Michael Ruehlman, Shadow Power, and the Dynamics of Distributed Energy Resources
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Of all the emerging trends to hit the renewable energies sector, one of the most exciting is the integration of distributed energy resources, otherwise known as DERs. These energy storage and generation units can increase resilience, contribute to the decarbonization of the energy sector, and allow customers to become active participants in energy markets.
Few understand the impact of DERs better than Michael Ruehlman, CEO and Co-founder of Shadow Power. With nearly two decades in the renewable energy sector, his trajectory parallels the rise of this transformative industry and illustrates how DERs are poised to redefine our power grids. Drawing from this extensive experience, Ruehlman and Shadow Power are helping utilities reliably meet energy capacity demand and balance electrical load to improve grid resilience.
From Global Initiatives to Domestic Innovations
Ruehlman’s career in renewable energy began in 2006, with a private equity fund that aimed to tap into emerging renewable technologies across the globe. The U.S. market wasn’t very mature at the time, which prompted Ruehlman and his team to look abroad, “The majority of our activity back then was in New South Wales, Australia, all over Asia, Hong Kong, where there was a proliferation of advanced solar cell manufacturing capabilities; and in Europe, where we were seeing both the historic cell manufacturing, the polysilicon manufacturing capabilities, and a rapid increase in deployment of utility-scale projects as a way of providing green energy to, even back then, a market that felt insecure about its energy future. It was an incredible initiation to the complexities of project economics and supply chains in renewable energy,” Ruehlman recalls. These experiences formed a foundational understanding that would later be crucial in his ventures back home.
In New York City, Ruehlman co-founded one of the first residential solar leasing businesses, working with big names like Panasonic, Sanyo, and Sony. This venture highlighted the pivotal role of financing in the renewable sector, particularly in a budding U.S. market.
"It was a great learning experience in understanding how to manage the various components required to offer that type of product in the US. What we discovered early on has now evolved into a multi-billion dollar asset class for both residential and commercial leases and loans. Over the last 20 years, this business has grown precipitously, but we also encountered challenges that arise with changes in the market," he notes. These experiences led to the creation of Sunlight Financial, one of the first providers fully dedicated to residential solar loans, and eventually led to his current role at Shadow Power.
Shadow Power’s Vision and Evolution
Shadow Power’s founding was inspired by a vision to address utility demand for managing flexible, dispatchable energy capacity and grid resilience. “It all started with the problem that only a small fraction of DER assets are aggregated for grid services, and many utilities and VPP operators have problems managing large-scale DER fleets.
The next step was to propose: What if? What if Shadow Power offers a technology platform to utilities like SoCal Edison that can rapidly aggregate, optimize, and ensure the performance of batteries and other behind-the-meter distributed energy resources?
Shadow Power differentiates itself by engaging utilities in long-term bilateral capacity agreements, maintaining assets over extended periods, and providing underwriting capabilities to capital providers. For the first time, the company is enabling the underwriting of grid services, which is the holy grail behind financing virtual power plants.
The Emergence of DERs
At Shadow Power, Ruehlman’s focus is on the deployment and integration of DERs, particularly energy storage solutions, into the power grid. DERs present a key resource for utility customers seeking reliable and sustainable energy solutions, particularly in light of the increasing demand for electricity driven by big data centers and the rise of electric vehicles (EVs).
“DERs provide a key resource to utility customers facing various challenges, such as maintaining a reliable grid, managing capital costs, and accommodating new demands from data centers and the proliferation of EVs. This is particularly evident in high-growth areas like the Southeast, places with aging infrastructure like New York and California, and regions like Hawaii, where solar overcapacity has led to power curtailment. Distributed energy resources can be part of the solution to these challenges.” says Ruehlman.
Thankfully for consumers, there has been an influx in both technology and business models to match the demand for DERs. "On the supply side, we're seeing more mature business models and entrepreneurs bringing advanced, bankable hardware technologies to market. Additionally, fast-maturing software technologies leveraging machine learning and AI are improving predictability of grid needs and asset performance, and managing resources efficiently over time. This combination enhances the ability to finance and control these assets at scale, creating a beneficial marriage between supply and demand in the current market,” Ruehlman noted.
The Complex World of Virtual Power Plants
While these business models are growing more efficient over time, there are still challenges present. One of these complexities is Virtual Power Plants (VPPs). VPPs are decentralized power-generating units that typically aggregate from various DERs - and each one is unique. This makes the financing and underwriting of these projects tricky. The key, Ruehlman says, is leveraging historical data and advanced technologies.
