Tucked into a recent federal approval of Japanese conglomerate Mitsui & Co.’s $15 million investment into Philadelphia-based smart grid startup Viridity Energy, there’s an interesting lesson in doing business in the quasi-monopolistic utility markets of the United States.
The document comes from the Federal Energy Regulatory Commission (FERC), which has jurisdiction over all interstate energy activity in the country. On Wednesday, it announced its approval of Mitsui’s stake in Viridity -- but only with certain conditions.
Those included a promise by both parties that the strategic investment “raises no vertical market power concerns.” That is, neither Mitsui nor Viridity owns generation, transmission and distribution businesses that could collude in a way that stymies the proper workings of the national power market. Mitsui does own a stake in the 160-megawatt Brazos Wind Ventures wind farm in Texas, but is selling that power under a long-term power purchase agreement that didn’t raise FERC’s objections.
The two also had to promise that they weren’t utilities -- in other words, that “no franchised public utility with captive customers is involved in the transaction.” That’s a rule that applies to all the investor-owned utilities, municipal utilities and other U.S. power providers that operate in traditional vertically integrated markets, which essentially own customers based on where they live. Foreign companies aren’t allowed to own controlling shares in utilities like these, because that would raise all kinds of thorny concerns about state, federal and international regulatory authority.
The document also has some details about Viridity’s $40 million in investment so far. To wit, investors Intel Capital, Braemar Energy, and AltEnergy own about 80 percent of Viridity outstanding shares, and Mitsui’s $15 million stake will give it 15 percent equity in the startup, providing a rough valuation of $100 million, or 2.5X the money it’s raised so far.
Viridity, which works with utilities and customers like university campuses, wind farms, demand response-enabled industrial facilities and the Philadelphia regional train system, doesn't have captive customers like utilities do. Its “virtual power plant” technology simply aggregates and manages power loads like office HVAC systems and industrial motors, or sources of power like batteries and on-site generators, to sell it back to the grid.
Mitsui, in its turn, may be interested in applying the technology in Japan, where the post-Fukushima nuclear power moratorium has placed the country in a power crisis. It’s also a huge domestic and international green power player, with plans to build 50 megawatts of solar power with Toshiba in Japan and investments in waste-heat-to-power startup GMZ Energy and networked LED startup Redwood Systems, to name a few examples.
On the building energy efficiency front, Mitsui is working with Transcend Equity, the efficiency services financing startup acquired by SCIEnergy earlier this year. That could provide an interesting tie-in with Viridity’s partnership with ConEd Solutions, a division of New York utility Consolidated Edison, to do energy efficiency retrofits and VPP installations for commercial buildings around the country. Once again, that shouldn't raise FERC's objections, since Viridity and partners will be competing in an open market for building energy efficiency and demand response services.
There is one project, however, where Viridity and Mitsui’s partnership is definitely going to play a future role in interstate power sales. That’s the Tres Amigas project, a $1.5 billion plan to link the three main grids in the U.S. -- the Eastern and Western interconnections and Texas’s ERCOT -- via a triangle of high-voltage, direct current transmission lines.
Viridity has been tapped by the consortium to manage the market side of the project, which wants to make money by charging tolls on power flowing from wind-rich West Texas or the solar-rich Southwest to bolster the super-grids serving the country’s main population centers. But so far it hasn’t raised much money, only $15 million -- and $12 million of that is from Mitsui.