(Bloomberg Markets) -- A short drive away from the gleaming glass skyscrapers of downtown Houston, in a leafy neighborhood known for good schools, biking trails and hipster bars, sits a home of the future, at least as far as energy is concerned.
Its roof is festooned with solar panels, its garage replete with lithium-ion batteries and bidirectional charging equipment, which can enable an electric vehicle to send power back into the house or the grid. It features the latest in energy-saving appliances, such as electric stovetops, front-loading washing machines and heat pumps. And at its center are the electronics and software that control it all, known as power management systems.
Such controls generally aren’t sold to consumers as standalone gadgets. Instead they’re based on capabilities embedded into storage batteries, solar system components, thermostats and more. An app on a phone or tablet connects wirelessly and lets the homeowner set preferences for how the home energy system works—letting the utility, for example, remotely turn up the thermostat by 1F (0.6C) during periods of high demand for air conditioning in the summer. For a home with solar and batteries, the system can also enable the homeowner to sell power into the grid, earning utility bill credits or even payments from some service providers. The app may also tie in a constellation of smart appliances as well as a smart breaker panel, which tracks and controls how much power is used by different circuits, as on a smart-home tour presented by Houston utility NRG Energy Inc. in March.
Why is power management important? Consider the effects of a homeowner installing a heat pump and a charger for an electric vehicle: good for the planet in terms of reducing greenhouse gas emissions, but a household that does this may double the amount of electricity it needs. If such homes manage their use of power more efficiently, they can save hundreds of dollars a year on utility bills. In aggregate, though, it may also avoid billions of dollars of infrastructure investment in the grid that might otherwise be required. “It’s boring utility stuff, but there’s a lot of money to be made,” says Evan Caron, a former US power trader turned venture capitalist. “Ultimately the home is this big, large, untapped opportunity.”
The easiest way to understand how one of these systems works is to think of it as a trader buying and selling electricity for an individual house. It takes in data including power prices, weather forecasts and the homeowner’s preferences, which it uses to optimize multiple sources of supply and demand for electricity. On a sunny afternoon when nobody is home and rates are low, the system might use solar panels to charge the home battery. During an evening when you go out for dinner instead of cooking at home, it might discharge that battery back into the grid for a profit. When you load up the dryer with wet clothes before bedtime, it might offer to start a few hours later, saving you money running one of the most power-hungry appliances in any house.
The race to get energy tech inside the home is luring everyone from industrial stalwarts such as Siemens to tech giants Amazon.com and Alphabet, along with traditional consumer-electronics companies like LG Electronics. Rooftop solar seller and installer Sunrun as well as battery and equipment makers Enphase Energy, SolarEdge Technologies and Tesla are layering the software on top of their products. And utilities that have spent decades selling electricity to homes are pouring money into the market.
“Anyone who has a recurring relationship with a homeowner is probably interested in this space,” says Jeff Osborne, a cleantech analyst with TD Cowen. “The question is how you give homeowners the tools to manage their electricity use. And that’s an area that I would call the Wild Wild West.”
To see why the market is developing now, it helps to understand just how rapidly the electricity sector is changing. For decades the industry in most parts of the world followed the same model: Large central plants fed electrons over power lines to customers who had a passive relationship with their utility—receive bill, pay bill. Consumption could vary based on the time of day and year, with more demand on a hot summer afternoon when air conditioning needs soared, less at night when lights turned off. Supply would adjust to meet demand, with power plants burning more or less fossil fuels to keep the system in balance.
Utilities that ran these systems usually operated as state-sanctioned monopolies. The system kept the cost of capital low but created no incentive to operate efficiently. When power markets started to deregulate in the 1990s, however, the new regime forced generators to compete to offer electrons to grids at the lowest cost. That created dynamic power markets with prices rising and falling during the day, as demand required progressively more-expensive generators to be switched on.
A new element was thrown into the mix as falling costs of wind turbines and solar panels brought vast amounts of new but intermittent capacity to the market. Wind and solar power is cheap when it’s available, but it appears and disappears based on time of day and weather conditions. Suddenly the once-staid power market was filled with multiple peaks and valleys of prices on any given day.
That frenzied activity creates opportunity, and power markets have been among the fastest-growing sectors for commodity traders in recent years. Power management systems offer the promise of bringing some of the benefit to homeowners.
