As you pause in front of the twinkling storefronts this holiday season, you’ll notice that behind the festive facade lies a paradigm shift poised to dominate both headlines and bottom lines in 2024 — the electrification of everything. Driven by a growing recognition that our reliance on fossil fuels is not only environmentally unsustainable but also economically imprudent, it’s only natural that businesses across sectors are increasingly gravitating towards electrification strategies that not only curtail their carbon emissions but also improve their cost structures.
Moving forward, as companies embracing electrification expand their competitive advantage, competitors can’t help but take note. While market leaders like Tesla and Google have historically led the pack as they’ve cut operational expenses, enhanced efficiency, and drawn in customers looking for more sustainable products and services, fast followers are catching on and asking themselves, “How should energy production and management play into my longer-term strategy?” As electrification accelerates, we will enter an era where (almost) every company is an energy company.
The Why Part 1: The Decline of Centralized Systems and the Rise of Distributed Power
Today, the era of inelastic and centralized fossil fuel-based power plants is giving way to a decentralized, adaptable, and electrified future. Driven by renewable energy and distributed energy resources (DERs), this transition is not just about substituting dirty power with cleaner alternatives; it's about reimagining the entire energy ecosystem, from where and how we generate electricity to the ways we manage and distribute it. With the recent pledges made at COP28 to triple the implementation of renewable energy and double the pace of efficiency improvements by the end of this decade, the secular tailwinds cannot be ignored.
At the heart of this revolution lies the concept of distributed energy. While the energy production of the past required massive consolidated facilities, production today is far more flexible when it comes to both location and volume. Similar to the evolution of financial services over the past ten years that has shifted the power away from rigid centuries-old institutions towards more dynamic digitally oriented operators, we are seeing DERs (think solar panels, wind turbines, battery storage systems, and more) extending energy production and storage far beyond the oligopoly of traditional power producers. As distributed energy empowers individuals and businesses of all shapes and sizes to take control of their energy production and consumption, they are becoming mainstream solutions – and valuable operations levers when it comes to both expense optimization and risk management.
The Why Part 2: Both Mission-Driven and Monetary Motivations
In today's dynamic landscape, enterprises are grappling with escalating energy costs and the pressing issue of a burgeoning carbon footprint. As a result, companies are displaying a heightened eagerness to transition to more predictable and reliable renewable energy alternatives driven by a multitude of factors, including:
- Optimizing Their Operational Expenses: As cost cutting efforts across industries accelerate, enterprises are streamlining their financial operations by seeking renewable energy solutions that offer greater overall energy efficiency and a lower realized cost per kWH.
- Mitigating Energy Market Exposure and Volatility: Given the costly energy market volatility and fluctuations of the past few years, businesses with elevated commodities exposure are focusing on greater portfolio protection and predictability.
- Limiting Operational Exposure to Climate-related Disruptions: Recognizing the growing impact of climate change on business operations, companies are keen to reduce their vulnerability to future disruptions as they solve for business continuity risk.
- Responding to Growing Regulatory & Customer Pressures: The evolving regulatory landscape has further prompted companies to rethink their energy footprints. to SB 261 or CSRD, as these industry giants put pressure on their own downstream suppliers, an expanding base of participants is entering the emissions accounting conversation.
With more than half of US clean power buyers last year emerging as net new purchasers and with more than two-thirds of the S&P committing to emissions reduction targets, the speed of this transition cannot be understated. In discussions with corporate sustainability leaders, we’ve found that reducing a company’s energy footprint ranks among the top 2 sustainability priorities for most organizations. As we turn the page to 2024, the era of electrification is indeed here.
From Analog to Algorithmic: How Software Will Reshape the $600Bn Commercial Energy Industry
Despite the surging demand for cleaner energy alternatives, the journey toward a sustainable future is not without challenges. While industry giants (think Microsoft and Amazon) have played a pioneering role in advancing the clean energy market, the majority of businesses today still lack the ability to effectively procure clean power and optimize their energy operations due to a dearth of accessible tools and the need for specialized and expensive expertise. Yet, as increasing grid volatility and the acceleration of climate-related disruptions drive up the cost of energy management for these businesses by billions of dollars each year, the long tail of companies (or the “mass majority”) today are being forced to take a more proactive stance than ever before. Thus, in an era where data and distribution strategies are becoming increasingly complex, there’s a growing opportunity for unified software solutions offering integrated actionable insights to displace the rigid and siloed spreadsheets of the past for customers both large and small.
