Podcast 038: John Powers – Can software supercharge financial returns for commercial solar projects?

John Powers Extensible Energy podcast Freeing Energy Demand Charge software

Listen in as John Powers, the CEO of California-based Extensible Energy, shares how software is helping commercial solar customers boost their ROI and reduce the most expensive parts of electricity bills, all at the same time. Learn how this innovative software approach is leapfrogging slow moving utilities by adding intelligence on the edge.

John Powers: Can software supercharge financial returns for commercial solar projects?

Listen in as John Powers, the CEO of California-based Extensible Energy, shares how software is helping commercial solar customers boost their ROI and reduce the most expensive parts of electricity bills, all at the same time. Learn how this innovative software approach is leapfrogging slow moving utilities by adding intelligence on the edge.

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Transcript

Bill Nussey:
Hello and welcome to all of our local energy champions. We are on this journey together to learn about how clean energy is happening and happening more quickly, thanks to people who are visionaries, pushing the energy production out to the edge, generating it locally, helping their communities. This is a transformation, it’s just beginning and it’s really exciting. And that’s what this podcast is all about.

What we try to do here is find some of the most interesting and inspirational people that are part of that change. And we love to hear their stories and learn from them about how we can all play a role in getting to the clean energy faster through local energy. And today’s guest is certainly a great example of this, John Powers, who by the way, has the most awesome name to be in this space.

So John is the co-founder and CEO of Berkeley-based California Extensible Energy, which is celebrating its 10th anniversary this year. His company is focused on developing intelligence software for the commercial solar market. And for those of you that have been listening for the last year, you know how much I love the commercial market and you add software to that, and this is going to be one of our most interesting conversations. So John, I want to take a moment and welcome you to our podcast today.

John Powers:
Thanks very much, Bill. It’s a pleasure to be here. Looking forward to a good conversation.

Bill Nussey:
I’m excited to talk a little bit about your company, but like we do at the Freeing Energy podcast, always want to start with a little bit about you. You’ve been in the industry for 30 years. And across that time, you have had a variety of really cool roles from consulting with utilities, doing community-based energy projects, you’ve influenced rate policies, which we’re going to talk about what a rate policy is today. You build software and service companies. So how did you get started on this incredible energy journey early on?

John Powers:
I’ve been an energy nerd all my life, really. I grew up in the oil crisis of the 70s and was always fascinated by questions like how customers use energy and how they make energy-related decisions. If you drill down through all the history here, that’s the underlying theme is trying to understand more about how it’s used and how we can shift that use to more efficient and to be cleaner. As you said, I’ve been in both consulting and software.

I’ve split the last 30 years, half and half between consulting and start up entrepreneurial ventures. I’ve been so lucky to be able to work on a wide variety of projects. And the recent one that we’re on now is headed squarely in your direction. We’re working a hundred percent in solar, a hundred percent in software, trying to bring the costs of commercial solar down and make commercial deals pay off faster.

Bill Nussey:
I’m looking forward to diving into how that works, because it is a really cool approach that you’re taking that certainly when I got into this industry, I wasn’t even aware that you could do. So you said recently that you were cursed as an economist with the ability to do math. Obviously you mentor other startups in the intelligent energy economy. So how did this unique combination of economist and math shape your thinking about solar energy? And tell us a bit about what that means in the context of an intelligent energy economy.

John Powers:
I studied economics as an undergraduate and I studied energy economics in particular. My first job out of college was in the rates department at Portland General Electric. So I learned a lot about how electricity is different from other commodities, that’s we use the same instant that it’s produced, it’s impossible to store. And as a result, the pricing is not like wheat, or oil or other things that we study. It could be priced differently at midnight than it is at noon. And that has a lot of implications about how the industry needs to evolve from a central station. Everything comes from one end of the utility from big, dirty fossil plants to the end user, without the end user having any degree of control.

As we evolve to a distributed grid of clean and renewable resources, we still have to balance energy usage with energy generation, instantaneously. So that responsibility is now being pushed from the generation side to the load side. If all the energy we put on the grid just comes on when it comes, whenever the sun shines, or whenever the wind blows, that just means the other side of the equation, which is the usage or load side has to be more flexible. So that became evident to me at a pretty early stage. And back to studying how customers use energy and how they make energy-related decisions. Somehow we have to make the usage patterns conform to when the sun is shining and the wind is blowing.

