The Exchanges

Q a watt in the U S cheaper in Australia and other places. Um, but anyway, give me the mechanics of like, how do you get a, just from a pure, you have, you know, you have customer acquisition costs and you have, um, Uh, labor costs and truck rolls and smaller batteries and all of that. So like, how do you overcome all of that to deliver a cheaper megawatt?

A Yeah. So this is kind of the heart of the issue here. And I think the shortest version of the answer is that vertical integration is the magic. And we'll talk about what that actually means tactically. And I can kind of start by saying, if you look at a utility scale battery deployment, you have to buy or lease the land that the battery sits on. You have to pay for the interconnection to the grid. You then wait in the interconnection queue, which adds additional cost. You then do what most firms consider project development, which is some level of construction to level the site and prepare it for the system. You have a big EPC firm come in and plug in all the hardware that you buy from an OEM that adds a bunch of margin on top of the cells that are reasonably commoditized. Um, and so there's a bunch of kind of line items in the model that add to a cost that we think is higher than where we can get by vertically integrating. So compared to our system, we do have CAC that they don't have. Um, they have install costs. We have install costs, too. We'll come back to that when we talk about design. Uh, but we don't buy or lease the land that the battery sits on. We don't pay for interconnection to the grid because it's already there. We don't wait in the interconnection queue, obviously, because this is behind the meter. On the hardware side, we're designing and manufacturing our own…

AI assessment note: “the shortest version of the answer is that vertical integration is the magic.”

Q you base are operating that battery all the time doing arbitrage or what else you're going to do in the meantime. So are you guaranteeing some level availability to the customer or how do you, how do you square the circle between like you're going to be charging and discharging the battery every day, but you want there to be some reserve available to the customer when there's an outage?

A So the short answer is yes, we guarantee 20% of the capacity of the battery to the customer no matter what. The reality is that The discharge window of the system is not very long. It's, you know, one to two hours a day. As you know, and listeners of the pod know, power prices are, are spiky and unpredictable, but like reasonably predictable in terms of kind of the, the pattern throughout most of the days, and it's different in the summers and the winters, et cetera. But, um, the windows in which you are discharging, um, they're, they're, they're reasonably predictable, and outages and high prices are, are actually not as correlated as one might think. So, uh, what I'm saying is that The likelihood that an outage happens at the bottom of the discharge window is statistically not improbable, but, but reasonably low probability given the fact that there are 24 hours in a day and only one or two of those 24 hours. The battery is kind of low state of charge. Um, so most of the day the battery spends its time at a higher state of charge. It depends on where the battery is and what the optimization function is. Um, but the reality is it is very unlikely that an outage happens at the bottom of the discharge window. Even if that does happen We do maintain 20% state of charge for that situation, and as a benefit of having really large systems, you know, our next generation product, whic…

AI assessment note: “we guarantee 20% of the capacity of the battery to the customer no matter what”

Q and so on, but really what you need to do is make a dirt cheap battery, a dirt cheap residential battery. Like that's the core, right? If you could do that and you can get it somewhere close to the total cost from a hardware basis that a utility scale battery is, then you can sort of picture how that is possible. Uh, but that seems like the challenge, right?

A Yes, but I will say it's not just cost, right? Reliability, safety, useful life, like useful life matters, right? So if you model the asset to 15 years, and it only, it only, you know, degrades in seven years, then your model breaks, right? So, um, it is, you, you are correct, and we are going to land the lowest cost, uh, home, home battery on the market, uh, and, and you should hold, and the industry should hold us to that. Um, but it will also be the most performant, uh, for the use case, right? So, If you want to use the battery as a good asset, it needs to be able to discharge effectively at high temperatures, low temperatures, high humidity, low humidity. That is not a trivial problem to solve, right? And the home batteries on the market today, they're not designed to do that, right? The, the engineers that are designing these products to be paired with, you know, home solar and sold at a upfront gross margin, they don't really care about, you know, participation in, in capacity markets and energy markets, right? Like that's not what they're designing around. And so, It is a novel design requirement, and we look at the whole performance, both the landed cost, but also the useful life, and, you know, your ability to actually perform grid services effectively, uh, you know, when we start thinking about design requirements, and, and, you know, we plan to, um, bring to market …

AI assessment note: “Yes, but I will say it's not just cost, right? Reliability, safety, useful life”

Q As you've been starting to have those conversations with utilities where it's a capacity product, what are you learning about how they think about a fleet of distributed batteries as a capacity product as compared to centralized storage?