“There is a lot of change afoot in the energy business,” says Aaron Jagdfeld, chief executive officer of Generac Holdings Inc., which sells backup generators and batteries and has been investing in energy management. “The classic utility model is changing, and I think homeowners have either willingly or unwillingly pushed ahead to take more control over their energy needs.”
In places such as Texas, California and parts of the US Northeast, consumers are used to seeing requests to conserve power for free. What’s changing now is that increasingly user-friendly technology can reward homeowners for providing flexibility to the grid. And consumers are also sitting atop a swelling source of supply. US power plants had a capacity of about 1,200 gigawatts at the end of last year, according to the Energy Information Administration. By 2030, EVs will have more power stored in their batteries than that, says Jon Wellinghoff, a former federal energy regulator who’s chief regulatory officer at Voltus Inc., which manages energy usage for businesses. “It’s a huge opportunity, and that’s why we have to get the rules straight.”
Already, Texas households have been able to earn money when power prices spike. Tesla Inc. compensated its retail customers 90% of the spot power price for supplying the grid from their home solar and battery installations, Jesse Aragon de Galvez, staff technical program manager, said at the Electric Reliability Council of Texas’ Ercot Innovation Summit in May. That meant some people who may buy power at about 10 cents a kilowatt-hour received $2 to $3 per kWh for power they exported to the grid when prices surged, he said.
So-called virtual power plants, which network small resources such as batteries in homes to scales similar to actual generation facilities, could add as much as 162GW of capacity by 2030, the US Department of Energy said in an analysis last year. About 70GW of that could come from pairing US homes with heating and air conditioning with smart thermostats, according to a study by Renew Home, a company created by the spinoff of the energy-services unit of the Google Nest thermostat business and a merger with rival OhmConnect.
For homeowners there are also resiliency benefits. As increasing bouts of extreme weather test aging grids, blackouts such as those that hit Houston after a hurricane in July are becoming more common. A house decked out with solar panels, batteries and a power management system can keep the lights on when the grid fails. If the system factors in weather reports that suggest grid trouble might be coming, it could even prepare, says Paul Dickson, chief revenue officer at Sunrun Inc. “As the utility ages and more people experience blackouts, there are a growing amount of people who are willing to pay for resiliency,” he says.
The benefits extend beyond households. Power grids are made up of millions of transformers that help step down voltage from massive transmission lines to smaller distribution lines, right down to the neighborhood level. As electrification increases household power consumption, those transformers will need to be replaced for the grid to keep feeding the same number of houses. Already there’s a shortage of transformers and other electrical components in the US, driving up imports of equipment from China in recent years.
Power management systems offer an alternate solution, says Raghu Belur, one of the founders of Enphase Energy Inc. Imagine a cul-de-sac with a dozen homes, each equipped with a power management system, some with solar panels and some with batteries. The systems could talk to one another, trading power among houses and recording payments. These micro-grids would be connected to the main power system but wouldn’t need an influx of new supply requiring an equipment upgrade. “So what are you going to do?” Belur asks. “Go in and replace 5 million transformers and spend hundreds of billions of dollars to do that? Or think about a world where the home is this highly resilient, self-reliant micro-grid?”
For all the forces working in favor of power management systems, challenges linger. At present, the market is nascent. In the US less than 5% of homes have solar panels, often the first technology that makes people consider more actively managing their energy use. And in many parts of the world, power prices don’t change depending on the time of day, leaving little incentive to optimize electricity usage.
The short-term costs can also be significant. In addition to solar panels and batteries, customers who live in older homes have to make significant investments to upgrade their electrical system for the new technology.
Companies in the power management market will essentially need to persuade people to spend money on an investment with questionable returns. That’s why TD Cowen’s Osborne says much of the adoption in the US will depend on federal, state and local incentives.
In any case, the power system is due for an update. “If Thomas Edison were to walk down the streets of Fremont, California, and he looked up at the energy infrastructure, he would recognize pretty much every element—centralized generation, transmission lines, substations, distribution lines, everything that was there 125 years ago,” Belur says. “The business has to transform.”
Murtaugh, Malik and Chediak cover energy for Bloomberg News; Murtaugh in Beijing, Malik in New York and Chediak in San Francisco.
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