The Grid’s Hidden Capacity

[00:00:02] Keith Zakheim

Welcome to the Age of Adoption podcast. I am your host, Keith Zakheim. Today, as we do with every podcast, we're going to ask our guest one question and one question only. What is your Age of Climate Adoption story?

A little bit about the Age of Adoption: We live in an era where enterprises of every shape and size, regardless of industry, must rapidly transform to become more sustainable, climate sensitive and just. My day job is CEO of the marketing public relations firm Antenna Group. Our agency works exclusively with conscious brands.

What is a conscious brand? It is a brand that is conscious of its responsibility to be on the right side of history. Like most businesses, our clients are experiencing a transition from an age of innovation, an era in which technologists, entrepreneurs and investors focused on innovating climate and sustainable solutions, to this age of adoption, which characterizes the world today.

So, if you accept the Age of Adoption hypothesis, then there's really only one salient question to be asked: What is your Age of Adoption story?

My guest on today's episode of The Age of Adoption, Patrick Flannery, grew up tinkering in rural Wisconsin and built a career writing software for high-frequency trading markets in Chicago and New York, eventually founding a firm that captured capital markets data with nanosecond-level precision. He grew that business to nearly a hundred people and sold it a few years ago. Most founders would call that the finish line, but for Patrick, it was an inflection point and the beginning of a second act.

With three young kids and a growing sense of urgency about climate change, he landed on a specific bet. The fastest way to rebuild infrastructure wouldn't be through policy, but through investment returns. If an investment pencils out at mid-teen IRRs or better, it will get built. No persuasion required. That belief became Ground Floor Energy, a company that develops utility-scale battery projects on underutilized grid connections. It's not a run-of-the-mill battery tech company, but a company that's cracked the code on where batteries should go and how to get them online fast.

In this conversation, Patrick breaks down the impact of the interconnection bottleneck, how software and automation can find underused grid capacity that is hiding in plain sight, and forcefully makes the case for why the economics have to work before the emissions reductions will ever take place. It's a conversation about batteries, but really it's about something bigger.

The belief that if you could make clean energy infrastructure genuinely profitable, you won't need to convince anyone to build it. They'll want to do so on their own. Back with Patrick in a minute.

Patrick, welcome to The Age of Adoption podcast.

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[00:02:59] Patrick Flannery

Thanks for having me.

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[00:03:01] Keith Zakheim

Of course. And Patrick you join us from London, England, I guess the home or the birthplace of myself, of your host here at The Age of Adoption podcast, which I guess it means the birthplace of the podcast itself in some strange way.

So, it's great to have you. Patrick you are a technologist and an entrepreneur who spent, I don't know, fifteen years plus in financial market infrastructure before you came to the energy world, and you're gonna obviously talk about your background, but that's the way I read it. And you founded Ground Floor Energy to develop utility-scale battery projects, really at underutilized grid connections, and we're gonna unpack what that is, why there's opportunity there, and how it really could be an interesting solve for a lot of the bottlenecks and issues that we have right now in the world of energy.

But if I could kind of formulate what I think the broader bet is, that you're making with Ground Floor Energy is that electrification of nearly everything is our future, and that electrification of nearly everything is gonna improve the economics of climate infrastructure, and that's gonna make projects attractive because they're gonna generate strong returns, not only because they reduce emissions. And that ultimately is a lot of—that's the theme of the past eighteen months for us, right? It's not virtue, it's economics. Economics work, and the market is huge and there's money to be made for everybody. So with that, Patrick, if you can give your career journey, your background, and of course, feel free to comment on what I just said.

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[00:04:33] Patrick Flannery

Yeah. I grew up in Wisconsin, pretty rural area, a bit of a tinkerer from a young age, so I started my first company when I was actually in high school. I was really interested in computers. I got a degree in computer science, and I started working in trading, writing software, kind of early high-frequency trading systems. I did that in Chicago and New York. But I'd say twelve, thirteen years ago, I started a company on my own. And the original idea of the company was as much that I just didn't wanna work for other people, which is not necessarily a great mission.

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[00:05:05] Keith Zakheim

You're speaking with a fellow business owner, so I can relate as well. It is what it is, right? A blessing and a curse.