Bill Nussey:
You guys are creating demand charge management software for the commercial sector. And for our listeners, commercial in the electricity industry means office buildings, retail, hospitality, institutions, campuses, anyone that’s not residential or a giant utility. Estimates are there’s 5.6 million commercial buildings in the U.S., so this is a massive potential market that we’re just scratching the surface of. And there was an article that just came out today in utility drive that commercial buildings are one of the largest areas to basically improve the grid by controlling how they consume electricity in harmony with the generation. And that’s exactly what you guys have been pioneering.

So, let’s talk about what you guys are doing, specifically for the commercial market. You sit behind the meters, they say, so how does it work? What are you doing to help customers save money?

John Powers:
So that’s really where we start is to make this work for the grid and to make it work for the customer, the customer has to see the savings. So you and I pay for our electricity bill in kilowatt hours at our home. That’s a measure of energy. And while commercial buildings do pay for energy, they also pay something called a demand charge, which is the highest 15 minutes of usage during the entire month. So that can be anywhere from 30 to 50% of the commercial customers’ electricity bill.

So think about that just for a second. That means your bill at your business reflects the worst mistake your building made for the entire month. So at that one, 15 minute interval, when everything turned on at once, that’s half your bill right there, so that’s the part of the bill that we focus on controlling. To back up a little bit, we characterize our software really as load flexibility software, because it’s more than just demand charge management. Demand charges are the current tariff structure or rate structure that utilities use to inform their customers, that it costs more to deliver a lot of powered watts. That’s fine.

But even as we put more renewables on the grid, the value of shifting energy usage from one period of the day to another increases in value. So our software is capable of shifting energy usage around, but the way we save money for the customer is through this demand charge, reducing that, in most cases by 25 to 30%.

Bill Nussey:
Most of us that pay those residential electric bills don’t have the concept of this demand charge that you’ve described. But for those people that have come from the internet where like I have, that’s a very common charge for large scale internet usage. When you’re tapping into a data center, for example, you pay for the most extreme usage. And it actually makes a lot of sense if you’re a data center or utility because that’s how big they have to build their infrastructure.

They have to be large enough that when you turn everything on, they’re there for you. And that costs a lot of money. So during these peak times, the reason customers being charged so much money is the utility has to go and pay for the most expensive power, usually a peaker plant, or something like that. The most expensive source of electricity for them. They pass it down to you. So everyone wins when you guys at Extensible Energy turn your software on.

John Powers:
Well, in particular, the solar guys win. Solar is great at delivering energy behind the meter to the customer, but not at saving demand. One cloud can ruin the whole month in terms of demand charge savings. So remember, demand charges are set on the worst mistake your building makes all month. That mistake could be an operating error, but it could also be that the solar drops out from clouds passing by. So the trick is to combine solar with demand charge management software, so your bid to the customer includes savings on energy and demand. And the entire system combined pays back much faster.

Bill Nussey:
One tricky part, in particular, is that demand charges are not consistent from state to state, or even region to region. How do you make this work across the country and eventually the world?

John Powers:
Our business is entirely partner-driven. So we don’t go direct to commercial customers with our software. We only go through our reseller partners. And to date, all of those have been in the solar industry. Anybody who has a relationship with the building owner can combine their offer in energy with ours. So, we aren’t deciding what states to work in, our partners are.

When we came out of our shell, just in the last several months, back in September at the big Solar Power International show in Utah, we announced that it was now possible to save demand charges with solar installations, without a battery. And we’ve been extremely pleased with the response from the industry. We’ve had more than a hundred solar installers contact us, and more than 50 of them have started actually sending us data from individual projects that they’re working on to see how we can help them bring a combination of solar and demand charge management to their customers.

John Powers:
So, it’s up to them to decide, are the demand charges in their area of interest high enough to justify this? Again, it comes down to a math problem. There’s some simple tools that tell you if you have the usage history of the building, will our software make enough of a difference to drive your sales? I’ll tell you, where some of the biggest ones have been, have been in Southern California, because the demand charges there in San Diego and Southern California, Edison service territory are very high. But we’ve gotten calls from Iowa. We’ve got lots of business from Colorado, places where demand charges are above say $10 a kilowatt. That’s plenty make our software a great combination with solar.

Bill Nussey:
If I’m a commercial solar installer, and I’m up against another commercial solar installer, who’s bidding for the same project, why do I want to use extensible energy?