A I'm, I'm, um, cautiously optimistic. I think that utilities around the country are coming around to the idea that a fleet of distributed batteries is as capable, in air quotes, as a utility-scale Power plant, whatever you want to, you know, whatever kind of technology you, you, you want to use as the example. I think that many of these utilities have kind of bad taste in their mouth from DR. One point O, whether it's smart thermostats or, uh, other kind of technologies that, uh, maybe, you know, promised a lot and, and didn't deliver much. Uh, our asset is, um, reliable, uh, responsive, uh, High uptime. Uh, you know, we, we own the asset. We control it. There's no like, oh, well, it turns out that the homeowner actually just shut off their AC or decided to override or, you know, their car was plugged in and it's no longer plugged in. Like this asset is owned by us. It's controlled by us. We have, you know, triple lines uptime and sub-second telemetry knowing what's happening at the asset level. Uh, and so I think we're starting to see the utilities wrap their heads around the idea that these are You know, high quality assets and they can actually use them in their, you know, power supply planning. Um, and that's, that's really encouraging.

AI assessment note: “utilities around the country are coming around to the idea that a fleet of distributed batteries”

Q vertical integration is that it allows you to do something differently in addition to just margin stacking, which it seems like is what you're saying. So that must manifest in the design of the battery that you're going to roll out. At the high level, you just talked me through like what batteries seem pretty straightforward. What can one different, what can one do differently if one is vertically integrated?

A Yeah. I don't want to give all the secret sauce away, but, uh, I'll certainly, and I, I definitely err on the side of, of oversharing and my team will give me a hard time for that. But, uh, I think that a lot of this, you know, comes back to the vertical integration and I'm not trying to sound like a broken record, but there's a real point here, which is like, take, for example, the way that the battery is installed, right? So most, basically all batteries on the market today are wall mounted. Why? Because it looks better, right? And this is a premium product and you want it to look nice. Well, Most people don't actually feel strongly about should this be on the wall or on the ground. I mean, your AC unit sits on the ground. This thing sits right next to your AC unit. We think it looks a lot better than an AC unit. And so people are pretty happy with ground mounted batteries. So when you decide to ground mount it versus wall mounted, that gives you a bunch more freedom. It released some constraints in the way that you actually designed the pack. And then you think about the fact that we do the installation. So, you know, I won't name any names, but like other Battery OEMs, you know, they, they sell the product, and then Bob's Electric, or Sunrun, or, you know, Freedom Solar, or, you know, any of those great installers go and install the product, and those guys charge time and m…

AI assessment note: “when you decide to ground mount it versus wall mounted, that gives you a bunch more freedom”

Q many batteries, we're only going to install more until volatility goes down in general. You have to some degree a hedge there, right? Because volatility is good for your business on the battery side, but bad for your business on the rep side and vice versa. Do you consider it a full hedge and you are totally agnostic to To volatility in ERCOT, or do you, like, lean a direction?

A Um, Generally, yes. I will, again, I won't give away all the secret sauce on how we think about risk management and asset optimization, but, but generally speaking, yes. Um, because we have this fleet of storage, said differently, because we have a long position, we can be more creative with our short position, with our, with our load book, right? So there are things that most reps do, uh, to hedge their exposure, uh, that we don't have to do because of our, our long position, and that becomes a profitable, uh, Undertaking for us. Um, that said, like, the batteries are more profitable in high, at times of high volatility, full stop. Let's talk about volatility for a second. I don't have a crystal ball. I don't know what's going to happen in ERCOT. Um, but what I do know is that markets, uh, generally work pretty well, and when volatility is high, people want to build a lot of batteries, and a lot of batteries presumably dampen volatility, and when volatility is low, people don't want to build a lot of batteries, um, and having You know, as the march of new additions, solar, wind, you know, more, more so solar probably going forward, um, increased intermittency on the grid, and then you just have continued load growth, uh, and batteries, you know, let's say we have five more years of low volatility. Presumably the, the rate of batteries, you know, coming online is going to be lo…

AI assessment note: “Generally, yes... because we have this fleet of storage, said differently, because we have a long position”

Q where the sales cycle changes, for example, in your context, I can imagine, you know, if you're selling an ERCOT, like After a hurricane and an outage, I imagine you have a spike in interest, right? And so, like, how do you marry a flat, level, consistent workforce who you are paying, who's fixed OPEX for you, with a, uh, demand cycle that might not be exactly suited to that?

