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Q at, you amortize it across a much, much smaller project, and that blows out the economics and it kills you. Um, this is where I think, you know, the way that you've been thinking about it is the most interesting to me, because that's the, this is the problem that's been the most intractable in my mind. So what, what gives you confidence the soft costs are going to change?

A Yeah. All right. So, If you think about sort of the total project cost of a C&I battery, right, roughly half of it is what we traditionally call soft cost, right? So let's just say for the sake of argument, uh, 800 dollars a kilowatt hour is sort of the average C&I project in the world today. So traditionally, the way to think about it, and this is sort of post-ITC, right, is three to 400 dollars of that is the hardware. About a hundred dollars a kilowatt hour of that is the soft software. So 400 dollars a kilowatt hour gets you the hardware and the software obligations you need, right? Um, the other 400 dollars a kilowatt hour is what we traditionally call soft costs, and that's broken down into two buckets. About 200 dollars a kilowatt hour of that is installation costs, and about 200 dollars a kilowatt hour of that is what I generally call transaction costs, right? Which is all the things you mentioned. Interconnection, permitting, financing, You know, the people, cost of customer acquisition, all those types of things. Um, Like, I think there are huge opportunities for reduction, both on the installation side and on the transaction cost side. The thing I've really been focused on over the last, you know, 18 months is the transaction cost side of things, and that's where I think AI is a huge part of the solution, right? And so, you know, the reality is, is that a lot of the …

AI assessment note: “train agents to do those repetitive workflows, and that drops your transaction costs significantly”

Q CNI Storage. Um, start by telling me why it has sucked historically. Like, what's your diagnosis of the historical problem?

A Yeah, man. So, so look, I think, um, to start off with, right, I think it's important to keep in context that, like, batteries in general on the grid are a pretty new thing. And so, if you think about pre-twenty-twenty, I think going into twenty-twenty, there was less than two gigawatts of total storage on the U.S. grid. Uh, as of twenty-twenty-five, that number is like 40 gigawatts. And so, um, all of the growth In storage has happened over the last five years, so this is a nascent thing that we're dealing with in real time. Of that, you know, roughly 40 gigawatts of storage that's been added to the grid over the last five years, uh, something like 90% of it is utility scale, and 10% is residential, and if you add 90 and 10, that gets to a hundred, which means that basically nothing is, is CNI. Um, so look, I think, you know, the, the argument for utility scale storage is pretty easy to make and pretty, pretty easy to explain, um, which is, uh, utility scale storage on a per kilowatt hour basis is cheaper than C&I storage and cheaper than Resi storage. I think one of the really interesting things is why Resi is 10% of that and C&I is zero, and I think that has to do with the fact that a lot of Resi storage isn't a purely economic decision. Um, and so, you know, generally speaking in the CNI space, the driver of customer adoption is economics, and I don't think the value propos…

AI assessment note: “driver of customer adoption is economics, and I don't think the value proposition”

Q You mean the ceiling price of the auction, right? Because we keep hitting the ceiling price, basically.

A Correct. So there's, you know, for those who aren't super familiar with capacity markets, in PJM, there's a price cap. Right. And that price cap for the last few auctions we have hit and not cleared, uh, what we need from a capacity standpoint. And so I guess a high level way of saying that is the market is not functioning properly. Right. And so, um, again, I think one of the antidotes to that is bring your own capacity, which allows hyperscalers, which are a big driver of capacity prices in a lot of different markets to sort of contract bilaterally with capacity providers. And they don't have exposure to that cap, so they can kind of pay whatever price they deem reasonable to pay to get incremental megawatts of capacity online. Um, and so again, I think, I think the fact that capacity prices have gone up 11 X in the last three years is a big driver of value. How you solve that problem, right? Because we don't want to live in a world where capacity prices go up by orders of magnitude in short time frames, uh, I think is the, is the big question. And that gets us into, you know, grid utilization and how we actually accomplish grid utilization in a market where the peaks are peakier, right? And that's essentially, you know, I think where storage sits as a key solution to, you know, the overall problem of, you know, how do we use the infrastructure we have and get more megawatt h…

AI assessment note: “Correct. So there's, you know, for those who aren't super familiar with capacity markets”

Q buy a pack or a system in the hundreds of kilowatt scale, let's say, Has been a lot more limited historically, and so you, you didn't necessarily see the same cost declines. You just had fewer suppliers because nobody was like trying to, you know, manufacture into a market that basically didn't exist. How much do you see that changing? It's a bit of a chicken or an egg problem.

