Every company is (becoming) a power company

Author: G2 Partner, Monica Varman

Until recently, only utilities and IPPs cared about developing power infrastructure, and these were relatively sleepy businesses. But several factors are shaking up the power sector:

• Demand is increasing considerably, after a decade of load decline, driven by data centers and electrification (EVs, heat pumps). McKinsey estimates that demand for power will increase by the equivalent of adding California and Ohio’s demand in the next 6 years
• Supply (new generation) is increasingly challenging to bring online — interconnection and permitting delays challenge new renewables and storage projects, environmental challenges cap new gas and nuclear
• The grid itself is becoming more unreliable due to aging infrastructure, extreme climate events, and the increased volatility of both the demand and supply sides

These dynamics are shaking up the power sector — Vistra Corp. has been the top-performing stock YoY, beating NVIDIA, largely on the thesis that data center demand plus a portfolio of diverse generation resources (nuclear, gas, storage) will put them in a strong position in an era of power constraints.

Several power companies have hit an inflection point: Tesla Energy will hit $10B in revenue this year, 5x over 2020, and Morgan Stanley analysts muse that business could be bigger than the core automotive business over time. Quanta Services, Inc., which provides EPC services for power infrastructure, has seen an acceleration of growth to ~20% p.a. in recent years (vs 10% in the prior decade).

In the scramble to secure reliable power, every company will become a power company.

This crunch is pushing companies that have power as a key enabler of growth to “insource” it in a new way.

The first wave we are seeing are hyperscalers, who are building transmission lines and investing in nuclear and geothermal in a desperate race for power. The next waves are of critical infrastructure (hospitals, defense), cold storage and 3PLs, and then small commercial entities like grocery stores / hotels / malls.

A colorful recent example is the new power retailer launched by convenience store chain Sheetz. The company has ~20% of the fuels market in PA, and as customers electrify and move to primarily charging at home or work, this revenue is at risk. Launching a power retailer that can “follow” those customers enables Sheetz to future-proof their business.

Lineage, a ~$18B market cap cold storage company that transports over a quarter of temperature-controlled food in the US, is investing in producing 100% of (clean) energy on-site using linear generators and storage.

Opportunities to build

Given this shift, I see several opportunities to create generational businesses:

• Infrastructure, including generation technologies for clean baseload and/or backup power, energy storage, and next-gen transmission. Buyers that were previously laser-focused on LCOE are now paying a premium for “time to power,” e.g. the 10–15% premium that MSFT is paying Constellation to reopen Three Mile Island, and this is unlock opportunities for new technologies to build a pipeline of initial projects and move down the cost curve
• AI-enabled platforms to optimize utility-scale resources, including gas plants, batteries, LDES. As the grid becomes more volatile on both the demand and supply sides there will be more “alpha” to be extracted in optimizing different resources on the grid, a perfect application of AI. Multiple winners could emerge here in a few ways: “(1) Autobidder for everyone else” — optimization platforms for battery assets that charge developers a “toll” (fixed price) to take on the risk of dispatching those assets. The platform retains the upside from this asset-backed trading, and developers get the safety of a bankable fixed offtake. (2) Next-gen IPP — There is room to build a new IPP from the ground up, using better technology end to end for project development, operation, and optimization
• AI-enabled platforms for distributed resources, e.g., an API layer that connects and controls a businesses or home’s energy devices for load shifting, ancillary services, etc. Existing platforms that help commercial and industrial customers bid into demand response markets are still reliant on manual workflows; there is room for a fully-automated platform to optimize multiple assets (batteries, EV chargers, etc) and use cases (e.g., shift use to times of day when energy is cheaper) for commercial customers. G2 portfolio company 1KOMMA5° launched “Heartbeat,” which integrates horizontally across multiple DERs (e.g., coordinate an EV, solar panel, heatpump, battery, and smart thermostat) for residential customers in Europe to make each home a mini-utility with the cheapest and greenest power.
• Charging applications: EV charging locations are a lot more dispersed than gas fueling stations — a mall operator, office building owner, etc. now might own / operate a charging station. They want to drive utilization of these assets, optimize energy use / costs, and also ensure a good experience for their tenants. Platforms that enable fleets and real estate owners to drive utilization of their EV and charging assets help these new owners of power assets get the most out of them
• Procurement and project tools, e.g. for land selection, energy procurement that are helping non-traditional companies (e.g., hyperscalers, SMBs) procure and develop power

This is the biggest transformation of the power sector since the late 1800s, and we are investing in (1KOMMA5°, Arcadia, Crusoe) and continue to invest behind this thesis. Reach out if you’re building in this space!