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If power start-up Drift can make it in New York, it may be lights out for traditional utilities

  • Drift is among the power sector start-ups that believe the traditional utility model isn't going to deliver the best deal to electricity consumers in the technology-led era.
  • It has been active in New York City since May and has hundreds of customers using its platform, which relies on blockchain technology and software algorithms to source and trade power and drive down pricing for utility customers.
  • Drift has developed business models for 16 states beyond New York, where it sees opportunity to create savings for utility customers.
The rooftop of Jetro Restaurant Depot in the Bronx, with a view of Manhattan. The 1.6-megawatt installation, installed in 2014 and highlighted by Gov. Andrew Cuomo, is covered with 4,760 solar panels.
DON EMMERT | AFP | Getty Images
The rooftop of Jetro Restaurant Depot in the Bronx, with a view of Manhattan. The 1.6-megawatt installation, installed in 2014 and highlighted by Gov. Andrew Cuomo, is covered with 4,760 solar panels.

Meet Farmer Dave, a landowner from eastern Washington. In 2009, Farmer Dave contacted a solar solutions company called Questar Energy Systems with a request: He wanted to install 100 solar panels on his property and sell excess electricity to his neighbors.

To Greg Robinson, then the CTO of Questar, Farmer Dave's request seemed both logical and feasible. Why shouldn't somebody be able to sell their self-generated electricity on the open market?

Robinson quickly found that things were not that simple. Farmer Dave would have to become his own utility, build his own network infrastructure or negotiate terms with an existing power company, which would likely pay him next to nothing. Over the years, Robinson encountered enough "Farmer Daves" that he began to question the efficiency of today's energy systems. Unfortunately, this isn't how the market works, he would have to tell people. But maybe it's how it should, he quietly pondered.

In 2014, Robinson co-founded Drift, a Seattle-based energy start-up trying to spark a peer-to-peer utility industry revolution, where today he serves as CEO. Traditional utilities determine how much power to provide 24 hours ahead of time, predicting demand based on the region's average monthly consumption from the previous year. In the event that consumer demand exceeds this very rough estimate, utilities rely on power plants known as peakers, which command a much higher price than baseload power plants.

Drift thinks it can provide a far more accurate, daily forecast of customer demand and drive down pricing. When demand spikes, Drift engages its network of small-scale producers — which includes homeowners with solar panels, family-owned hydro dams and large commercial buildings with excess power — to fill in the gaps with low-cost energy. For example, if an unexpected heat wave causes energy consumption to increase, Drift will procure power from a local solar owner to cover shortages.

The underlying science of Drift's platform — and its ability to better forecast demand — is rife with tech buzzwords like blockchain (the ledger technology that underlies digital currencies like bitcoin), machine learning and peer-to-peer trading (P2P). If there are 100 owners of a hydro-dam, for example, being able to track the value of that plant across the owners and accounting for energy transactions with multiple owners, even lienholders, is made easier using the blockchain. The goal of the business model is easier to understand: to let consumers take control over their own energy supply and eliminate nuisances most people understand — utility middlemen, fees and bureaucracy.

Though it's registered as a utility, several features distinguish Drift from traditional power companies. For one, the start-up doesn't believe in contracts. Customers use a dashboard to choose whether to prioritize cheap or low-carbon energy sources, and they're able to terminate their relationship with Drift at a moment's notice. Drift delivers weekly bills that break down the customer's costs, as well as from what sources — clean or dirty — their power is coming from.

An example of a customer bill from Drift showing a breakdown of power sources.
Drift
An example of a customer bill from Drift showing a breakdown of power sources.

Drift also doesn't own the distribution infrastructure that supplies electricity to homes, instead leasing it from the grid based on how much power is needed. So unlike utilities that make more money the more power customers use —and which have a primary mandate of providing a secure and reliable source of power rather than lowest price — Drift is incentivized to keep costs down. Drift takes the idea of an energy service company (ESCO) — in New York State, consumers can choose their retail energy supplier from close to 150 registered ESCOs, while the transmission and distribution of electricity is still maintained by the local utility — to a new level. In fact, some Drift customers bristle at the thought that it is just another ESCO.

Drift is registered as an ESCO in New York, but some of its early adopters think of it as going well beyond traditional ESCOs in its mission.