Looking ahead, as the antiquated and analog energy industry evolves into a digitized, distributed, and decarbonized domain, forward-thinking businesses across sizes and sectors have the chance to turn their energy footprints from liabilities into valuable assets. We’re excited to see increasing activity in three key areas of emerging opportunity:
Energy Enablement
As clean power production extends its reach, an enticing prospect is emerging for businesses with surplus commercial and industrial site capacity—the opportunity to transform into a power plant through the installation of DERs and / or energy storage.
Yet, while the combination of cost containment and economic upside make on-site energy generation seem like a no brainer, the decision today is not without onerous operational overhead. From the complexity of navigating permitting, financing, and procurement during the pre-construction phase, to the ongoing challenges in monitoring, management, and payment reconciliation (in instances where companies choose to sell their excess capacity) post-installation, the investment requires multidimensional coordination and operational expertise.
In this landscape, automation emerges as a beacon of opportunity. The introduction of streamlined software solutions holds the promise of simplifying rules-based, repetitive tasks. And as we witness an increasing number of high ROI AI applications emerge around the world of construction, we’re increasingly optimistic about technology's potential to disrupt every facet of the energy enablement journey.
Looking ahead, will the tax rebate and incentive programs put forward both here in the US and across the pond in Europe catalyze increasing investment interest from financially oriented parties in power generation programs? And what roles might financial engineering and B2B marketplaces play in the expansion and democratization of these development efforts?
Power Procurement
Given the higher adoption hurdle of pure play energy enablement, energy buyers with a more diversified set of considerations and on-site development constraints might instead opt for third-party production through a Power Purchase Agreement (PPA) or Virtual Power Purchase Agreement (VPPA).
PPAs allow corporations to engage in long-term contracts with renewable energy developers, who then design, install, and operate off-site renewable energy systems. Offering symbiotic assurance, the PPA provides certainty for both parties – energy developers get guaranteed income from the project (which they might need to secure project financing) and buyers benefit from a lower fixed electricity price. Once a market pipe dream, PPAs today are now weaving their way into the fabric of mainstream energy practices.
However, like existing energy enablement initiatives, PPA procurement and management today currently involves an intricate labyrinth of workflows. From high minimum volume requirements to lengthy and bespoke legal documentation, process costs and complexities have historically served as a critical barrier to adoption for interested parties beyond the Fortune 100. Yet, with advancing systems interoperability and enhanced data visibility, there is optimism for a gradual shift from a people-powered procurement motion to a more tech-enabled architecture.
Looking forward, will cost or carbon emissions considerations emerge as the primary procurement consideration for PPA buyers? Who will serve as the primary decision-makers within interested organizations? And how might these factors influence the associated workflows and structures of these contracts?
Operations Optimization
With energy expenses continuing to climb as a result of not only commodity price volatility but also energy-intensive AI investments, companies across industries are increasingly incentivized to optimize their energy consumption in order to contain costs.
When it comes to their energy footprint, there is ample low-hanging fruit as businesses consider meticulously optimizing anything from what times lights are on in the office to how they’re managing the storage of energy generated on-premise. Today, advanced forecasting and analytics offer the potential to automate these ambitions through the introduction of software. Because power markets can fluctuate so dramatically on a minute-by-minute basis, we believe that AI will be a game-changing force in dynamically accounting for the latest trends to offer better recommendations and insights than have ever been possible before.
In the future, will companies adapt their approach to energy operations to reflect a similarly proactive mindset as their approach to IT infrastructure? And with AI expanding the scope of potential forward-looking predictability, might automated energy management extend beyond cost containment into financial hedging and risk management?
The coming era of electrification is not just a structural shift; it's ushering in technological transformation that will impact almost every corner of the economy. While its genesis lies in the empowerment of individuals and businesses to seize control of their energy future, the far-reaching implications stretch into the realms of revenue generation, risk management, and much, much more. If you’re as excited about the future of energy automation and the associated implications as we are, we’d love to hear from you.
