Grid Edge Infrastructure: Powering the Energy Transition

Ben Hertz-Shargel, Global Head of Grid Edge at Wood Mackenzie

Distributed technologies and innovations known collectively as the network edge will be integral to efficiently powering an electrified world. So where will the capital come from to finance it? And what role will public services play in its future?

The increase in electrification and the dramatic growth in distributed energy resources, such as rooftop solar, represent a doubling of society’s dependence on the electric grid. At the same time, natural disasters, extreme weather events and rising fuel prices are placing unprecedented pressure on existing infrastructure.

Network rewiring

Hundreds of billions of dollars will be needed to improve regional and inter-regional transmission, allowing people and commercial centers to access clean energy produced hundreds or even thousands of kilometers away, where the natural resource exists. New network enhancement technologies (GET) such as dynamic power flow and line assessment technologies will be invaluable in maximizing transmission line capacity. Meanwhile, smart meters – a requirement for advanced utility rates, efficient billing and customer energy usage information – need to be fully deployed. So far, after tens of billions of dollars invested, only 63% of homes and businesses have a smart meter installed.

Build new infrastructure classes

However, investing in transmission and distribution networks is just the start. Customer demands for building and transportation electrification, distributed generation, and energy resilience require new classes of infrastructure at the edge of the grid:

EV charging stations: More than 36 million electric vehicles will be on the road in the United States by 2030; home charging will predominate, but robust public charging infrastructure will be needed for drivers who do not have access to off-street parking or who travel.

Microgrids: Businesses, governments, educational institutions and at-risk population centers are increasingly requiring microgrids to provide backup power when the grid fails.

Battery storage: “Behind the meter” storage in homes and businesses is increasingly used not only by the end customer for resiliency and bill savings, but also by utilities as local low-emission energy capacity of carbon when their network is limited.

How will he be paid?

Annual spending on non-traditional network edge infrastructure is expected to reach US$20 billion by 2026 (see market breakdown below).


Projected United States Network Edges Market Size to 2026 by Type

Electric Vehicle Charging Infrastructure (ECVI)

US$10.1 billion

Residential storage

US$6.0 billion

Microgrids

$4.2 billion

Commercial and Industrial (C&I) Warehousing

$1.7 billion


A key question is where will the capital come from to fund this new infrastructure? There are three main options: end customers, private capital or utilities.

Empower end customers

One option is for owners and businesses to own the assets that serve them locally. However, the cost of capital is high for end customers, who are often unable to pay the initial cost. In addition, asset ownership comes with maintenance and operating responsibilities for increasingly complex technology. Although it may be outsourced, the purchase of the asset exposes the client to risks related to the performance and life of the asset.

Leverage private capital

A second possibility is that private equity funds, asset managers and other investors provide the necessary capital. Investor capital is deployed by Distributed Energy Resource (DER) developers through what are generally referred to as “energy-as-a-service” offerings. In this model, the investor funds the facility and keeps the asset on its balance sheet, while the customer pays a recurring service fee to use it. This is usually a turnkey solution, with service fees covering operations, maintenance and even asset upgrades. Private equity firms and technology providers often create joint ventures, which act like a developer with a huge balance sheet.

In the microgrid space, the market share of this approach has grown from 18% in 2019 to 44% in 2022. Meanwhile, despite the falling cost of ownership, the huge upfront price premium for electric vehicles makes the fleet-as-a-service model critical for startups looking to electrify small commercial vehicle and bus fleets.

One of the advantages of the energy-as-a-service model for developers is that they are free to monetize the asset by offering sophisticated energy services to utilities or the wholesale electricity market. Although these are risky value streams, some developers are willing to underwrite them, thereby reducing customer service fees based on expected revenue over the life of the contract.

Another possibility is to sell the assets in the form of asset-backed securities, allowing others to invest in tranches according to their risk tolerance. Solar retailers already do this for power purchase agreements (PPAs) and leases that they sell to homes and businesses instead of selling them the solar system outright.

One of the challenges is that network edge infrastructure must compete for capital with expensive, large-scale renewable investments. The projects are smaller and riskier than the infrastructure funds they are used to, while the rates of return may not meet their risk tolerance – especially for electric vehicle charging stations, which are currently suffering from bills high utility bills but low utilization.

It should also be noted that homeowners are increasingly opting for low interest loans rather than PPAs. However, the APP
APP
market share is expected to rebound thanks to the Cut Inflation Act, which creates a price advantage for the third-party-owned model due to tax credit markups.

Focus on public services

A third option is for utilities to fund network edge projects. In almost every state, investor-owned utilities (IOUs) are incentivized to make capital investments, on which they can earn a regulated rate of return. Typically, these investments are in poles and cables, but ambitious utilities are increasingly looking to network edge infrastructure as a revenue opportunity.

Eighteen utilities in the United States and Canada have set up their own public electric vehicle charging networks, while at least four have sought regulatory approval for resiliency-as-a-service offerings – where they would own and operate batteries installed at customers. And 27 U.S. states — all on the west coast or in the southeast — have utilities that have deployed microgrids. Along with investing in these assets that generate a regulated return, many utilities have spun off their unregulated activities, the investments of which carry risk.

Proponents argue that network edge infrastructure is a public good, the cost of which should be borne by all utility subscribers. Opponents fear that utilities are stifling competition by asserting their market power. Moreover, it can be difficult to justify taxpayers footing the bill for an asset when private capital is ready to finance it.

Utilities as Operators

The alternative to utilities owning network edge infrastructure is the well-established trend of leveraging third-party assets – from residential smart thermostats to utility-scale battery systems – to meet their reliability needs in a more profitable. In bring your own device (BYOD) programs, for example, utility customers can enroll their thermostat, battery, EV charger, their EV itself, or even a connected water heater to provide network services to the public service.

As customers continue to adopt distributed energy resources and seek to monetize them, it may become more difficult for policymakers and regulators to avoid the approach of leveraging existing assets rather than compensating utilities. to build theirs. Jurisdictions that are either power islands or facing particularly rapid adoption of distributed resources are at the forefront of moving toward alternative regulatory approaches that support this model.

In California, the Public Utility Commission decided that in the future, utilities could only invest in the electrical infrastructure behind charging stations, leaving investment in the stations themselves to other companies. The state has also enacted a framework that requires utilities to procure network services from third parties, and plans to fully decouple utility revenues from capital investment in a landmark regulatory process.

In Hawaii, regulators have gone even further by adopting a new performance-based pricing paradigm that penalizes utilities to own generation assets rather than procure network service from third parties. Other jurisdictions may move in this direction as they approach their own distributed energy adoption tipping points.

Utilities are motivated, but watch out for private equity

Homeowners and businesses are unlikely to be able to finance the substantial investments in grid edge infrastructure needed to decarbonize the grid while enabling widespread electrification and ensuring reliability. This leaves the responsibility – and the opportunity – to private capital markets and public utilities.

Unless conventional regulation that rewards utilities for their infrastructure investments is reformed, utility companies will aggressively pursue these types of investments. However, all eyes should be on the willingness of major private equity funds to come forward. By investing at scale in grid edge infrastructure, the funds will send an unequivocal signal to policymakers and regulators that they are ready to finance the energy transition.

Ben will speak at Wood Mackenzie Grid Edge Innovation Summit in Phoenix in December. Click here to know more.

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