For investors following the crypto world, you have likely heard about “Decentralized Finance” or DeFi, but there is another type of decentralization that you may want to know about. In this piece, we will discuss the distributed electrical grid, how it relates to the shift towards renewable energy, and what it means for the future of power.
At the start of human civilization, energy came in the form of carbohydrates with power generated by humans or animals to move things, build, farm and fight. In the mid-nineteenth century, the steam engine arrived, and muscle power was gradually replaced with mechanical power. Eventually, systems developed around the world to distribute electrical power from a highly centralized source. These sources have typically been powered by coal, gas or nuclear, and they provide a relatively steady and controllable amount of energy all day and night.
This type of system is highly centralized due to enormous economies of scale. This is because it doesn’t make much sense for every neighborhood in town to build and service their own nuclear power plant. Supplying energy to a wide and diverse group of users also helps manage one of the vulnerabilities of this type of system. Neither coal nor nuclear power generators do well when their output is increased or decreased quickly. To do so wastes a lot of resources and energy. So, a traditional power grid typically faces variable demand but relatively steady generation.
This brings us to the issue of renewable energy sources. Demand levels must adjust to the availability, unless when excess power is stored and later released when demand exceeds generation. This means that an electrical system using renewables for power generation faces variability on both sides, generation and demand. The crux of the problem is that electricity isn’t like wood logs that you can pile up and then use as needed. Electricity needs to be effectively stored to avoid problems such as frequency stabilization, transformers and generators blowing fuses or harmonic voltage spikes.
This is a very real problem around the world as nations try to shift towards renewables. For example, in the first quarter of 2020, the South Australian electrical market saw over $100 million in extra costs for frequency control, and the Australian Energy Market Operator was forced to intervene in the market nearly 230 times last year, compared to just 15 times in 2017. In June of 2019, Germany saw demand for power spike to 6 Gigawatts, more than its system was able to produce, which caused the spot price for electricity to rise to €37,856 MWh, according to a McKinsey report. For comparison, in mid-June this year, spot prices for Germany were in the lower to mid €80s MWh. Neither McKinsey nor the grid operators have determined exactly what caused this spike, but McKinsey said it expects the problem to worsen as Germany retires its nuclear capacity next year.
As the world moves towards more renewable energy generation, the demand for dynamic electrical energy storage will grow. For example, Australia spent AUD$11 billion building Snowy 2.0, a large water pumping station that uses excess electrical power generated during peak solar output to pump water uphill. During the evening, power is generated by the water flowing back through the turbines on the way back down the hill. As of 2019, such hydroelectric storage solutions accounted for about 96% of global energy storage capacity.
A related type of energy storage is gravity-based energy storage, such as those developed by Energy Vault, which uses an infinite and free resource, gravity. Energy Vault uses surplus renewable energy to stack large blocks into a tower. When demand exceeds supply, the tower is then unstacked, with the blocks producing kinetic energy as they are dropped. In September, Energy Vault and the Special-Purpose Acquisition Company (SPAC) Novus Capital Corporation II (NXU) agreed to merge with the newly combined company expected to be listed on the New York Stock Exchange. The merger is expected to be completed in the first quarter of 2022. Other types of mechanical energy storage solutions include compressed air and flywheel energy storage.
Another option would be really, really big batteries such as the Tesla (TSLA) lithium-ion Megapack, each of which has a capacity of up to 3 MWh, weighs in at 23.1 tons, and is the same size as a shipping container. While Tesla gets a lot of attention, AES Corporation (AES) has been deploying utility-scale lithium-ion batteries for nearly 15 years. In 2017 AES deployed a 30MW/120 MWh of lithium-ion batteries in Escondido, California. LG Chem (LGCLF) has been producing lithium-ion batteries since 1999. NGK Insulators (NGKIF) produce utility-scale sodium-sulfur battery storage solutions, and Toshiba (TOSYY) also produces utility-scale lithium-ion batteries.
Yet another option for managing the complexities created by renewable energy sources is the distributed grid and the internet of electricity. In this system, every powered device from a laptop to an electric car, a dishwashing machine to an air conditioning unit can bid for and offer electricity to other devices. Every device would be assigned five attributes: a unique identifier, a geo-positional market, a blockchain address, and a bid and offer price for power based on its current needs. Devices would then engage in real-time transactions, exchanging digital currency. This system would have a much higher level of resiliency and will become increasingly more viable with the growing implementation of solar panels by households and businesses and electric vehicles. For example, 100,000 electric vehicles would be able to deliver 500MW of extra capacity.
That brings us to Voltus, which is going public via a merger with the SPAC Broadscale Acquisition Corp (SCLE) that will value the electricity-market technology startup at around $1.3 billion. Voltus uses software to manage small decentralized electricity systems (DERs) for customers, including Home Depot (HD) and Coca-Cola (KO). Voltus claims that by partnering with grid operators to connect DERs to larger markets, it is able to save corporate customers money and deliver more reliable and sustainable electricity. It is one of the first DERs to go public and competes with companies such as the Danish EnergyConnect, New York-based Tangent Energy Solutions and EnergyHub, and the UK-based Open Energi.
The bottom line is that as more of our energy needs are supplied by renewable resources, the very nature of our power grids will have to evolve. They will become more distributed, more intelligent and more resilient. That is a world worth reimagining.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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