A Yeah, it's a good old fashioned hard problem. Uh, I think there's a couple ways to answer the question. You know, one is that if you're a demand constrained business, uh, and demand is very spiky, then this hard problem is like really, really hard to solve. If you're a supply constrained business, like businesses are fundamentally constrained by something, right? And, you know, supply, demand, and capital are really kind of the three core constraints. And if you're a supply constrained business and you have more demand than you can serve, which is the position that we're in today, this problem is a lot easier to solve. Right. Because you're just like installing these things as fast as you can make them. And, you know, your installers are running at, you know, near a hundred percent efficiency. Uh, obviously it's never, never quite that good, but, um, you, you have this problem less. So I think we're in the phase of the company right now where we are deeply supply constrained. We have incredible amounts of demand because our product is really good and customers really like it. And so we have had to solve this problem kind of, but it certainly will get more difficult and more complicated as we scale.

AI assessment note: “we're in the phase of the company right now where we are deeply supply constrained”

Q of thermal generation, or now increasingly batteries maybe too, but they're utility scale things. So as you think about, like, The pluses and minuses of your version of a gen tailor, wherein the asset, the physical asset base is all residential scale. Like, what is it about that that is better than the NRG version of being a gen tailor, and what is it that is more of a challenge?

A Yeah, well, there's the customer answer, and then there's the system answer. And the customer answer is, when you're, when you're selling power to homeowners, all that matters is price and reliability. So, We are able to provide a level of resiliency to the home that the competition can't at a price that they can't compete with, right? So when you sign up with base, you get a 25 or 50, if you, if you offer two kilowatt hour system on your home, that is all yours to use when the grid goes out for 19 dollars a month for the 25 kilowatt hour system and 29 dollars a month for the 50 kilowatt hour system. So in terms of home backup, it's the, the most affordable option On the market. At the system level, though, why our Jen Taylor model, I think, is more attractive than, than others is strictly cost-oriented, right? What matters is fully landed cost of the megawatt. And our view is that we can land a megawatt, gigawatt of storage on the grid faster and more cost-effectively than the centralized utility scale developers. And for what it's worth, faster and more cost-effectively than a gas plant or a coal plant. So, we You know, we use this strategy that we define as compounding cost advantage through vertical integration, or kind of vertically integrate, vertical integration plus technology to land assets on the grid, starting with batteries, and eventually we'll, we'll do other stuf…

AI assessment note: “we can land a megawatt, gigawatt of storage on the grid faster and more cost-effectively”

Q I think there's good evidence and you probably know the details of this more than me, uh, historically that if you're installing something, you know, others have done a version of what you're describing Selling something physical in the home in the hopes that that maintains a stronger, longer customer relationship, but what, what do you need to be true about customer churn in order for your model to work?

A So I love this question. Um, you know, the best way to limit churn is to have a killer product, right? Like reps have high churn because the product is a commodity and It is really easy to compete with them, um, and there are lots of players in the space who are willing to do uneconomic things with a short-term time horizon, um, To capture arbitrage, for lack of a better word. Um, our product is, is really good. It's, it's the most affordable home backup on the planet, and it is a reliable, low electricity rate, and customers really love that. So, I'm proud to say, we are, I'm looking at a couple dashboards in the office, and we've got on the order of 5000 of these batteries in the ground, uh, actually 5000 homes, and so it's more batteries, because a lot of them have two. We have had, in our direct business, we have had one customer I remember her name. I remember the day it happened. I won't say it on the pod, but, uh, it is then that low because the product is, is really good. So, um, yes, we think we will have structurally lower churn because there's an upfront cost and because there's an asset on the home, but most importantly, because we think we're bringing a ton of value to the homeowner and they really want the product. I mean, we've had a number of customers email us and say, Hey, so You didn't ask this question, but I'll frame it up. So what happens when someone move…

AI assessment note: “we think we will have structurally lower churn because there's an upfront cost”