A It's changing, but it's a really important point, right? And so from a hardware standpoint, there's essentially a gap in the market, right? So if you think about utility scale storage, and I'll talk about this as like an An overgeneralization, but utility scale storage projects are basically built in one megawatt blocks, right? For the most part. And so you can use that same one megawatt product in a CNI use case if you have a commercial and industrial load that's justifies a one megawatt system. So for the CNI space above a one megawatt system, you don't really have any equipment problems, right? There's a robust market. There's a lot of providers. Both, you know, domestic content providers and alternatives. Um, and so on that side of the, on that side of the equation, like supply chains and availability of equipment and options are not a problem at all. Then on the, then you sort of have the resi side of things, right? Which are typically like, let's call it 10 kilowatt sort of baseline blocks, right? And for very, very small commercial applications, and right, STEM is a good example of a company that's sort of done this, you can stack those blocks together, right? So they have like, as an example of the three-phase power wall coming out, you can stack a bunch of those together, and maybe you can serve like a 70 to a hundred kilowatt commercial facility with that. So under a …

AI assessment note: “It's changing, but it's a really important point, right?”

Q every project is a snowflake, and every customer is a snowflake, and so you have to go through all this rigmarole to get a deal signed with a customer, and that also contributes to this really high soft I mean, some of that is sort of AI-fiable, I guess, in the sense of, like, proposal design and development, that kind of thing, but how do you think about customer acquisition?

A Yeah, I mean, look, I think this is one of the most interesting, you know, aspects of this conversation. You and I have talked about it a lot, and a lot of our friends have talked about it, right? And so there are no right answers here, but I'll give you my theory of the case as someone who's been trying to sell commercial and industrial batteries for a long time. I think it's really, really hard to sell stuff That doesn't have a clear beneficial value proposition to customers, right? And so 10 years ago when I was trying to sell commercial batteries, right, as part of microgrid systems, um, I had to put a lot of work into making every single project optimal in order to deliver a customer value proposition that was compelling enough for a customer to sign on the dotted line, right? And what that meant was my hit rate, and I was pretty good at this, Was probably like five percent, meaning I would go out and talk to 20 customers, and one of those customers was signed on the dotted line. But I had to pay for the other 19 trips I took to meet with those customers, and so that all got rolled into the project I signed, and hence, customer acquisition cost was high, right? I think as we drive cost down and the value proposition becomes a lot clearer and a lot easier to sell, right, now my hit rate is maybe 30%, right? Where now I only have to talk to three customers in order to get a …

AI assessment note: “customer acquisition costs are essentially a proxy for how hard it is to sell”

Q Okay, so just to push on that for 1:02, let's take a, your average data center, right? Every data center has backup power, uninterruptible power supply, so it can island from the grid, and the whole point is to have resiliency in the event of a, of an outage. Is that, in and of itself, a microgrid in your mind?

A Yeah, so it depends on what it's doing during normal operating conditions, right? So, uh, most data centers in the world today, those, uh, backup power generation devices are diesel generators, right? Increasingly, they're becoming natural gas generators, but for most data centers, they're diesel generators. And what those diesel generators do is they sit idle pretty much all year, and they wait for that grid disruption, and then when that grid disruption happens, they turn on, and if everything goes well, The data center continues to function. So that, in and of itself, is not a microgrid, because the diesel generators aren't providing services to the grid during, ah, normal operating conditions. Now, where it gets tricky is with gas, right? So instead of using a diesel generator, if you use a gas generator, in some areas of the country, depending on sort of the regulatory construct, that can be a microgrid, because you can turn on those gas engines, ah, during periods of needs on the grid to provide additional capacity, um, In some areas of the country, you can't do that, and so a data center that has just gas generators, uh, can be a microgrid, or might not be a microgrid, depending on where you're at in the market, sort of, that you're operating in, if that makes sense.

