stations dot the landscape and are a reminder of how the grid was viewed and formed over the past century. The network of plants delivers4 electricity across a complex grid of transmission and distribution lines to end users, big and small. Industrial, commercial, and residential customers historically drive about one third of the overall demand each, receiving power that is generated as needed, with usage depending on the time of day and the weather. This is an intricate system that is highly coordinated to ensure demand is met and enough electricity is produced.
But that traditional utility model is being disrupted. Over the coming decades, there will be a significant change in how, when, and where electricity is produced and consumed, driven in large part by a broad electrification of vast swaths of our economy, including personal and commercial transportation, heating systems and industrial processes.
A diverse mix of new technologies, better materials, and better equipment is allowing us to push a growing portion of our generating capacity closer to where the electricity is being used. From solar panels and batteries to small wind turbines and microgrids, individual users can become their own mini utility. Falling costs are helping to drive this rise in distributed electrical generation – which can serve an individual home or be part of a microgrid (such as a university campus, neighborhood or industrial or commercial business park). We are seeing record solar and storage installations, but market share remains relatively modest when compared to the total, and is still an enormous opportunity for growth.
At the same time, changing usage patterns are creating demand that previously did not exist, especially driven by EVs. As EV adoption reaches a tipping point, chargers will no longer be a perk, but a requirement. Once these cars become more ubiquitous – EVs could make up half of all new car sales by 2030 if new targets set by the Biden Administration are met5 – homes across the U.S. will be charging them in their garages after work, in the evenings and overnight, traditionally low demand periods of the day.
Meanwhile, urban areas, which typically do not have space or desire for new large power plants, yet are typically pockets of significant demand, will benefit from this trend. By developing distributed assets in these locations, generation is placed closer to where electricity is being consumed. In urban areas where large legacy power stations do operate – often in lower income neighborhoods – implementing a distributed generation asset program can ultimately facilitate the closure of these plants and abatement of their associated pollution, while at the same time providing more equitable access to clean power.
The Future of Storage
While many factors are altering how we approach the grid of the future, no single component is more important, or enabling, than battery storage.
Storage allows for the decoupling of generation from its consumption – a major shift from the traditional supply-on-demand design of grids that have operated over the past century. Batteries and other types of energy storage have broken this once-interdependent relationship, enabling renewable sources like solar, wind and hydro to supply a growing proportion of the country’s energy.
The global energy storage market has experienced record growth with the U.S. and China leading the way, according to BloombergNEF6. While the sector is experiencing some project delays and cancellations due to supply chain issues and roaring commodity prices, the U.S. saw record deployments in the battery storage market in 2021 – demand that will only increase in the coming years across grid-scale and distributed installation.
The U.S. alone, led by states like California and Texas, is expected to account for 38 percent of global installations, reaching 8.7GW by 2025, BNEF projects7. U.S. capacity for utility-scale battery storage in 2021 stood at 4.6GW, the U.S. Energy Information Administration8 reported in July 2022, triple from the 1.4 GW at the end of 2020. Other states, like Connecticut and Maine, have begun adopting energy storage targets as well.
Behind-the-Meter (BTM) battery system adoption is also increasing. This is not just about cost benefits, tax credits, and self-supply, but is also climate-driven. In California, power outages resulting from wildfires are likely a potent incentive driving adoption for both residential and commercial customers. Another example is Texas, which saw much of its electricity grid collapse in February 2021, when Winter Storm Uri dumped snow and freezing rain across the state. Nearly 70 percent of residents lost power and nearly half experienced water service disruptions. The event exposed the problem with centralized grids and demonstrated how battery storage infrastructure can play a critical role.
How Investors can Capitalize on the Transition
By the end of this decade, renewables could make up between 65 to 80 percent of the electricity generation mix, according to estimates by Boston Consulting Group9. This represents an enormous opportunity for companies and investors to seek partnerships and make investments that can help them scale, diversify and accelerate their growth. It is also an opportunity to explore how emerging technologies can shift demand and better utilize the infrastructure we already have in place, and identify those that will become the stepping-stones toward reaching net zero.
Policy incentives at both the federal and state level will drive accelerated growth in the sector and have cascading effects. Consumers incentivized to embrace new technologies like EVs will likely be more inclined to adopt complementary technologies like residential solar and storage systems without the need for further enticements. Commercial and industrial consumers that put panels on their building roofs and PV carports in their lots are more likely to consider electrifying their own transportation fleets and building heating, to achieve net zero goals while differentiating themselves in a crowded market.
So, what does this mean for companies and investors? In short, there is a deep pool of opportunity, but without some form of filter, finding the best opportunities will be a daunting task. Astute investors will need to carve out expertise in specific areas of interest to make discerning and timely decisions, while broadening their existing skillset and understanding. Investors will be presented with new business models, revenue constructs, technologies, and regulatory risks.
Each of these components will require detailed analysis and thought as it relates to the investment process. There will be a natural merging of traditionally different disciplines and sectors. For example, technology investors looking at grid edge software will need to understand how the old, centralized grid model worked, and educate their boards and committees on the economics of distributed generation, storage and transmission. Similarly, traditional infrastructure investors will need to understand the cloud, software and how digitization impacts their market, and how and when assets are developed, used and deployed. Both will need to dive deep into the supply chain to understand how raw materials are sourced and gain comfort that the product will not become yesterday’s technology too soon. At the same time, while most successful investors will become more focused on one or two sub-sectors, they will also need to become more multi-disciplinary. The energy transition will accelerate change and this increasingly rapid technology cycle will require constant vigilance. No investor wants to awaken one day to the realization that their product or business has been out-innovated and dismissed as “yesterday’s technology”.
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1 https://www.vox.com/policy-and-politics/2022/7/28/23281757/whats-in-climate-bill-inflation-reduction-act
2 Boston Consulting: US climate policy implications for the energy sector (Aug 2022)
3 Boston Consulting: US climate policy implications for the energy sector (Aug 2022)
4 https://www.epa.gov/energy/about-us-electricity-system-and-its-impact-environment
5 https://www.whitehouse.gov/briefing-room/statements-releases/2021/08/05/fact-sheet-president-biden-announces-steps-to-drive-american-leadership-forward-on-clean-cars-and-trucks/
6 BloombergNEF: 2H 2021 Global Energy Storage Market Outlook
7 BloombergNEF: 2H 2021 Global Energy Storage Market Outlook
8 https://www.eia.gov/todayinenergy/detail.php?id=53199
9 BCG report - Boston Consulting: US climate policy implications for the energy sector (Aug 2022)