John Powers:
Well, because the return on investment on the proposal you’re giving to the customer will be better than the one that your competitor is giving. But I want to back up from that a little bit and make it less simple. So what we’ve been saying for a while is that the commercial solar industry is changing. I somewhat derisively refer to some of the folks in the industry as panel salesman. And if all you’re doing is selling panels and then moving on, you’re not solving the customer’s real energy problems.

If you’re willing to go inside, if you’re willing to take the time to understand the customer’s utility bills and their energy needs, then you can combine your solar offer with something like our software that modifies the usage patterns inside the building and make a real impact for that customer. But it does require you to understand things like a little bit of IT.

We put a little IOT gateway in the building, which is just a little PC that talks to the energy management system in the building. Or in many cases in smaller buildings, it’s just a simple rip and replace of dumb thermostats with smart thermostats. And then we talk to the heating and cooling systems in the building to shift the energy around a little bit. So how do we actually achieve this demand charge management? It isn’t magic, it’s technology. It has to talk to the energy using systems that are in the building.

So that could be a battery, or it could be car chargers behind the meter, but that’s the world we hope to live in. The world we live in now, most of the flexible loads are heating and cooling. So we need to be able to modify the heating and cooling loads of the building. No one cares when the compressors run, they only care that it’s comfortable inside. So we shift the usage patterns of the heating and cooling around it changes the temperature by a couple of degrees at different times of day. Nobody feels the difference. It’s more comfortable after we get in than before, but that requires somebody who’s willing to go inside the building and manage a project that includes changing out thermostats. It’s a one day install, but it’s different from installing solar panels on the roof.

Bill Nussey:
I want to make sure we surface a couple of the really important points here, because this is a big deal to me. What you’re doing is taking a model that we relatively well understand, which is selling solar panels on roofs. You’re then turning it into something. That’s a brand new business model. You’re finding ways to bring together different economic streams, solar energy, demand charges, and you’re weaving them together in a way that creates value that didn’t exist before.

My take on business in general, and the energy business specifically, is that it really is in the early days, a history of radical business models. Thomas Edison decided that people didn’t want to buy a light bulb, they wanted to buy light. And so he built an entire grid and just rented you the light, the light came with the grid. And Sam Insull, who I write a lot about in my book, had this great notion that we can’t build enough scale unless we take away competition, so he invented the regulated monopoly for which many people love and hate him a hundred years later for that.

But this is another new business model and one that works because of software. This feels to me like the toe in the water of a massive change in how we think about energy. And you’re also putting it out into the customer’s hands. There’s a version of this I’d love for you to explain briefly that has been around for a long time. And I’m sure you get confused with occasionally, which is demand response. Demand charges have been around for a while. And there have been software companies helping customers do demand response management. So explain what that is and how you’re different.

John Powers:
Demand response tends to be a utility side program. The utility grid, as you mentioned before, is made up of many different types of power plants and the most expensive ones run when demand is highest. Well, building power plants that only run a few hours a year is not cost effective, so utilities also put out programs that allow customers to basically chop their demand down for a few hours per year. So you might get an incentive to shut off your air conditioning, or raise the set point on your thermostat at home by a few degrees during the highest usage period for the utility.

Those programs tend to be for a few times a year and for the benefit of the utility. And you might get a small incentive payment for participating, but it’s never been particularly customer-focused type of program. And we tend to think you have to make this work for the customer first, and then we can talk about turning it into a benefit for the grid. The difference between a utility program that pays you to turn off your air conditioning three times a year, our software runs 24/7, 365, and saves the customer money against the published demand charge. No matter what time of day it is, no matter what the grid conditions are. So there’s a big difference between those two worlds.

Bill Nussey:
A lot of what you’re talking about, shifting loads and lowering costs, a lot of folks think about batteries doing. And so why would somebody not just buy a battery?

John Powers:
Behind the meter in a commercial customer, a battery is a very expensive proposition. In a car you’re amortizing the cost of engineering over a hundred thousand, or a million vehicles that you’re hoping to build. Whereas in a building you’re amortizing about the same amount of kilowatt hour capacity over one. And so we’re not making master electricians any cheaper. We’re not making permitting any easier. There’s no easy way to handle fire suppression in a commercial facility for lithium ion batteries. All these things are very expensive. And even if the price of batteries goes to zero, in a small to medium commercial facility, it’s going to be very expensive to have batteries just for economic reasons, just for demand charge management, or time of use rate differences. It just is not going to pay off in most states.