AI assessment note: “So that, in and of itself, is not a microgrid”

Q megawatts at a minimum, and if you're doing hundreds of megawatts of CNI storage, uh, you're already the size of the existing entire portfolio of CNI storage, uh, let alone doing it in a short period of time in a given metro area or something like that. So, how do you see it ramping in these types of contracts? Like, how do we get to enough scale that it matters?

A Yeah, so, um, I think that is the, I was going to call it the million dollar question, but maybe it's more like the hundred billion dollar question, right? Like, um, look, I think, I think this is the, this is the key sort of, uh, question that we're trying to answer in the market today. Right. And so everything you said is a hundred percent, right. Right. Which is that the driver of a lot of load growth and the customers most willing to pay for incremental capacity Are hyperscalers, right? That shouldn't be a surprise to anyone who listens to this podcast. Um, but hyperscalers think in gigawatts, not megawatts, right? And my whole life has been in the megawatt world, right? And frankly, sometimes the kilowatt world, right? And so how we get from megawatts to gigawatts is the question. Um, and the answer to that is aggregation, right? And so one, one megawatt CNI site doesn't matter to a hyperscaler. But a 1001 megawatt CNI sites matters a lot to a hyperscaler and can represent a competitive advantage for their business. Um, so the problem I had, right, was I don't know how to aggregate, uh, individual batteries into a virtual power plant that sort of serves that type of, of load. Uh, and that's where Voltus comes in, right? So, you know, as I think people know, um, I, uh, started a company called Brightfield AI that was really focused on sort of driving the transaction costs o…

AI assessment note: “and the answer to that is aggregation, right?”

Q layer to that. Does it need to have generation? I guess so. If it's going to be able to island, it has to be able to power the thing that's islanding, right? So it does have to have generation. It does have to be able to island. Does it have to have anything else? Could it, like, is it, is backup generation any different from a microgrid in your mind?

A Yeah, so, so, um, yeah, to go a level deeper on this, right, I mean, I think the way we should talk about this in the broader world is we should call microgrids distributed energy resources that can island, right? But when you actually get into, like, the wonky parts of this, the distinguishing feature of a microgrid is it can island from the grid, uh, during periods of macrogrid disruptions. That's, like, the thing that matters and separates microgrids from the rest of the distributed energy resource community. Um, but yeah, right, I think technically, like, the Department of Energy definition of microgrid, um, is an asset that can provide electricity services to the grid during uptime, and then island from the grid, um, in the event of a grid disruption. And so, yes, generation is a critical aspect of that. Uh, we could talk about more, more about, like, the various ways that, that companies are doing that in the market today. Um, but you have to be able to generate electricity, typically behind the meter, um, Um, provide electricity services to the grid during normal operating conditions, and then island from the grid, uh, in the event of a grid disruption.

AI assessment note: “the distinguishing feature of a microgrid is it can island from the grid”

Q you know, how, how scalable a given design is versus every project being a snowflake, that kind of thing. Um, you mentioned switchgear, which I agree is the one that gets talked about the least. Let's just spend one minute on switchgear because I think it's important and, and we haven't talked about it enough here. Um, how big a problem is the supply chain bottleneck for switchgear right now?

