VWV Volumes #4: Associate Aayush Setty '24 on Energy Innovation
Commercializing Energy Innovation: The Growth of Renewable Energy and Solar Technology
Economics teaches us a very simple principle: People respond to incentives. Unfortunately, these incentives do not always align with the collective best interest of the group. The best example of this is energy. For centuries, we have relied on the burning of fossil fuels for the generation of electricity, but at the same time, scientists have been warning of the catastrophic global climate repercussions for about the same amount of time. For perspective, scientists started noting the negative effects of excessive carbon dioxide only twenty years after coal power first started being used in 1882. So why then did we let fossil fuel power generation get out of hand? Financial incentive. The perceived benefit of burning coal for electricity was greater than the perceived downside of the associated pollution. At the same time, there was no alternative and efficient way to generate large amounts of electricity.
Today’s system is not much different. We still burn exorbitant amounts of coal, natural gas, and oil in the pursuit to satiate the world’s increasing appetite for electricity. The only difference in today’s system is that we have a choice. The growth of renewable energy technology has made solar energy and other renewable energy sources feasible as alternatives to fossil fuels. Currently, based on the BP Statistical Review of World Energy, about 36.7% of global electricity comes from low-carbon sources, but a majority of that comes from nuclear and hydropower. Although both are very effective forms of alternative energy, these forms of electricity production are hard to scale up and require a very high upfront capital investment. Recent technological innovation, however, has the world looking towards solar power as the future of alternative energy and as the solution to the increasingly difficult problem of incentivizing renewable energy adoption.
The Growth and Prospects of Solar Energy
According to the Center for Climate and Energy Solutions, solar generation is expected to grow from accounting for 11% of total U.S. renewable generation in 2017 to about 48% in 2050. Even over the past decade, solar power has experienced an annual growth rate of about 49% mainly fueled by strong growth in residential, commercial, and utility-scale installations. Solar technology itself has drastically reduced installation price. Over the past decade, the cost for installing a solar system has dropped by about 70%. The unique nature, however, of solar energy installation is that residential, commercial, and utility-scale installations are all unique markets of their own and they all have had government support throughout the last two decades through the investment tax credit.
Source: https://www.seia.org/us-solar-market-insight
The Investment Tax Credit
In 2006, President George W. Bush signed the Energy Policy Act into law that, among other provisions, created the Solar Investment Tax Credit (ITC) which solidified a government backed tax incentive program for residential and commercial adoption of solar power. The initial provision set out to reimburse up to 30% of the total cost of the solar energy system. Over the years, this provision has been extended and modified to continue for both commercial and residential entities to invest in the capital necessary to switch to solar energy. As of now, the residential ITC is set to step down to 0% in 2021 whereas commercial-scale solar installations will step down to 10%. The ITC has thus provided a strong push towards the adoption of solar technology across all branches of the solar industry.
Source: https://www.cedgreentech.com/article/solar-itc-stepdown-explained
Residential Solar Energy and Distributed Generation
Solar energy gives a very unique ability to residential homeowners: The power to generate their own electricity. This allows homeowners to circumvent the use of the centralized electrical grid. This brings a host of benefits including more reliable, cheaper, and cleaner energy generation. This system of distributed electrical generation is growing at a blistering rate thanks to innovation from companies such as Tesla, Enphase, Solaredge, and Generac; these companies are innovating more accessible and reliable home solar energy systems for effective residential use. Although cheaper and more reliable electricity is always a strong incentive, there is an even larger incentive for residential solar power adoption: net metering. If households can produce more energy than they consume, centralized electrical grids will buy any excess electricity from homeowners. Net metering, thus, provides an income generating stream and an incentive for homeowners to adopt cleaner energy sources as well as reduce electrical consumption.
Residential solar installations are growing rapidly and just recently experienced a 16% growth in installations in 2019. Along with this growth comes a large open space for startups to provide solutions for monetary and operational logistics, installation services, solar technology innovation, and other electricity grid services. Aurora Solar, a SaaS company specializing in remote residential solar installation and sales, recently raised $50 Million in a series B funding round solidifying the role of residential solar as a strong growing branch of the solar industry.
