California’s Demand Response Auction Mechanism (DRAM) has brought 700 megawatts of distributed energy resources into play over the past three years, with big companies and startups alike competing to deliver kilowatt-months of grid capacity at still-secret, but presumably competitive, prices.
This month, California’s big three investor-owned utilities announced the winners of the final round of DRAM auctions, revealing another stealth player taking a big stake in the state’s nascent distributed energy resource aggregation market — Leap.
The San Francisco-based startup announced Tuesday that it won contracts to deliver a total of 90 megawatts of commercial-industrial load reduction capacity under the DRAM program, split evenly between Southern California Edison and Pacific Gas & Electric.
That’s more than half of the total of 167 megawatts awarded by all three utilities to the rest of this round’s contract winners, according to GTM Research’s tally. Aside from Leap, all the companies winning contracts this time were previous DRAM participants, including Ohmconnect, EnerNOC, Stem, Engie’s Green Charge Networks, CPower and NRG Energy.
Leap now has until Jan. 1, 2019 to round up the capacity it’s promised, and make it available to state grid operator CAISO for up to four hours per day to help reduce peak demand.
To get there, Leap has built a technology platform that communicates with HVAC systems, EV chargers, building management systems, DER controllers and other sources of grid edge flexibility, through its Distributed Energy eXchange (DEX) API.
As Thomas Folker, Leap’s co-founder and CEO, told us in an interview last week, the DEX platform is meant to be “a marketplace for flexibility that is technology-neutral and has cloud access for anyone to participate, no matter what your capability is, no matter what your availability is.”
Here’s how it works: First, participating devices provide a “bidding curve” indicating when and how much they can curtail load, and at what prices they’re willing to do so. Leap’s platform then collects pricing data from CAISO and converts it into “asks” for load reduction, which it communicates via smart contracts to every participating device.
As those devices respond with kilowatt-hour reduction offers, Leap matches and executes those trades in real time. It verifies the reduction through smart meters, which are also used for CAISO settlement and eventual distribution to partners.
To bring this platform to market, Leap has built relationships with a number of existing demand response aggregators in California that are interested in tapping loads that traditional command-and-control DR mechanisms can’t reliably reach.
“We’re talking to your very familiar names in the demand response aggregation world,” Folker said. “There’s also a good amount of demand response load that’s not very happy with current programs” in California, he noted, and are seeking opportunities in whatever demand-side regimes emerge from the DRAM process.
To be clear, Leap is also taking on the market risk involved with fulfilling its contracts. “We take a risk position — we participate in DRAM, put down a pretty sizable performance bond to make sure we have enough skin in the game,” Remco van den Elzen, Leap’s co-founder and COO, said.
Leap does have some influential investors. The startup has raised $1.6 million from recently launched VC firm Congruent Ventures, as well as angel investments from Sunpower co-founder Tom Dinwoodie, former Sunpower CEO Howard Wenger, and Grid Singularity founder and CEO Ewald Hesse, and has enlisted former Federal Energy Regulatory Commission chairman Jon Wellinghoff as an adviser.
“Without going into much detail about which partners are signed on and what is committed, we are very confident,” van den Elzen said. “We don’t have to go door-to-door.”
Leap is currently integrating with utility and CAISO systems to manage settlements and payments, he noted. But the platform is built to support blockchain as an accounting tool, via its partnership with the Energy Web Foundation.
“The potential benefits of blockchain are huge,” Folker said. That sentiment is apparently shared by investors that have poured more than $324 million into energy-related blockchain startups over the past year or so, much of it through initial coin offerings (ICOs) and other cryptocurrency plays.
However, since no utility today is using these technologies commercially, “we don’t depend on blockchain to make this work. It’s much more of a data connection play and an API play.” Leap is currently in the process of becoming a scheduling coordinator with CAISO — a designation that allows it to operate in the grid operator’s energy markets — to serve that function for customers as well.
As the number of devices available to play in grid markets grows from hundreds to thousands to millions, “that’s where blockchain becomes a reasonable technology to use — perhaps not to transact, but to settle,” he said. “Blockchain also allows us to get into a deal with someone who we don’t know, and we don’t have to know,” because the technology’s distributed ledger function allows participants to “immediately verify if you have the funds [and] if you have enough load,” to meet the call.
GTM Research Grid Edge Analyst Elta Kolo noted that Leap’s big DRAM win indicates that it priced bids relatively low compared to the competition. Of course, the actual dollar values of DRAM contracts are a closely held secret, and no participants have disclosed their bidding prices, or whether those prices have allowed them to earn a profit on participation.
“Overall, I don't think it's hard to win megawatts in DRAM,” Kolo said. “There are vendors that won capacity in every auction and declined the contract because the price was too low for a profit margin. The challenge for vendors participating in DRAM is in making the economics pencil out with the low price point at which bids are accepted, and, of course, delivering on the promised megawatts.”
Since its founding in 2015, the DRAM program has garnered a total of 717 megawatts to date, and provided $63 million in utility funding for participants over the course of its four auctions. As it grew, it refined the type of resources it’s seeking, adding new “flexibility” categories that offer more lucrative prices for resources that can mitigate the state’s most troublesome supply-demand imbalances, as well as local capacity to serve specific sub-areas, known as sub-load aggregation points within the state grid system.
DRAM was created to provide a template for overhauling the state’s demand response regimes, which have underperformed compared to those in other parts of the country, and the California Public Utilities Commission has been collecting confidential data on its progress since it started.
But last month the CPUC decided to extend the deadline for the DRAM pilot into mid-2019, to allow for more time to evaluate the program’s successes and failures. “I think that during the DRAM evaluation, one of the things that will receive critical assessment is the pay-as-bid clearing price mechanism, which lacks transparency in the competitive market-based ecosystem where DRAM functions,” Kolo noted.
As to whether Leap’s investment in blockchain technologies will pay off, Kolo noted that the DRAM program will likely not offer the startup a chance to test that proposition. “Rather, Leap's unique value proposition for DRAM is the intermediary optimization role it plays as a demand response enabler, collaborating with DR aggregators rather than competing with them,” she said.