A It's a big problem. It's a big problem. So, you know, look, I think, um, What the real question in the market is today is not what the present state is, right? Anyone you talk to about, uh, switchgear in the commercial, industrial, in the bush sector, anything like that is going to tell you it's a problem today. The real question is how quickly is it going to get corrected? And there's sort of two theories of the case. Um, a lot of the supply chain runs through China for switchgear. That's just the reality of the situation. Um, and that supply chain was, uh, very heavily disrupted by, uh, Uh, COVID. And so, you know, part of the question is, is that going to bounce back sort of naturally as we move into, you know, a post-COVID world, or is that going to only bounce back once we establish manufacturing capacity, uh, in other areas outside of China? And so both of those things are kind of happening right now. Um, you know, the Chinese supply chain is kind of getting back on its feet. Still some issues there. Um, but we're also opening up new manufacturing facilities in Western Europe and the United States and places like that. Largely on the back of the IRA and some of the legislation that's been passed over the past few years. Um, and so, you know, really what you're trying to figure out if you're in this market today is how fast is that problem going to correct itself? Um, and …

AI assessment note: “It's a big problem. It's a big problem.”

Q would deliver if you were just operating it in the market and saving money on your bill and whatever. And then here's the incremental cost of giving yourself a fully islandable microgrid that'll operate in the event of, of an outage. And, and that incremental cost is the value of the resiliency. So like, how big is that incremental cost? And again, Who, today, who is happy to pay that?

A Alright, so, this is an awesome question, and extremely complicated. I'm gonna try to unpack it, and interrupt me if I'm heading off track. Alright, so, Look, I think the, if we just get back to your original question, right, like, the people that are adopting microgrids today are people who value resilience more than the grid provides, right? And so, you know, that can range, uh, you know, on the smaller side of things in the CNI space, uh, you're seeing, you know, grocery stores as a driver, driver of the market, in mid-size commercial, right, warehouses and distribution centers. So if you think about You know, the shift in, uh, e-commerce that's taken place post-COVID, right? Everyone orders their thing on an online platform. They expect it to show up on Thursday. That means the warehouse that's actually shipping that good, uh, cares a lot about resilience because they don't want it to show up on Tuesday because, you know, they had a power outage. Um, increasingly, right, uh, fleet vehicle operators are really looking at this because they can't get the capacity, so that's, like, sort of a whole other subset of, Of this, but if you are converting, uh, traditional internal combustion vehicles to electric vehicles, and you need your fleet to operate, then you are concerned about resilience, because what happens if there's a power outage and all your vehicles are electric? Um, a…

AI assessment note: “the people that are adopting microgrids today are people who value resilience”

Q for what a CNI, or, you know, a representative CNI customer, they're not monolithic, obviously, there are many different kinds, but what do they need to see in terms of economics? Is there, like, a percent of bill savings? Is there an IRR calculation? Like, what is the metric we should be thinking about where we say, like, we cross some threshold and the economics do, quote, pencil for them?

A Yeah, so look, I, I, I think, before I answer your heuristics question, right, I think that, you know, I, I think about this, generally speaking, in terms of, you know, everything that, you know, all C&I customers do is they do cost-benefit analysis. And I think, you know, a huge part of this is the time commitment that's required on the part of the customer to make these projects happen. And so one of the things I do think our industry has done a really, really good job over, over the last decade, Is figuring out how to sort of simplify the customer acquisition process, right? Well, the contracts are simpler. They're clearer. The economics are, um, you know, more transparent to the end-use customer. Financing these types of projects has gone from, you know, kind of a one-off, right? On a, from a project finance standpoint to more of a standard offering. So I think the time commitment for CNI customers to actually acquire a storage asset today is materially different. Than it was, you know, even five years ago, and that makes a big difference, right? Like, storage is never gonna save your business, right? It's not gonna be something that, like, hey, I had a bad business on Tuesday, and then I put a battery in, and then on Thursday, like, my business was booming. That's not really the case, and I think most CNI customers are focused on, you know, their core business. Um, and so,…

AI assessment note: “if you can reduce the customer's, uh, net electricity spend by five percent”

Q customer for a microgrid or there are a couple of archetypes? Like, you know, I think a lot of people would think of something like a university campus or something like that. But my sense is that that's actually, those are more, more snowflakey and there's probably other categories that are more scalable. But like, what do you guys typically see if you're defining the archetype of a typical customer?

