Swell raises $120M for virtual power plants to link solar and batteries

Almost every company in the rooftop-solar and battery space has at least a few virtual power plant projects underway. VPPs control tens, hundreds or thousands of individual home solar and battery systems to turn their collective energy flexibility into megawatt-scale resources for utilities and the grid today — and potentially gigawatt-scale resources in the years to come.

VPP developer Swell Energy is becoming a major player in key U.S. markets like California and Hawaii, by connecting customers who have or want batteries for their solar-equipped homes or businesses, the companies that make those technologies, and the utilities and energy markets that can pay for the grid value they can provide.

In the process, the Los Angeles–based company has come up with techniques and technologies that CEO Suleman Khan thinks could transform the VPP business model. Those include novel contract and financing structures to reduce the cost and complexity of signing up new customers and technology vendors. They also include underlying software that can balance the need to provide the grid services that utilities have been promised with the need to ensure that customers get what they want — reliable backup battery power and steady payments for participating in a VPP.

On Tuesday, Swell is announcing a $120 million equity investment round, led by SoftBank Vision Fund 2 and Greenbacker Development Opportunities Fund with participation from Ares Management Infrastructure Opportunities Fund, to boost development and growth of these VPP-building tools.

Swell already has up to $450 million in project financing available from a 2020 agreement with Ares Management Corp. and Aligned Climate Capital to back the 350 megawatt-hours of VPPs it now has in development in California, Hawaii and New York. The new equity round, which brings Swell’s total equity funding to $152 million, will help support development of another 200 megawatt-hours of contracted capacity in those and other as-yet-undisclosed markets across the U.S.

These contracts call for VPP capacity to be delivered between the end of next year and 2027, Khan said in an interview. Now it’s up to Swell to deliver on those promises. 

Counting the ways to grow a VPP

A portion of that future capacity could be met by getting customers who’ve already installed solar-and-battery systems to join a VPP, as Tesla and other companies have done during the grid emergencies in California in recent summers. Swell already has some customers up and running in California VPPs, such as those it brought in to serve a 2016 contract with utility Southern California Edison.

But the lion’s share of Swell’s VPP capacity contracted for delivery in future years will need to come from getting new customers to install solar and batteries. That’s also the case for the growing roster of VPPs being developed for future delivery by vendors of distributed solar and batteries including Tesla, sonnen, Sunrun, Sunnova, Enphase, SolarEdge and Generac — some of which are also Swell partners, Khan noted.

“What’s compelled them to work with us is having this roster of utility contracts, adding up to 27,000 homes,” he said. ​“Shortly that will be more like 40,000 as we announce more contracts.”

But to hit those targets, Swell and other companies that have committed to delivering megawatts of VPP capacity in the future will need to structure the economics just right, he said. 

Khan describes Swell’s fundamental business as consisting of three components. 

First, there’s a development company, or ​“devco” — the part of the business that puts new VPP projects together. That involves winning contracts with utilities to deliver future capacity, as well as enlisting customers to install new equipment or enroll existing systems in the VPP. For new customers, Swell needs to offer clear financial benefits to offset the extra cost of adding batteries to their rooftop solar systems, he said.

Second, there’s Swell’s financing arm, or ​“finco,” Khan said. It differentiates the revenue streams that customers and Swell earn by providing VPP services from the underlying value of self-generated solar power, so that Swell can sign up customers who’ve already installed batteries via other companies to take part in its growing VPP roster. The banks, private equity firms and other providers of debt finance that play a vital role in making solar-battery systems a going economic proposition today also need that differentiation, so that they can understand and assess their risk profiles, he said.

Third, there’s Swell’s grid-services company, or ​“gridco,” which encompasses the underlying technology layer that can control thousands of home solar-battery systems in ways that are visible to the utilities it’s working with. That requires purpose-built software and digital communications that are integrated both with utilities and with all the battery and solar and inverter systems that need to be controlled in real time.

All together, these components make up Swell’s ​“VPP-as-a-service model,” Khan said. 

The changing nature of VPP project development

The VPP concept has been around for years. What Swell has done differently is to create a model for developing these projects independently of making and selling solar panels and batteries. 

Swell’s 2014 founding coincided with the launch of Southern California Edison’s 2.2-gigawatt Local Capacity Requirement procurement, the first major opportunity to aggregate lots of home solar-battery systems to meet a U.S. utility’s grid needs. Most of the winning projects went with large-scale batteries at power plants or commercial buildings, but Swell focused on adding batteries to residential solar systems — a much tougher financial prospect back then than it is now.

Since then, batteries have gotten much cheaper, new rate structures have made them more valuable for net-metered solar systems in California, and the state’s utility wildfire-prevention blackouts have given homeowners a reason to look for backup power options. Swell’s growing roster of VPP projects with SCE and California’s other two big investor-owned utilities, and the additional value those can bring to lowering the upfront cost of installing batteries, creates new money-making opportunities that can sweeten the battery proposition for homeowners. 

That has allowed Swell to ​“roll out the red carpet for a lot of solar installers to get into the battery space,” Khan said, including a network of about 50 regional installers across the states it works in. It also allows the company to ​“bring in any batteries that are available and willing” from those already installed in the regions where Swell is building up VPP capacity, he said. The company calls this its ​“capacity exchange program,” which could offer customers who already have batteries more money and shorter payback times. 

Structuring finance that makes sense for VPPs

Supporting these multiple methods of growing its customer base requires clever financing structures. That’s where Swell’s finco steps in, Khan said. 

