Chapter 2/3: we didn’t manage to scale our low-carbon hours forecast
This post belongs to a 3-post series gathering my learnings after 18-months as a ClimateTech founder at adapt.sh. I hope sharing my experience will help others trying to avoid climate chaos. In the previous post, I explained what we do and calculated our direct climate impact.
- We tried 5 different business models (BM) to value our solution, but didn’t find any scalable model (we sold 80k€ of pilot projects in the first 18 months, and secured a business pipe of approx. 100k€ for 2023).
- Despite good traction in terms of traffic, adapters’ willingness to pay for additional services (freemium), or even to be paid to have their equipment controlled (explicit flexibility), is very low.
- Most importantly, energy consumers’ willingness to pay for real-time, low-carbon energy is strongly challenged by dubious certificate schemes for renewable energy and carbon offsets.
- The need for flexibility services is increasingly important, but independent system operators (ISO) in charge of grid balancing tend to work directly with IT consulting companies to develop their own tools for residential flexibility.
Introduction: electricity is a heavily regulated business
Electricity is a regulated market for two reasons:
- Energy, like food or drinking water, is a strategic resource
- Electricity relies on a common infrastructure, making for it’s monopolistic market structure
The public regulators are independent public bodies in charge of the electricity market design. They ensure an efficient and fair energy system for the consumers. In most OECD countries, these regulators have enhanced competition mainly in two sectors:
- Electricity generation, especially from decentralised & standardised renewable energy sources like solar PV, onshore and offshore wind.
- Electricity supply to commercial and industrial consumers, which can include various contracting / optimisation services (e.g. direct supply on the electricity market, electricity tariff optimisation, onsite solar PV for self consumption, etc.).
Because it makes sense to have only one electric cable per street, electricity transmission remains a monopoly (though it could be privatised). In some large electric systems, independent system operators create and manage electricity markets to engage energy producers and consumers in contributing to balance electricity generation & consumption 24/7. These markets are wholesale electricity markets and ancillary services that contribute to the system’s ‘flexibility’.
adapters directly contribute to grid optimisation through flexibility
To meet climate targets, upgrading, improving and securing the electricity grid — the so-called ‘backbone of energy transition’ — may be one of the most impressive human feats, on par with the pyramids of Egypt or the Great Wall of China a few millennia ago. This challenge requires huge investment somewhere in the area of +$21 trillion.
As we explained in the previous chapter, adapters directly contribute to grid flexibility on a recurring basis.
adapters reduce CAPEX investment need:
- By favouring local consumption of renewable electricity, CAPEX investment in new high voltage lines to export surplus electricity is minimised (e.g. instead of building power lines across the country, e.g. from windy north of Germany to industrial south);
- By smoothing household consumption, CAPEX investment in grid upgrades to integrate electric cars and heat-pumps is minimised (e.g. batteries, transformer stations).
adapters reduce OPEX costs:
- By reducing peak demand, the need for fossil fuel back-up plants is reduced (e.g. reduction in the cost of burning hydrocarbons);
- By improving the flexibility of the system, the need for system maintenance is reduced (e.g. maintenance of back-up power plants)
We sold our climate and flexibility services to different energy actors
During the first 18 months of adapt, we employed the five BMs below.
In total, we sold & delivered ~80k€ worth of projects (incl. 30% of consulting), and secured a pipe of ~100k€ for 2023 (repeat orders + new clients) in America and Europe.
By working alongside different energy actors and requesting formal price quotations from others, I made the painful decision to stop our commercial activity (including ongoing and invoiced projects) because I don’t believe there is a replicable business model, at least today (see below details for each BM).
In the medium-term, significant changes in the structure of the energy market could make some of these business models feasible.
NB: We did some consulting projects for industrial companies, but we didn’t try to sell our products to non-residential energy consumers for two reasons:
- Commercial and industrial energy consumers with the largest flexibility potential already optimise and shift their consumption based on the electricity wholesale market (which is correlated with carbon intensity).