Bill Nussey:
A lot of people have thought about the energy startup environment for the last couple of decades, hold their nose and look back to 2011-ish when energy tech investors famously lost 10 to $25 billion. And so there’s been a bit of a winter with funding energy tech companies, but one of the things that everyone agrees on is software.

And one of the reasons the energy tech bubble burst in 2011 was a lot of those companies were asset heavy businesses that didn’t have a lot of software and the risks and the timeframes, the flexibility. Explain for a lot of the folks that don’t live in the world of startups and investors, why is it that venture capitalists find a software-focused business more interesting than one that’s say makes new solar panels, or does installations on roofs?

John Powers:
The main thing I think of as the difference and what I try to stress with our team is the difference between project economics and product economics. If every site requires custom work, if every site requires high-skill team members to go there in person and implement something complicated at every site, then the path to growth is at best, linear. Whereas if you can make the product that you’re selling something that is easy to install, learn, and use at the site so easy that someone else can do it. Then you don’t have to put your own team members in the field all the time. You don’t have to have every customer interaction be a new set of challenges.

So, software enables you to scale much more quickly when what you’re doing is relying on other work that’s already happening at the customer’s site. The idea behind it is that product economics, everything you learn on one job is immediately reflected into your product, just like with solar cells, right? A solar hardware has been improving continuously for the last 40 years.

John Powers:
You don’t suddenly have a slip up where the next technology of solar cells becomes less efficient than the one before that’s product economics. It’s made in factories. Every time you make an improvement, it’s automatically included the next time. Same with software. It’s automatically included. When we learn something, the next customer benefits right away.

Whereas with project work, you’re just encountering new and different obstacles that every single site and the most you can hope for is that you stay on schedule and grow linearly. With a good distribution model and a product that’s always improving, you can scale very quickly.

Bill Nussey:
I’ll add two other things to that, that I love about software. One is that if your customer takes a look at your software and says, “You know, John, I wish it did this”, your team will probably make that thing available within a week or an hour, depending on what it is they’ve asked for. Whereas if say I bought a solar panel and I wish it had another feature, I might have to wait two or three years before that feature can be put into the solar panel, can be UL approved and put out to the distribution market.

And the other really cool thing about software by the way, is this little notion that accountants like to refer to as a gross profit. If you’re making software, your gross profits are 99%, or 95%, or whatever platform you’re using. That extra money you make is put towards research and development, which allows you to iterate your software so much more quickly.

And that’s probably the biggest reason I wanted to get into this space. The notion that software had barely touched it, had barely changed it. A tiny few companies like yours and maybe a hundred, or two others that are really bringing software intelligence specifically to the edge of the grid that are going to change the pace and allow for entrepreneurship to exist in a way that it didn’t for the last hundred years.

John Powers:
Absolutely. And the growth of solar for the last 10 years has been very impressive, but that’s to those of us who were inside the field. Exponential growth only becomes evident to the rest of the world when it really starts to not be doubling a tiny number, but doubling a big number. So you’re going to see the next 10 years, people sit up and take notice as solar goes from 2% to 20%, or more of the grid. And that’s not going to happen without software. Every industry reaches a point where the hardware has been commoditized and software becomes the key differentiator and the commercial solar business, I think is at that moment right now. We’re trying to work in an ecosystem that is all trying to bust this market wide open.

Bill Nussey:
I’ve been around long enough to have seen this phenomenon you just described happen in other industries. We saw it happen in marketing, which was my previous software company. And you go all the way back to an age when computing meant mainframes. And to me, that analog with the utilities is incredibly clear. There was a small number of companies making these giant devices that were centrally controlled, very expensive, available only to a few. The individuals, homes, small businesses, had virtually no say in what happened if they could even access it.

And similarly what’s happening in companies like Extensible and countless others, the commercial solar installers are basically putting choice back into the hands. They’re basically inventing the PCs, if you will, in a world of mainframes. All of a sudden you go from a world where there’s a hundred, 200, maybe depending if you’re generous, a thousand utilities, making active decisions about what to do to literally millions of buyers, companies like you’re selling to. Your ultimate longterm customers, the commercial building owners, there’s millions of these people that can make individual decisions. And the rate at which change occurs, the rate at which innovation occurs just goes through the roof.

That’s why I’m so excited about what local energy does and why you guys selling to the end customer. That’s why I think you’re part of the acceleration of the space. It’s so exciting.

