The “Grid Edge” Market is Expected to Grow
According to a new report from Wood Mackenzie, it has been a good start to the year for the U.S. “grid edge” technology sector, which has benefitted from a surge in deals, with positive signs that investment will continue to flood in. Wood Mackenzie defines “grid edge” as an umbrella term to cover all the distributed hardware, software, and business innovations that exist in proximity to the end user, rather than at the center of a traditional generation network. The “grid edge” can be leveraged by both customers and utilities to help decarbonize the grid and unlock new value streams while maintaining and enhancing reliability. The name comes from the proximity of these elements to end users and away from centralized generation. Key examples of “grid edge” technology include EV charging infrastructure, behind-the-meter (BTM) resources, heat pumps, and grid modernization.
These are the four “grid edge” themes from Wood Mackenzie’s most recent report:
1 – There are massive deal flows across the “grid edge.” The report noted that 2023 is expected to be a “banner year” for the U.S. “grid edge.” Massive venture investments have been made in EV charging infrastructure as demand for charging solutions grows. In addition, federal investment will continue to spur the deployment of public charging infrastructure throughout the year. During the course of this year, $4.2 billion in funding is expected to be released to the sector from the U.S. Department of Energy’s “Grid Resilience and Innovation Partnership” program.
Energy storage has been another big area for deal-making, with at least eight investments in Q4 2022 exceeding $100 million. All four US-based companies that have made those investments have also been awarded DOE grants, suggesting that federal dollars may well have been an investment driver. Storage investments spanned the value chain, from manufacturing to recycling. Investors are equally diverse, from climate to infrastructure funds, which shows that storage appeals to a range of investors.
2- The drive to modernize the U.S. grid infrastructure is being supported by positive regulatory changes. After years of underinvestment in U.S. grid infrastructure, public funding and regulatory support will drive grid modernization in the year ahead. Regulators are increasingly amenable to utilities rate-basing grid modernization investments, for example, as well as more targeted cost-recovery mechanisms, like rate riders. In specific, $8 billion is also available through two massive grid-related federal grant programs.
Despite this support, a bottleneck has emerged in grid innovation. While corporations and venture funds have invested billions of dollars per year in R&D, investor-owned utilities have invested an average of only 0.1% of ratepayer revenue. According to the Wood Mackenzie report, the speed and scale of utility investment will need to increase in order for vendor R&D to reach commercialization and cover its costs.
Heat pumps will also get a boost from regulatory changes. In building codes across the country, regulators are setting efficiency requirements that essentially mandate their use. Meanwhile, heat pump adoption will be supported by subsidies offered under the Inflation Reduction Act, as well as state and city electrification policies.
3 – Costs continue to increase for heat pumps and other technologies. While heat pumps will be supported by regulatory incentives, their costs have risen 11 percent year-on-year since 2020 across major manufacturers. In 2023 alone, heat pump costs are four percent higher. Contractor shortages and increased metal, refrigerant, and labor costs will continue to drive the all-in price further upward.
Regulatory support can’t address the operating costs of heat pumps. These costs depend on the ratio between the retail electricity price and retail natural gas price during the heating season. The break-even threshold for this ratio, below which heat pump raise customer costs, depends on the efficiency of the appliance and the mildness of the climate. Heat pumps make more sense in milder climates, such as Florida, which has a favorable electric/gas ratio and has consequently long been in the money for this technology. Heat pump adoption is most likely to succeed in markets where it saves customers money on their winter heating bills. Right now, that is in a large minority of U.S. states.
4 – There are innovations in home energy management. Historically, home energy management (HEM) systems have been “toy technology.” However, they are now quickly becoming an imperative, in order to protect customers against rising electricity prices and help them manage time-of-use tariffs and dynamic electric vehicle rates. These systems will also be needed to manage solar that is not net-metered, such as under California’s new solar tariff, which must be aggressively self-consumed in order to make solar economics work.
New life has been breathed into HEM through partnerships between “heavyweights” of the “grid edge space. Sunrun, Sunnova, Generac, and Enphase are partnering to explore these systems, which will mean that rooftop solar and storage could soon be “talking to” home chargers.