- The flexibility potential is very limited for small commercial consumers (e.g. offices) compared to industrial processes (e.g. water pumping) or residential heating and smart-charging.
BM #1 — SaaS for energy retailers
Selling our products to energy retailers has two main limitations:
- As crazy as it sounds, energy retailers have (almost) no interest in shifting the consumption of their residential consumers. The balancing of their electricity portfolio is based on standard consumption curves for residential consumers. In continental France, 92% of residential consumers have a Linky smart meter which can provide real-time consumption data, but energy retailers opt to use the standard theoric ‘ENEDIS profile’ consumption curve for balancing 99% of residential consumers. These standardised profiles limit the risk of exposure to the wholesale electricity market (up or down).
- Most energy retailers claim they supply 100% renewable electricity thanks to the Guarantee of Origin certificates. Such claims are heavily encouraged by public authorities to enhance ‘competition’ in electricity supply. It’s very convenient! Nobody should bother explaining to their consumers that 100% renewable electricity doesn’t exist in the physical world.
Some energy retailers provide low-carbon hours forecasts for marketing purposes (like Energie d’ici, a small French renewable energy producer and retailer, or Engie), but they don’t use all the economic potential of shifting electric consumption to when electricity prices are lower.
Last but not least, due to the energy crisis, a lot of electricity retailers went bankrupt (because of poor financial risk management policy), and the survivors have very little interest in developing innovative offers because of electricity markets uncertainties. After decades of promoting a free-market approach to the electricity and natural gas industries, European governments are taking back control of these vital functions. Deep market reforms are ongoing.
BM #2 — Carbon intensity data provider
The market for carbon intensity data is currently limited for three reasons:
- Low entry barrier for energy players: most of the open data sets used to estimate carbon intensity of electricity are provided by energy market operators and available for free, like the ENTSOE data platform in Europe (for electricity consumption and generation). For example, electricity independent system operators are developing their in-house carbon intensity data (in France, in the UK, in Germany and in California).
- Small total addressable market for electrical device manufacturers: the number of automotive, EV charging stations, smart thermostat or smart-home device manufacturers from North America or Europe is quite low.
- Low standard for scope 2 carbon footprint: when measuring emissions from purchased or acquired electricity in the “scope 2 emissions” perimeter, corporations are not required to use hourly carbon intensity data (e.g. GHG Protocol).
Future 24/7 carbon-free procurement goals could enhance the value of hourly and local carbon intensity data.
BM #3 — Flexibility aggregator of residential devices
What is flexibility?
‘Demand-side flexibility’ (often referred to as just ‘flexibility’), is the ability to decrease, increase, or shift electricity consumption to balance the electrical grid. This business at the heart of the electric system is growing rapidly (worth €16B in 2022 in Europe, a +100% increase YoY). Flexibility can be achieved in two ways:
- Explicit demand-side flexibility: a flexibility aggregator shifts electricity consumption based on explicit “incentives” from different energy markets, like ancillary services. In Europe, most of the flexibility aggregators focus on electricity-intensive industrial processes that can easily be postponed by a few hours without harming operations, like water-pumping or greenhouse warming and lighting.
- Implicit demand-side flexibility: the consumer plans their electricity consumption according to electricity price signals. In France, the former integrated public electricity company EDF has succeeded in shifting significant amounts of electricity with the “heures creuses” off-peak tariff. An automated signal corresponding to the “heures creuses” off-peak tariff is directly connected to millions of electric boilers, shifting ~1GW every day (about 2% of French average load). A lot of free apps have emerged to plan and execute EV charging during off-peak hours.
Aggregating a very large number of ‘smaller’ electrical devices (like EVs that mostly charge at home) and using them as a ‘virtual power plant’ (VPP) that could inject electricity back to the grid (‘vehicle-to-grid’, V2G) has been the gold rush of many startups, VCs and automotive manufacturers for more than a decade. The flexibility potential of EV smart charging in Europe by 2030 is estimated at 48 GW, equivalent to the current average electricity consumption in continental France!
