In April, for the first time in the U.S., renewables generated more electricity than coal, according to the Energy Information Administration. Now that renewable technologies like wind and solar are largely commoditized, investors and utilities are looking for ways to improve their margins, and they're turning to startups in artificial intelligence to do it.
There is a current wave of investment underway in digital technologies that are making renewables the cheaper, cleaner, safer energy option. Venture firms, incumbents and private equity have raised more than $3 billion in new renewable energy-focused funds over the last three years.
Wood Mackenzie’s latest Energy Transition Outlook predicts the world will add 3,000 gigawatts of wind and solar over the next two decades, far more than new gas-fired capacity. Bloomberg New Energy Finance forecasts that nearly half of the world’s electricity will come from renewable energy by 2050 as costs of wind, solar and battery storage continue to plummet.
And these shifts are expected to occur in tandem as demand for electricity is expected to increase globally more than 50 percent over the next three decades.
One of the key drivers of this wave of investment is the emergence of digital technologies like AI — technologies that can take advantage of a proliferation of data to provide predictive analytics and real-time insights into asset operations.
Within the last five years, we’ve witnessed these technologies emerge in large numbers and scale to create an all-new class of technology that is increasingly being deployed by utilities and energy companies. Increasing business pressures from climate change, static electricity demand, and distributed resources are forcing utility companies — traditionally slow to adopt new technologies — to innovate rapidly.
Core technologies like wind and solar are demonstrably effective and reliable. What's pushing them into the money — attracting new investment and allowing them to surpass coal — is these new digital technologies that improve margins for investors and asset owners, making the core technologies both more effective and better-performing for the bottom line.
Years ago, when clean energy wasn’t cost-competitive, these technologies wouldn’t have been viable investments. Incremental improvements to efficiency, power or margins are irrelevant if the core technology is too far out of the money. Today, wind is the lowest-cost new resource to build on the grid, with solar not far behind and gas competing on similar margins.
Fifteen years ago, we would have seen stark contrasts in the margins and return on renewables compared to their oil and gas counterparts. Not anymore.
"Less-risky" digital investments
The last wave of renewable energy venture investing a decade ago focused on hardware; today's clean energy investments are largely in digital technologies because even marginal improvements to efficiency or output can help win contracts and deliver better returns.
Utilities and energy providers are using AI to make clean energy the lowest-cost energy option, increase its reliability and output, speed its deployment, and provide better service to their customers.
The proliferation of accelerators and venture funds dedicated to these types of digital clean energy innovations speaks to incumbent and investor interest. Across the country, accelerators like Clean Energy Trust, Greentown Labs, Plug and Play, and Elemental Excelerator connect startups with global energy household names. Organizations including Exelon, National Grid, Southern Company, Tokyo Gas, ExxonMobil work with the accelerators to identify advanced technologies that can help them speed up the deployment of reliable renewables, save money and make low-risk investments.
From an investment standpoint, one of the main benefits of these new digital technologies is their relative lack of risk.
Investing in hardware involves significant capital costs and long timeframes, which creates substantial risk. Digital technologies, on the whole, have both much better margins and much broader applicability across industries than hardware.
Companies like SparkCognition and DroneDeploy are great examples of this multi-sector relevance. SparkCognition uses AI to predict performance and failures of industrial equipment in industries including electric utilities, oil and gas, aviation and manufacturing. DroneDeploy uses computer vision and AI to analyze data and create maps and 3D models for applications ranging from mining and construction to agriculture and electric utilities. These companies are helping utilities either get more out of their renewable energy assets or deploy them faster, but also have successful track records in other industries.
AI is driving a resurgence in renewable energy investing and moving us inexorably away from fossil fuels. It is helping make renewables the default best energy choice, and enabling utilities to provide better service and cheaper prices to their customers.
AI is also making clean energy attractive for investors by offering great returns and significantly de-risking portfolios. It’s a great time to invest in digital technologies that are not only in high demand across industries but also helping us create a cleaner, more sustainable energy landscape.
Amy Francetic is founder and managing director of Energize Ventures, a Chicago-based VC investor focused on digital solutions.