“We have learned a lot about asset performance, which can be used to underwrite future revenue streams, making these assets bankable. We know solar performs. We know we can measure the performance of batteries and forecast their performance over time. We have historical data on customer performance and customer payment. Ultimately, those are good building blocks that allow us to make assertions about revenue streams from these assets.” Ruehlman says.
The next challenge? Understanding the additional benefits DERs can offer the grid and how to underwrite these secondary revenue streams effectively. Shadow Power’s bilateral fixed contracts with utilities provide some revenue certainty. Yet, in unregulated markets, assessing the performance of merchant services and ancillary services based on historical data is crucial.
“As we deploy more DERs and gather data, our underwriting strategies will become more refined,” Ruehlman notes. “We now have enough use cases to know that DERs will continually be a part of the energy mix, that capacity mix, of that transformation of the grid to be more reliable and sustainable.”
Building an Ecosystem for Financial Asset Classes
One of the goals at Shadow Power is to scale up VPP and DER usage. To do so, they aim to create a more simplified financial asset class similar to a car loan or a mortgage. “We need to get more assets deployed, we need to get a lot more data. But in order to do that, we need to make it less complicated,” Ruehlman says. “This doesn't mean conforming every asset to the same contract or technology, because just as there are many different cars and many types of contracts with a car loan, there are also many different types of assets with different types of contracts in the renewable market.”
Unlocking DERs’ value involves unique financial structuring. Ruehlman describes how different revenue streams and assets are bundled: “In other unsecured asset classes, we have a pattern of expectation for bond performance based on the underlying asset. For DERs, we have separate utility revenue streams and grid service benefits, acting as credit enhancements.” This complexity is akin to bundling a car loan with a subscription service. “Imagine a car loan with a subscription for streaming music within the car,” he analogizes. “We need to securitize both simultaneously, despite differing durations and underwriting standards.” As DERs and VPPs grow, new financial structures will emerge to accommodate these unique assets. Ruehlman is confident the industry will find innovative solutions to these challenges.
Market Valuation and DERs’ Exponential Growth
Valuing and pricing DERs is complex. Ruehlman acknowledges the lack of a definitive formula but sees emerging strategies. Utilities often target specific constraints, like replacing a gas peaker or anticipating load growth, traditionally addressed through capital and operational expenditures.
“DERs provide an effective alternative by delivering grid services without the utility actually having to construct new infrastructure. Instead, private companies and developers handle this development. Utilities are essentially paying for the incentive to develop these resources in the private market, which has been an attractive aspect of this model for them.”
The potential for exponential growth is significant. A portfolio of 50 MW of VPP assets can offer more value than five 10 MW portfolios due to enhanced grid services, resilience, and avoided transmission and distribution investments.
Scaling DERs requires more asset aggregators and vertically integrated business models. “We need more market participation to demonstrate reliable fulfillment and long-term performance,” Ruehlman says. “More vertically-integrated businesses providing competition and expertise in construction, manufacturing, operations, and maintenance are essential.”
When it comes to scaling VPPs, the key lies in software. Ruehlman underscores that DERs are actively managed technologies requiring software for every step, from sizing and forecasting performance to managing resources and demonstrating payback.
“Managing a utility-scale deployment of networked assets behind the meter requires software,” Ruehlman says. “Software plays a huge role in scaling up - When you look at the difference between a traditional solar installation and a DER, traditionally, solar installations are passive assets that require measurement and understanding mainly for system maintenance and billing. With a DER, you have a much more actively managed technology over a longer period that requires software for every step of the process, from properly sizing and forecasting the performance of that asset to demonstrating to both the end customer and the utility what that anticipated performance is going to look like.”
Software facilitates everything from predicting performance to structuring financial products and agreements, ensuring long-term value and efficiency.
Looking Ahead: The Future of Distributed Energy Resources
In the next five to ten years, Shadow Power aims to further demonstrate the long-term value of its programs to utilities, accelerating the mass adoption of clean energy technologies like DERs. Ruehlman envisions rapid growth, with the company doubling its installation volume annually for the next five years.
“Fulfilling our existing contracts alone is going to create a situation where we need to effectively double our installation volume every year for the next 5 years. And I think ultimately that will lead us to be able to approach individuals on the host side and offer additional services, such as installing EV charging stations or adding solar panels to their existing batteries. On the utility side, we can offer to increase capacity through their programs as their requirements change and evolve,” Ruehlman says.
As for the future of DERs and VPPs, Ruehlman is optimistic about the industry’s potential to address energy challenges and create sustainable solutions. With the right mix of policy support, technological advancements, and innovative financing, DERs will play a critical role in shaping the future energy landscape.