How one Texas energy retailer plans to forge a new path for VPPs

Attention on virtual power plants to address load growth and increase grid flexibility has surged. But, as illustrated by the recent closure of Swell Energy and the patchwork utility-scale pilots, VPPs still face difficulties. 

That’s not just because of technical challenges and conservative utility adoption, but also because nobody seems to have figured out how to make good money.

Branch Energy, a Texas-based retail energy startup founded in 2021, is hoping a new business model for VPPs — and a more moderate expansion plan — will help it avoid many of the pitfalls in the market today.

In deregulated markets, retail energy companies generally make money by adding a margin to electricity they purchase from the wholesale market. Branch plans to make money by managing behind-the-meter assets for customers it already has a billing relationship with.

In its first few years, Branch has focused on building out a retail energy platform that integrates AI. Now, armed with a newly raised Series A, the company is moving on to the next phase: using that platform to deploy assets that it both finances and installs.

Tim Woodward, managing director of Prelude Ventures, which led Branch’s latest funding round, said Branch’s unique approach sets it apart from other VPP companies, and starting exclusively in Texas could prove successful. 

“In a lot of the RTOs, the Swells and other companies are obligated to aggregate multiple sites to get enough capacity to make it worthwhile for the utility or the RTO interface,” Woodward said. “Branch can look at every single individual customer…and make a decision to participate or not.” (Disclosure: Prelude Ventures is an investor in Latitude Media.)

To begin, Branch is focused on storage assets only, and is primarily targeting long-term commercial and industrial customers, explained co-founder and CEO Alex Ince-Cushman. 

Branch will essentially “eat the complexity” of VPP programs for those customers, he added, by deploying batteries to help reduce costs. It’s a role that energy retailers, which have direct access to customers, direct exposure to wholesale markets, and a deep understanding of real time market operations, are uniquely positioned to play, he said.

Branch won’t be targeting “sophisticated” commercial customers, like data centers, for whom energy is such a major part of their operating expenses. Data center operators have to understand electricity markets, and for the most part, hyperscalers don’t need Branch to help them optimize or get additional value from an asset, Woodward explained.

The target customer is instead commercial entities, like warehouses, who have a straightforward interface with a retailer that involves simply buying power, he added. For those customers, the Branch brand will simply be an energy provider. “Branch can provide them that at a lower cost, 100% clean, and also give them some level of opportunity for resiliency when they need it, as well as minimum rates.”

Ince-Cushman put a finer point on it: “When I talk to customers, most of them have never heard of a VPP.”

A model for Texas

From the Prelude Ventures perspective, Branch’s location in Texas is a huge part of the company’s value proposition.

“The procurement of energy for consumers is more complex than it’s ever been, and it’s only going to get more complex,” said Woodward. “The days of just buying your energy from the utility and maybe negotiating the contract a little bit to get a sweeter deal are gone; if you’re a consumer, you have a lot of choices in front of you.”

Texas’ market structure and focus on using price signals to influence behavior, is “ground zero of that shift,” he added.

Starting with batteries rather than another type of asset is also intentional. Revenues for batteries in Texas have been on the rise in the last several years, as the market has pushed up against the challenge of balancing a renewables-heavy grid, Ince-Cushman said.

 “The revenue these batteries can produce is a function of how volatile the wholesale energy market is,” he added. “I would trade one commercial battery for a thousand Nest thermostats in terms of capacity that’s reliable and doesn’t decay away when people change their WiFi password.”

But the bigger dynamic at play is the impact of IRA tax credits. “18 months ago, I might not have been able to sell a package of 20 behind the meter projects at any price; there just wasn’t a buyer,” Ince-Cushman said. “Now it’s possible to sell tax credits for baskets of projects. And when you combine strong battery revenues from volatility with quite meaningful tax credits, that allows you to get a nice, attractive, economic [internal rate of return] from the deployment of the asset.”

Growing large, but not far

Branch will be “heads down on batteries in Texas” for the next several years, Ince-Cushman said. That’s in large part because the Texas model can’t necessarily be copied in another market. “The effort from a platform perspective actually scales with the number of device types and geographies, so it’s as much work to figure out Delaware as Texas,” Ince-Cushman said.

Eventually though, the company will hope to scale beyond ERCOT. “Once we’ve got a platform that can manage thousands of these batteries in real time, all at the site level, a lot of that hardened infrastructure will translate very well, and we’ll just have to update the algorithm to conform to the [specific market,]” he added.

But from an investment standpoint, Woodward wants Branch to avoid being spread too thin.

“I don’t know that all of the things we’ll be able to do in Texas will parlay to national RTOs,” he added. “But to some degree, Branch doesn’t have to go too far out of Texas to build a really big business.”