"Drift is 110 percent not an ESCO," said Christopher Morini Jr., one such Drift customer who has taken to posting his weekly energy bills on Twitter. "It is a separate utility entirely. A modern power utility in a modern era using an algorithm as a digital power savior to save you cash. ... Correct me if I'm wrong, but I don't believe power delivery as a service has been modernized," Morini Jr. said.

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The utility start-up officially launched in New York three months ago and so far has signed up hundreds of customers — though it would not be more specific — some of which double as both producers and buyers. Drift charges a flat rate of $1 a week ($4.33 a month), while customers report savings of at least 10 percent compared to Con Edison and other New York-area energy utilities. Drift savings come from buying power through its independent network and selling it to the grid at prices more competitive than "peaker" prices.

"People all over the country produce electricity but are too small to compete in the large, wholesale markets where utilities purchase energy," said Justin Hamilton, a Drift consultant and customer. "Their prices might be just as good — maybe even cheaper — but if they're not selling at a certain scale, they're pushed out of the market."

"Drift is not just offering to help consumers get access to energy in the market that meets their specifications for price and carbon/renewable, they are also offering an opportunity to 'prosumers' (consumers who also produce resources through solar PV or demand response of a range of types) to monetize investments they make (solar PV and demand response enabling investments) and actions they take (demand response actions)," said Richard Sedano, president and CEO of the Regulatory Assistance Project, an NGO that is focused on power sector policy. He added, "These actions and investments would otherwise occur but be uncompensated and not guided by market values, or not occur at all."

Customers say they are saving up to 20 percent

Hamilton himself has experienced week-by-week savings of 20 percent after switching to Drift. After a lifetime of only ever seeing his power bill go up, not down, he is confident that peer-to-peer energy has a future in the tech sector dominated by consumer-facing disruption.

Others have lodged similar complaints. In 2014, former NRG Energy CEO David Crane penned a letter to shareholders lamenting that there is no Amazon, Apple or Google of the American utility industry. Though Crane was later ousted by NRG, his vision of an energy company that "enables, connects, relates and empowers the consumer" is one that Drift and other P2P trailblazers hope they can carry to large-scale fruition.

Drift says its success will rely on creating a profitable economic model that is technology customer-rooted. Drift thinks of itself as a software services firm for both buyers and sellers of electricity who will pay for a "subscription" because Drift can keep costs lower using its proprietary operating system. "Providing that OS is the big opportunity," Robinson said.

The Drift co-founder claims that's going to be a big advantage: As administrative costs for buying or building new software become more common and critical for the utility industry, costs will take the form of higher prices passed along by the established utilities to customers. Not doing the same is one of Drift's advantages.

Experts, while supportive of innovative models like Drift, doubt the system will change easily. Customers also should expect pricing to be volatile as more free-market trading comes onto the grid.

Karl Rabago, executive director of the Pace Energy and Climate Center at the Pace Law School and a former Texas government utility commissioner, said the blockchain offers huge potential in the electricity market for finer-grained and faster transactions — as small as 1 kilowatt hour and involving no more than the decision to turn off one light. "To [Drift's] credit, this is what I want people to do, to really work peaks out of the system finely rather than bluntly," Rabago said. But he added that there isn't meaningful blockchain traffic at this point, and it could be five to 10 years before there is.

Rabago also said Drift customers should be prepared to face greater risk. "Drift can pass on more savings, but it can't do that with also more risk. I wouldn't want to say it's the Wild West out there if you go with an ESCO, but if there were a run on the market, Drift will stop serving you long before Con Ed. Not just because Con Ed has a bigger balance sheet, but because it's contracting with suppliers that are more expensive but more secure."

Robinson conceded that its approach to the power market is fundamentally different from what it expected of a traditional player like Con Ed. "We are really focused on price, and Con Ed's mandate is to keep the lights on. That's the huge advantage of the traditional model. But given the utility is keeping the lights on and the grid is stable, enabling micro-transactions and decentralizing ownership of power supply is how to help get to more stable pricing." Robinson added that during events like the polar vortex, Con Ed didn't do anything to keep prices down for customers. "Decentralizing ownership of the grid is the whole point," Robinson said.

The big utilities also face new risks to providing a secure and reliable source of power from hackers, which a report this week in Wired said is no longer just theoretical.

