Decentralized Energy

07 Feb 2023

The Grid Is Fragile. Is Distributed Energy the Answer?

07 Feb 2023  by   

Scale Microgrid Solutions developed, owns, and operates a hybrid solar, generator, and battery system microgrid at Bowery Farm. (Courtesy: Scale Microgrid Solutions)

Tim Hade's perspective on the distributed energy transition is simultaneously optimistic and uncertain.

He's confident that distributed energy resources are key to breaking through the barriers holding the industry back. Wildfires, floods, and more frequent extreme weather events routinely highlight the grid's vulnerability, and DERs could be the answer.

But when will this happen?

Markets still undervalue the myriad benefits DERs provide for resiliency and decarbonization, and incumbents aren't willingly ceding ground any time soon.

Will we come to embrace DERs before it's too late?

Hade joined the Factor This! podcast to discuss the role of distributed energy for the grid of the future, the perils of scaling a climate tech hardware company, and what's holding back the Inflation Reduction Act. He also shared five tips for anyone starting a clean energy company. Spoiler alert: get smart on tax equity. Or find someone who is.

Hade was first drawn to the climate fight during his time in the military. He attended the Air Force Academy and went on to serve as an officer for five years.

By 2008, Hade was working in the Pentagon. He recalls conversations about the threat of climate change, which he said the Department of Defense has long recognized as one of the greatest challenges facing the U.S.

"That stayed with me," Hade said.

When he left the military, Hade started looking for his angle to get involved. He said he wanted to devote the next stage of his life to something that would make a positive impact in addressing climate change.

Hade went on to work for ENER-G Rudox, a New Jersey-based provider of primarily diesel backup generators, working alongside his childhood best friend Ryan Goodman and Ryan's father, Howard Goodman.

A turning point came after Superstorm Sandy devastated the Northeast in 2012.

Many of the company's employees went without power for weeks. And he and his partners saw first-hand the impact that the storm had on families and communities, and trends pointed to more frequent extreme weather events in the future.

"That flipped a switch for us," Hade said. "As we move forward into a climate future that has increasingly unstable weather, our infrastructure is really not up for it."

Ryan and Howard Goodman had a vision of transforming their business into a sustainable energy company. That started with co-generation and led them to become early adopters of solar-plus-storage technology. Along with Hade, they used the proceeds from a successful sale of the business to launch Scale Microgrid Solutions in 2016.

The thesis behind Scale is to power the world with cleaner, cheaper, and more sustainable distributed energy. Building a company that can achieve those goals doesn't happen overnight.

That vision shaped Hade's perspective on the role of distributed energy. And it underscored the magnitude of the work ahead.

"I think the reason I'm so optimistic is, this shit works," he said. "With that said, "I think the biggest question facing the distributed energy market right now is how fast is this going to happen."

DERs and the market

How markets value DERs going forward will likely be the greatest factor in determining their fate.

Currently, there isn't a consensus around how to accurately value things like the resilience and climate benefits of DERs, Hade said. He believes that's largely due to the absence of a free market in energy.

Utilities wield immense power over the growth and interconnection of these assets. And while DERs can, and should, work in support of the macro-grid, not all utilities subscribe to that thinking.

"We should work together on this," Hade said. "The practical reality is that some utilities have that perspective and some very much don't."

Standing in the way of rapid deployment of DERs is the divide between policy and regulatory frameworks and the technology curve.

Those with bearish outlooks for DERs argue that many of the regulatory processes are political in nature, like California's recently-concluded net energy metering proceeding.

Hade contends that the flip side is that the system as a whole routinely shows its vulnerabilities. More people and businesses will opt for distributed energy solutions to meet their needs, he believes.

It's the bottom-up momentum of DERs that gives Hade the most confidence. Utilities and regulators can slow the progress, but they can't stop it.

"I think over time cooler heads will prevail and we'll end up building the best system and the market will work the way the market is supposed to work," he said.

The Defense Department, for example, has created a quasi-market to reflect the attributes of DERs. The agency is likely to account for more than half of the global microgrid market over the next decade, Hade said.

DOD's deep pocketbook, and obligation to keep mission-critical operations online, has so far kept the microgrid industry afloat.

Hade believes the commercial and industrial sector will begin to shoulder the load by the turn of the decade. Last year was still a year for "early adopters," he added.

Tips for scaling a clean tech company

Hade and his co-founders have learned a lot in the seven years since they launched Scale.

Leading a climate tech company is difficult. And unlike software offerings, hardware companies can become ensnarled in trade disputes and supply chain constraints.

But both segments share the challenge of raising money, which Hade said has been the toughest hurdle to overcome.

Securing checks for $1-5 million from venture capital firms is relatively straightforward. But few shops have the ability to fund $50-100 million fundraising rounds. And the ones that do are not typically early-stage investors.

The only way Scale was able to convince institutional investors that they weren't an early-stage startup was to get projects built.

"We ended up begging and borrowing from anyone who would give us money to build our first few projects," Hade said.

The effort to prove out Scale's business model worked. Hade and his team were introduced to the private equity firm Warburg Pincus, which has served as the company's capital provider for the past five years.

Lowering the barriers to access capital for clean tech entrepreneurs should be a top climate priority, Hade said.

"If I had to do this again, was it a good risk/reward trade-off from a financial standpoint? Probably not. Even as I sit in this position, it worked out, but it probably wasn't a responsible bet."

  1. Sales
  2. Finance
  3. Commercialization
  4. Technology
  5. Operations

Hade said believes every clean tech company needs to master five elements to be successful:

"I've never met a person who's good at all of those things," Hade said. "Ultimately, this is a team game. You have to surround yourself with people who compliment you but also address your weaknesses."

Maybe most important is being able to navigate the complicated world of tax equity.

A different perspective on the IRA

Hade describes the Inflation Reduction Act (IRA) as the world's most important piece of climate legislation to date. Like many, he believes the law will drive significant clean energy deployment and decarbonization.

But Hade also thinks some have gotten carried away about the IRA.

For one, supporting clean energy deployment through tax credits creates a financial maze that even the most experienced industry leaders have trouble navigating.

Monetizing tax credits is tricky and inefficient, according to Hade, who has been working with tax credits for a decade. "It is the most inefficient way to fund something that I've ever seen in my life."

Hade advocated for direct pay provisions, but those never made it into the final piece of legislation. And while Scale has a team of financial experts to navigate the tax code, many developers don't have those resources.

Without a change to the system, some developers won't be able to build profitable businesses, Hade said. The ever-changing value of tax credits, and the poor condition of the tax equity capital market, are "huge drivers of uncertainty," he said.

Hade's optimism for the future of DERs is constantly in conflict with the reality that markets, regulators, and utilities still hold a lot of the cards.

"That's where all this climate stuff gets really tricky because there's also a timeline on this," Hade said. And does he think this will happen over the next 10 years? "I hope so," he replied.

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