The limits of ‘explicit demand-side flexibility’ in the residential sector
After exploring the BM of explicit demand-side flexibility (talking directly with hundreds of adapters, connecting to some EV (thanks Tesla Owners France!) and smart-homes devices, and getting a pricing quotation from a leading flexibility aggregator), I believe this BM has 2 limitations:
- Low profitability in European power markets: even assuming that hardware and installation costs would be reimbursed by a subsidy and electricity spot prices would still be higher than average (e.g. >500€/MWh during >20 days / year), we calculated an LTV/CAC ratio of 2. For sure, in 2022, electricity markets in OECD countries have been very volatile (as in the US or in Europe), but it is difficult to know whether the electricity market price spread between a few hours or days will be as wide in the coming years as it has been as of recent. For sure, this spread is much higher in electrical grids with lesser regulation (Australia, Texas, California), where electricity prices could reach $20,000 per MWh.
- Low economic incentive relative to implicit ‘time of use’ electricity tariff: in general, the financial benefit for a consumer to participate in an “explicit” flexibility program is sometimes below the savings that are achieved with an “implicit” flexibility smart contract (e.g. off-peak). Based on adapters feedback, it’s very rare that explicit & implicit demand-side flexibility programs combine.
Based on my experience, I think the potential for implicit demand-side flexibility is still huge (with seasonal off-peak contracts, for instance — see below).
The question then is: will it be profitable (for the consumer, the electrical system AND the operator) to capture the remaining flexibility potential with explicit programs?
BM #4 — Freemium app
Freemium is a typical business model for B2C software & app companies (Dropbox, Spotify, Strava, LinkedIn, Google, Twitter, etc.) in which users pay a small amount of money (usually 10–100€/y) to get access to premium product features.
Such a model requires two things: massive traffic, and a good conversion rate. To make ~1M€/y, with a very good conversion rate of 2% of adapters subscribing to an ‘adapt connect’ service at ~30€/y, would require a user base of 1.5M. Our acquisition results show a pretty good start relative to our direct competition, especially considering that we didn’t pay for it (we didn’t even get a PR agency!). On the other hand, based on the results of our crowdfunding campaign, we estimated a very low conversion rate.
One reason could be because numerous free tools providing essential energy management features exist within our direct perimeter (e.g. type ‘free EV smart-charging app’ on your app store…).
By looking closely at the 2021 results of yuka, the champion of healthy food consumption, we can see that, even with a massive community of +20M users, it’s challenging to make a 7 figure profit with a freemium subscription model.
BM #5 — Carbon offsets credits
Currently, companies with ‘net-zero’ claims can buy a carbon credit at less than 1€/tCO2e avoided on the so-called ‘voluntary markets’… The effectiveness of such cheap carbon offsets have been highly debated recently.
Thanks to precise electricity consumption and carbon intensity data, our climate impact additionality is easier to demonstrate in a transparent way. But even at a very ambitious price of 100€/tCO2e avoided, we would need 40-400k active recurring users to make our first 7 figure profit (based on our climate impact estimate), which is quite a challenge to amass.
Conclusion: put on your suit (again) and be a consultant
The global market for ‘smart energy management systems’, including grid balancing software, is probably worth dozens of billions. Main actors in this industry include large energy conglomerates, such as Schneider Electric, Siemens and General Electric, that upsell billions worth of ‘digital solutions’ on top of their ‘smart infrastructure’ electrical equipment. Some of them almost have a worldwide monopoly position for critical software at the heart of the system.
Independent system operators, with almost infinite budget thanks to their monopoly position and very high standards of operations, also like to contract with consulting companies to ‘own’ the tailor-made technology developed for their needs. French independent system operator RTE alone spends almost a 10 figure budget on IT & consulting services every year!
Being able to sell a scalable product in such an ecosystem is quite challenging; on the contrary, providing tailor-made IT services seems much easier. If you’re an energy company willing to develop such a tool as adapt, I can offer you my recommendations & assistance!
The question now becomes: what should we do with adapt? Our answer in the next chapter!