The Energy Transition Can’t Happen Without Renewable Technology

As companies look to capture this growth, we believe the market will evolve from a landscape of point solutions to consolidated platforms.

The energy transition isn’t just replacing traditional energy sources with renewables. It’s bringing about dramatic changes in the way power is generated, distributed, managed and monitored across a complex physical infrastructure and regulatory landscape, and we see technology playing an integral role in helping members of the energy value chain support the level of flexibility and oversight they need to navigate them.

In this GrowthBit, we’ll look at the challenges facing an energy industry in transition and the massive growth opportunity we think this will help create for today’s early-stage renewable technology companies. As companies look to capture this growth, we believe the market will evolve from a landscape of point solutions to consolidated platforms. LLR has a history of helping companies navigate this period of consolidation in other growth industries and is excited to partner with businesses looking to rapidly scale and capture market share.

Multiple growth levers are accelerating the transition

The shift to renewable energy sources is gathering speed in response to a host of social, political, regulatory and economic pressures. The U.S. is planning to invest an estimated $4 trillion in renewables over the next few decades,¹ which is projected by the Energy Information Administration (EIA) to increase the proportion of renewable electricity generation from 20% to 40% by 2050.²

But it’s not just direct investment that will help stimulate this shift. Other trends include:

• Power infrastructure upgrades, including thousands of miles of new, resilient transmission lines
• $80B in funding earmarked for power and grid from the Infrastructure Investment and Jobs Act (IIJA)
• The declining levelized cost of energy for renewables, making it an attractive alternative to fossil fuels
• Carbon neutrality goals from major corporations such as Apple, Google, Amazon, Microsoft and Meta
• The creation of a Grid Deployment Authority charged with building a 21st century electric grid
• The Inflation Reduction Act (IRA), which has extended tax incentives through 2032 and decoupled solar and storage sites

The evolving energy mix requires a grid that can accommodate diverse energy sources, bidirectional power flows, power storage, smart metering and an array of other complex features.

Renewables are reshaping the energy grid

The transition to renewables is changing the infrastructure required to produce, store and distribute energy.

The traditional energy value chain was simple: a utility would generate a relatively consistent load of electricity and supply it to the consumer via a network of transmission and distribution lines. However, this system is no longer adequate. The evolving energy mix requires a grid that can accommodate diverse energy sources, bidirectional power flows, power storage, smart metering and an array of other complex features.

Situations such as homes that deliver solar power back to the grid, or battery storage providers that consume energy when they charge and supply it when they discharge will become more commonplace. The complexity is compounded upon by a transition to deregulated markets, which allows for more competition in the energy supply chain and a host of new market participants.

As renewables become a larger part of the grid, reliability and transparency are also becoming more critical, with regulators such as the North American Electric Reliability Corporation (NERC) seeking to strengthen energy management and predictability. Disclosure mandates will require more rigor around emissions monitoring and management. For example, the SEC’s proposed disclosure rules for listed companies to disclose emissions will require systems capable of measuring and reporting on greenhouse gas emitted by energy usage.

At the heart of our approach to investing and creating value has been helping companies expand organically and through M&A.

From point solutions to consolidation

Renewable technology is still in its early stages, reflecting a fragmented landscape where many vendors have developed point solutions to specific problems. On the upside, these solutions are relatively fast and inexpensive to deploy when compared with comprehensive solution suites. They also tend to be more feature-rich and offer a better UI and user experience. On the downside, many are not yet capable of establishing enough customer touchpoints to become truly sticky and indispensable.

However, the space is maturing quickly in response to the growing need to manage and optimize a complex grid. At LLR, we see favorable growth opportunities for technology vendors with domain expertise who are creating logic flows fine-tuned to the needs of renewables. Those early to market should have the advantage in terms of building brand recognition and gaining customers in a vertical where churn is low and long-term relationships can expand over time, especially if the vendor expands their offerings through acquisition.

We’ve seen this play out in many other rapidly growing markets. At the heart of our approach to investing and creating value has been helping companies expand organically and through M&A in order to become a dominant player and capture long-term market share.

Software vendors with strong point solutions are positioned for success as consolidation activity creates sticky, end-to-end systems for members of the renewable energy value chain.

For example, in 2019, we identified a market need for integrated business management and payments solutions that were tailor-made for SMB customers. We identified and invested in DaySmart, a software provider to the salon, pet care, spa and tattoo verticals, with the thesis that an intentional combination of organic SaaS growth, payment processing growth and M&A could help facilitate product expansion into existing and tangential vertical markets.

Through the activation of these growth levers, DaySmart now delivers purpose-built solutions for several additional verticals including recreation, fitness, veterinarians and children’s activity providers, and is one of the leading providers of business management solutions in a rapidly consolidating SMB market. We are excited about the opportunity to leverage this and other related experiences to help create a similar platform in the renewable technology market.

Here’s the bottom line.

The energy transition is gaining momentum, incentivized by consumer preferences and infrastructural, regulatory, financial and environmental requirements. But addressing the complexities of a diversified energy grid should rely on software that can bring greater flexibility and transparency to energy monitoring and management.

It’s still early days for renewable tech, but we think software vendors who are in the market today with strong point solutions are positioned for large-scale success as consolidation activity creates sticky, end-to-end systems for members of the renewable energy value chain. We look forward to partnering with businesses looking to capitalize on the industry tailwinds and build a comprehensive solution with a dominant market share.

Learn more about the LLR team, relevant investment experience and our focus on the Renewable Technology sector.