A Yeah, so I don't know. Maybe this is the part where we can get interesting, right? So I can tell you what typical microgrid customers are today, right? But I think what's more interesting is what microgrid customers are going to look like in the future, right? And I think ultimately what this comes down to is how do we define the value of resilience as society, right? So right now, today, there's a certain percentage of commercial and industrial customers that That have a high value of resilience, and those are the archetype of microgrid customers. So when you go out into the market, you try to find a good customer to work with from a microgrid standpoint, the first question you're asking is how much do you value resilience? And even within sectors, there's no sort of standardized way to do that, right? There's no commonly accepted methodology for calculating the value of resilience, and so some people buy into it and some people don't, and that's essentially the game right now. But as a society, my argument is basically that we're massively undervaluing resilience. And, uh, you know, in traditional energy economics, we call resilience a private value. So we say that, you know, when we go to sort of, you know, integrated resource planning and stuff like that, right, we think about reliability as a metric, we think about affordability, we think about sustainability. Um, but then…

AI assessment note: “I can tell you what typical microgrid customers are today... But I think what's more interesting”

Q like, this is your opportunity to get on your soapbox, like, what's holding this market back today? I mean, you sort of talked before about, like, the world hasn't come to appreciate yet the importance of resilience and the existential systemic risks to the grid and all that kind of stuff. I mean, maybe that aside, from a more, like, practical market perspective today, what holds back the microgrid market?

A Yeah, so, so look, I mean, um, Just to clarify, right, like, I don't want to set that aside. So, like, one of the things I want to make sure everyone hears, right, is that, like, so, I don't know, maybe to take a step back, right, like, I come from the military, right, so that was my background, and one of the things I learned how to do in the military was threat assessments. This was, like, a big thing in the post-nine-eleven military, right, and so when I look at our grid from a threat assessment standpoint, it freaks me out. Like, it really, really, really freaks me out, and so again, this is, like, a when, not if thing, There is going to be a major event in the United States where people lose electricity for weeks or months. Keep in mind, right now, what we're doing is we're electrifying everything, which means that if we lose electricity for weeks and months, it's not just an economic disaster, it's a humanitarian disaster. And when that happens, and people are walking around in this, like, post-apocalyptic world, but by the way, like, this happened in Hurricane Sandy. I lived in New Jersey. It was, like, pretty much a post-apocalyptic world, and everyone's pointing at solar panels on roofs that aren't generating electricity and don't work, right? We're all going to say to ourselves, like, this was pretty stupid, and then after that event, hopefully, like, things are going…

AI assessment note: “the biggest thing holding microgrids back is that we as a society are”

Q it's been declining, or at least flat for a while, again, not just because we've added enough batteries to the system, so there's some equilibrium there, right? People expect we're going to see a bunch more load growth in Texas, that'll make it pick up again, but over time that ARB value in particular is like a function of Both the market and how much batteries are in the market?

A I think if you talk to a lot of people who are experts in ERCOT, right, they will tell you that, uh, over the last five years, solar and storage has saved ERCOT, right? That's sort of like the high-level argument they make, and I think if you dig into the data, there's a pretty compelling case behind that, right? At the same time, a lot of people who have installed batteries in ERCOT, which have saved the grid, are Not being economically rewarded for those investments. And I think that's the conundrum from a market design standpoint that we have to solve, right? Which is, you know, grid operators are benefiting from storage assets. That's just definitively true, uh, in all markets where storage has been deployed at scale, right? This stuff is working and it's helping to solve a lot of the problems that we have on the grid. And at the same time, That hasn't necessarily been a good investment to make in the markets where storage is having the most impact, right? And so from a market design standpoint, we have to figure out how to come up with a set of rules that incentivize the behavior we want. If we want folks to install tons of storage in a grid, there has to be an economic case for them doing that, um, that's compelling and opens up capital stacks and gets people to want to invest in these types of assets. Um, And look, I don't think we're there yet, right? I think that's one…

AI assessment note: “people who have installed batteries in ERCOT... are Not being economically rewarded”