Residential solar and battery financing is a complicated matter, involving long-term calculations of how much each customer can expect to save on their utility bills and earn from the net-metered solar power they send to the grid. Those variables are inherently different from the contractual structures of a VPP, which means that the financing structures for the two must be distinct as well, he said.

Swell’s solution is a ​“two-way transactive retail offer” that separates the contractual and financing terms for the portion of the solar-battery system that’s tied into the customers’ net-metering value from the portion of the battery that’s dedicated to serving the needs of the VPP.

For example, in exchange for a rooftop-solar and battery system that will allow a homeowner to save money and sell power to the grid, a Swell customer can make monthly lease or loan payments, he said. But in a separate financial agreement, Swell may agree to pay that customer monthly for the VPP value provided by that battery, he said — a value that can add up to thousands of dollars over the life of the VPP contract.

That’s how Swell has organized the financing for batteries it’s installing for customers it signs up itself. Starting next year, it will start offering similar lease and loan structures to the third-party solar and battery installers it works with in California, Hawaii and other states where it makes sense, Khan said.

“We’re basically productizing the VPP — we’re creating a retail product offer for that,” he said. In other words, the company is creating a standardized set of terms for its growing network of solar and battery installers to make the VPP offering to customers on Swell’s behalf.

This kind of standardized approach to clearly delineating the financial value of participating in a VPP is something of a novelty today, he noted. Most VPPs to date have been launched by large solar and battery installers that have created their own particular systems for rewarding customers, from one-time, upfront cash payments or gift cards to spur people to sign up, to delayed payments based on how much each customer’s home contributes.

Swell’s focus on VPPs built on bilateral contracts with utilities, which come with well-defined revenues for years to come, allows it to pursue a more precise monthly fixed payment structure for its customers, Khan said. While the company is open to participating in wholesale energy markets in the future, those markets are more volatile and offer less certainty of long-term payback, he noted.

Being able to finance projects against utility contracts, at least for now, ​“brings more value to the utility, which means more value to the customer,” he said. That’s also critical to carrying out the company’s future plans to repackage long-term VPP contracts for securitization, he noted — the financial structure that’s driven down the capital cost of residential solar loans over the past decade.

Building the grid-to-customer tech to make it all work

To capture the full range of values a VPP can provide a utility, a VPP operator must do more than just dial down a home’s energy use and inject all its battery power into the grid during a few hours of the year, Khan said. That’s what most VPPs do today, whether it’s by enrolling in traditional utility demand-response programs or bidding into wholesale energy market capacity auctions.

Swell has a more sophisticated approach. Many of its contracts call for reducing grid demand or injecting battery power across many more hours of the year, as well as more fine-tuned reduction of load on specific portions of a utility’s grid, he noted. In the case of its 80-megawatt VPP contract with utility Hawaiian Electric, Swell’s batteries are even being asked to remain at a certain state of discharge to absorb wind and solar power that may exceed the demand on its island grids, he noted.

That’s where Swell’s gridco comes into play, Khan said. Central to that role is Swell’s software, dubbed GridAmp, which was first rolled out to support its Hawaiian Electric contract. It stems from a portion of the software developed by startup AMS, one of the companies that was a big player in Southern California Edison’s 2014 distributed-energy procurement, which Swell bought from AMS in 2020.

To ensure that all the solar-and-battery-equipped homes in a VPP are actively doing what their contract requires them to do, a VPP has two main tasks, Khan said. 

First, it must connect to and communicate with all the different devices it’s controlling in homes, including the batteries from a number of different manufacturers. So far, Swell installs batteries from LG Chem, sonnen, Tesla, Enphase and Generac, and more will be announced soon. ​“We want to talk to everyone’s batteries,” he said. ​“That becomes even more important when we talk about batteries on wheels,” i.e., electric vehicles, he noted.

The second thing a VPP must do is interoperate with a utility’s grid control platform, ​“which is not a trivial task,” he said. But ​“we’ve gone through this with flying colors” with utilities including Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric in California and with Con Edison in New York, he said.

“We can take their requests for how to dispatch the VPP and process them, and do that work on the back end, and get back to them with the M&V,” or the measurement and verification that confirms that each battery did what it was told to do, he said.

In Khan’s view, this kind of tight integration between utilities and devices earns Swell’s GridAmp software the title of a distributed energy resource management system, or DERMS. Many companies use terms like VPP and DERMS to describe what they do, but there’s a lot of variation among them in terms of capability and interoperability. 

Expanding the definition of a VPP to meet the needs of the future grid

Giving utilities a way to monitor, manage or even control customers’ solar-battery systems, EV chargers, air conditioners, heating systems, electric appliances and other electricity-using devices will become an increasingly important part of the push to decarbonize the grid. Only a few U.S. utilities, like Hawaiian Electric and Green Mountain Power in Vermont, have gone beyond pilot-project–scale efforts to use these ​“behind-the-meter” assets in a comprehensive way — but lots more are planning to do it in the future.

Besides working with utilities, Swell is involved in some larger-scale projects that could stretch the boundaries of the VPP concept, Khan said. One example is its work with Nimiipuu Energy, the ​“tribe-to-tribe energy cooperative” launched by the Nez Perce Tribe in Idaho, which hopes to link up distributed solar-and-battery systems on tribal lands across the Pacific Northwest.

The details on that project are still being worked out, he said. But in the coming months, he said to watch for more news on a ​“capital-A aggregation of behind-the-meter assets across a bunch of different tribes, to essentially create what we believe will be the largest VPP in the country over time.”