"If we are profiting while your power bill doubles, we are at odds with each other. If we don't save you money, we want you to leave. That's what we tell customers." -Greg Robinson, co-founder and CEO of Drift

One potential future for the U.S. power industry can be seen in the example of Australia, which has been a pioneer in the democratization of the utility sector.

"The regulatory hurdles [in the United States] were not drafted to stop P2P; they were drafted at a time when P2P wasn't possible," said David Martin, co-founder of a Perth, Australia-based blockchain P2P company called Power Ledger. "Government frameworks emerged around the model of big, noisy, loud power stations. What we've got now is a completely different model — one that is sympathetic with urban development."

Power Ledger isn't only using the blockchain for energy trading, but this week launched an initial coin offering — the type of cryptocurrency start-up fundraising that was just banned in China. Power Ledger raised $17 million in 72 hours and is doing another round on Friday that could bring its total value up to as much as $30 million, Martin told Greentech Media. That was lower than the $100 million the company had estimated last month it might be able to raise in an offering.

With an abundance of natural resources, government support for a nascent solar industry and solar panels installed in 16.5 percent of all households, Australia enjoys many of the conditions necessary for distributed energy to thrive, Martin said. And nearly every state in Australia has a deregulated energy market, meaning that utilities are barred from holding a monopoly over generation, distribution and retail. This gives customers and distributed energy systems the flexibility to explore innovative and competitive options.

"Once we acknowledge that the system has changed, I think we'll start to grasp the potential for P2P and see that the barriers are only barriers because of the way we've thought about the market," Martin said.

The market in Australia is so accommodating that as the price of distributed resources has become cheaper, the desire for energy independence has actually become a cause for concern. Martin said that as more consumers chose to "get off the grid," power prices on the grid can become too expensive for residential customers who can't afford to join the exodus.

Solar panels are seen on a rooftop in Melbourne, Australia.
Getty Images
Solar panels are seen on a rooftop in Melbourne, Australia.

This catch-22 was the impetus for Power Ledger's business, which had a successful trial in Auckland, New Zealand earlier this year and has begun implementing its blockchain trading platform in communities throughout Western Australia. Power Ledger allows consumers to use the existing network to trade clean, surplus energy amongst themselves, thus ensuring the ongoing relevance of the grid.

AGL Energy, Australia's largest private owner, operator and developer of renewable energy, has also begun a trial of P2P trading with the help of IBM and a $120,000 grant from the Australian government.

New York could change the face of US energy

New York has been the site of other P2P experiments like the Brooklyn Microgrid, a project initiated by LO3 Energy, largely because of the deregulated energy market. Brooklyn Microgrid takes P2P to an extreme, building an energy market for locally generated, renewable power driven by the very community it serves. It was conceived to work with the conventional grid, which is the subject of a number of clean energy initiatives under New York State's Reforming the Energy Vision strategy.

Sedano described the Drift approach as "disaggregated P2P," different from Brooklyn Microgrid but with a similar, underlying theme. "What Drift appears to me to be doing is building a community around interest in energy. The distributed ledger, blockchain, does not care about proximity. It cares about unique and traceable participants wherever they are. Think about the community of people plying Minecraft or PokemonGo that is built because the members are drawn to the experience."

Innovation-friendly environments like New York, where there is real customer choice and a real free market, can not just reform the grid but "absolutely change the face of energy in the U.S.," said David Gutelius, an adviser to AGL Energy.

"I think something like this will work in some places with enough people interested in an energy experience," Sedano said. "Consumers seem excited, though these are early adopters and active communities. Will this fly in the South Bronx or Howard Beach as well as it flies in Brooklyn and Manhattan? Will it fly in Buffalo? Oswego?"

The rigidity of existing grid infrastructure and the price of solar panels and PV batteries — which are still too expensive for most households without some sort of subsidy — means that the widespread change will take time. There are reasons for regulators to move with caution.

"The execution of all this requires a lot of work and can be done well or poorly or in between," Sedano said.

While it is only in New York City now, Drift has business models that identify pricing opportunities built for the entire state and 16 additional states. "If we are profiting while your power bill doubles, we are at odds with each other. If we don't save you money, we want you to leave," Robinson said. "That's what we tell customers."

— Zachary Basu, special to CNBC.com

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