John Powers:
What I tell people on the utility side is you aren’t designing the grid anymore. We’re all designing the grid now. It’s not something where you guys have all of the answers. And if you look around and loosen up a little bit, you will see that the consumers, whether that’s residential, commercial, industrial customers, the folks who are consuming electricity are now also producing electricity, because they want it that way.

And the initial reaction in the utility space was horror, right? But I think the smarter utilities are coming around to this distributed vision as being a great opportunity for them. And they’re the platform across which electricity will continue to be exchanged. And that’s a great business opportunity too. But if you can’t evolve your business model, either as a commercial, solar installer, electric utility, a distribution company, then you’re fighting gravity. It’s not a winning battle.

Bill Nussey:
That’s the quote of the day, fighting gravity. I love it. As we were preparing for this interview, you shared a little fact with me that I found fascinating is that you live in a part of the U.S. that is occasionally getting your power turned off by the utility, hoping to prevent another set of horrible wildfires. What’s that like living in the 21st century with digital computing, and yet you’ve said during this podcast, maybe your electricity would be shut off arbitrarily and we’ll have to do it over again. That’s crazy, right?

John Powers:
Yeah. So in the utility space, we talk about this as resilience. You want your customers to be resilient. And so there’s a lot of folks out selling batteries, backup generators on the notion that your utility is not as reliable as you thought it was. This is serious stuff in California. The last three years, the wildfires season has been most of the year. And I live in the East Bay in a lovely suburban area. I evacuated my house once last year. I’ve been breathing thick, dangerously, toxic smoke, at least three, or four weeks every year for the last three years.

This area is proof that climate change is bringing negative consequences to people in previously comfortable suburbs, today. And that’s not getting any better. The notion that PG&E and really the other utilities in California to have to shut off power because their infrastructure is causing some of these wildfires is absurd. And there has to be a more sophisticated control system for the entire grid than blacking out large chunks of it, in order to prevent fires.

It’s uncomfortable is what it’s like. You ask a good question, but the answer is it’s uncomfortable living in a place where fire danger results in energy insecurity, and that’s driving a lot of demand for distributed energy, which includes both solar and storage capabilities.

Bill Nussey:
Well, John, this has been incredibly, incredibly interesting. I love what you guys are doing, bringing together a lot of the most exciting parts of the clean energy industry, really exciting. And I think we should all watch this space very closely, because I think you’re at the beginning of one of the most exciting trends in energy in the world.

So as we wrap it up, I want to hit you with our four lightening questions and get your thoughts. So the first question is share something that you think most non-history folks would find surprising about the work that you’re doing in the new world of clean energy.

John Powers:
The fact that we’re working on software that can change how buildings use energy would surprise most people. And the energy space is not thought of as a software business, but everything’s a software business now.

Bill Nussey:
If you could wave a magic and change one thing to help us get to clean energy faster, what would it be?

John Powers:
I would make permitting for all distributed resources, solar batteries, and the rest much, much easier. If I could literally do it by magic, I would eliminate the need for long delays in permitting. I’d make permitting automated and instantaneous.

Bill Nussey:
Third question. What do you think will be the single most important change in how we generate, store and distribute electricity in the next five years?

John Powers:
So I think that the question is only partially a good one. So the most important change will be, we’ll put a lot of wind and solar on the grid and that’ll be a very important change. But you left out how we will use energy and we will in five years be much further along the path of synchronizing our usage with the generation of wind and solar.

Bill Nussey:
Bingo. And last question. And the reason a lot of people listen in on the Freeing Energy podcast is, when someone says to you, “I really want to see this transition happen more quickly. What can I do? How can I help as an individual to make the clean energy transition come more quickly?”

John Powers:
The part of the clean energy economy I’m most excited about is the transition away from individuals buying dirty fossil fuel-based assets. The biggest one is their car and towards clean flexible electric vehicles. Buy an electric car. Electric vehicles is the biggest individual choice that a person can make right now to clean up the world.

Bill Nussey:
Fantastic. I love it. Thank you. Thank you for those thoughts. Great thoughts. And I want to thank you overall for your time today, John, I really enjoyed talking to you. You have such a clear way of explaining very complicated ideas. And I can see a great future for Extensible Energy. You guys bring these new ideas and twists on old ideas into the marketplace and basically save your customers money. And at the same time, make better use of this clean energy transition that’s happening everywhere. So thank you very much for your time today.

John Powers:
Thank you for giving us the opportunity to speak to your extremely well-informed audience and to connect with the community that’s trying to drive this whole energy transformation.

 

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