Source: https://www.seia.org/us-solar-market-insight
Commercial Solar
Commercial-scale solar installations are also a rapidly growing segment of decentralized solar energy generation. Solar energy has a very compelling value proposition for big business: cheap, reliable, scalable, and carbon neutral electricity production. The cost to install commercial solar has declined by 30% over the past five years. Along with the financial incentive of lower electricity costs, the rising emphasis put on ESG factors by stakeholders is pushing large public companies towards the adoption of efficient and carbon neutral energy sources. Currently, commercial solar installations are able to generate 12.7 million megawatt-hours of electricity: Enough electricity to power 1.6 million homes.
Source: https://www.seia.org/sites/default/files/2020-10/SEIA-SMB-2019-FINAL.pdf
The Spaces for Innovation
The prospects for solar energy are great and the benefits of its adoption are plentiful, but solar technology comes with its own drawbacks: the complication of electrical grid logistics and energy storage.
Centralized grids are extremely fine tuned and require very careful operation for one simple reason: large-scale electricity storage is not feasible. All the electricity that is consumed by households and businesses has almost instantaneously been produced to serve the need, so power plants are almost constantly modulating their electricity output to avoid over or under-generating electricity. Distributed generation and net metering make this process even more complicated as now there is a variable input of electricity from households; this is quite a large problem considering the US surpassed two million solar installations in 2019 which is expected to double by 2023.
Startups are aiming to solve this problem by leveraging AI to predict and manage electricity production and flow to help power plants operate more efficiently. BluWave-AI, recently completing a $3.9 million seed funding round, is pioneering AI solutions for both large scale grid operations and commercial renewable energy generation management in local microgrids. Along with BluWave-AI, there are multiple more startups creating logistical and procedural solutions for renewable energy management because at the end of the day, managing electricity logistics is just as important as cheap electricity production.
The real place for innovation, however, stems from the hallmark problem behind most renewable energy sources: A lack of controlled power production. Solar energy can only be used when the sun is out and wind turbines only generate electricity when the wind is blowing, so what happens when the sun goes down or the wind stops blowing? This uncertainty and intermittent nature of renewable energy insites the need for advanced battery technologies to store electricity for longer periods of time when electricity cannot be produced. Tesla popularized the technology for efficient home-based battery systems with the Powerwall. These battery systems are feasible for residential applications, but the rising size of these solar installations at commercial sites and large off-site solar farms are making lithium-ion battery technology infeasible for large-scale electricity storage.
VC Funding in the battery storage industry has increased 103% to $1.7 Billion in 2019. Northvolt, a battery manufacturer focused on green and scalable battery systems, recently rose $1 Billion in funding to further expand their efforts. On the same token, Sila Nanotechnologies, a startup pioneering the field of alternative battery technologies, raised a cumulative $215 Million to expand the development of higher power density batteries. Showcased by CNBC, multiple startups are even going away from lithium ion technology all together. Primus Power is pioneering zinc bromine flow batteries, Antora Power is developing a thermal battery, and EnergyVault is conceptualizing a bold gravity-based system to store unused energy.
Concluding Thoughts
The renewable energy space and especially the solar energy industry has never been growing faster. The combination of government incentives and lower installation costs are driving both homeowners and large businesses to adopt solar generation and this trend is only going to keep growing. An increased push towards green technology and carbon neutrality has multiple companies making large sweeping commitments to carbon neutrality: a commitment only possible with the adoption of solar-based energy systems. Along with the growth in solar energy, there comes a host of other industries that now have the incentive to grow and innovate faster: battery technology, electrical grid logistics, residential solar installation software, supply chain management, and so much more. There really is no better time to be looking into the renewable energy space as the growth is just starting and VC firms have only seen the beginning of a rapidly growing industry.