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[00:05:14] Patrick Flannery

Yeah. But what I started doing is what I had been doing in my previous job. I started writing software that connected to markets and it ingested the market data from these high-frequency markets. And when we were doing that pretty early on, we realized that having a really high-quality copy of the data was really valuable, so we started to record this data in a really uniquely high-fidelity way, recording it down to nanosecond-level precision. And over time, I think we built one of the highest quality copies of this capital markets data that was out there.

And ultimately, the business grew very nicely, and we had a lot of marquee customers and sold the business a few years ago, which was great. And you get to change. You get to do other things in your life. So on the one hand, it's like it's not that selling a business is giving up, but you no longer do it. So you don't do that anymore. So I had built a really great team. We had about eighty people, a little under a hundred people. And there were lots of really great engineers, like really, really talented programmers building really hard software. So that part that I really liked, and I felt like when I sold the company, I was really kind of starting to get my legs, like learning how to be a CEO.

So that brings me to now, which is I wanted to start another business, and I wanted to have a really big positive impact. So I have three kids. My youngest is seven, my eldest is thirteen, and I don't know how much you read about climate science, but it's pretty scary in my perspective. When you look at, in really crude terms, how many parts per million are in the atmosphere, two hundred and seventy or so before the Industrial Revolution and going on four hundred and thirty parts per million now. And the rate of change is accelerating, so that's first and second derivatives are positive, meaning we're adding constantly more carbon. And there's probably a lot of reasons for that, like melting ice caps and melting of the permafrost and on and on. So my first piece of philosophy was like, "God, this is really urgent." This is like, actually, we've probably already passed one point five degrees Celsius, and so there's no way to move too quickly at this.

And a way to move quickly within the system that we have, being a believer and interested in markets, is we need to build profitable businesses. We need to be able to identify ways to accelerate the rebuilding of our infrastructure that produces good returns. And I believe there wouldn't be a climate crisis if we were able to make intelligent infrastructure investments that had great returns. And what are great returns? Well, IRRs that are in at least the mid-teens, maybe even higher. And so my Midwestern upbringing in a sort of rural industrial area where I grew up, there's all sorts of old, I'd say almost abandoned factories, old car plants, military bases, things like that, that aren't used anymore. And so I started Ground Floor Energy, and it was this big ambition to say, "We wanna do things on the gigaton scale," but the way to get there is to have a profitable business. And so combining my love of software and working in trading, I right away see that power markets are super volatile, right?

You're like, "Oh, this is amazing. This is amongst the most complex and volatile markets." And after I had sold my previous business, I actually did a project in upstate New York on the Hudson River, where I built an entirely environmentally aligned house, and it has solar and geothermal and batteries, induction. And the battery was really this eye-opening thing for me because it fit a lot of stuff together. You can put a battery. With a little bit of land, you can charge it. And this was a house, and this was before the period of really big inflation and some of the geopolitical problems that have caused energy prices to go up and power to skyrocket, so kind of pre-2022. And so the idea that this would be a house without a power bill for the most part didn't seem like that great of a feature in 2022. I mean, it really does change the economics of the house quite a bit. And so putting those all together, I was like, "Okay, I want Ground Floor Energy to be, over time, a really big business and have a great culture where we have innovative people doing important work."

And what we set out to do was to find, using software, existing connections to the grid that were underutilized, and we found a few different paths and have a number of projects that we're working to develop. And you could think of old factories. Whether it's like, I don't know, you live in the New York area now, so imagine Newark, New Jersey. There's something that we're working on there. Places that used to have a lot of industrial—

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[00:10:05] Keith Zakheim

Upstate New York is an area where there's a lot of that.

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[00:10:07] Patrick Flannery

Yeah, we have two projects right now that we're working on in upstate New York, and there's a lot of opportunity. And so thinking about things, like for us, it's like, one, using technology to identify where these locations are and the ideal locations tend to have fragile grids, fairly volatile prices and maybe some instability in the grids that are there. And so there might be a few factors that come together. The other thing that we're doing is we've really been focused on the mid-market. So you could think about things that are a handful of megawatts, maybe up to twenty. Twenty is particularly large. So instead of trying to build gigawatt scale—twenty megawatts is in a pretty important threshold where above that's transmission level versus distribution level below it.

So finding locations on the grid that are amenable for a battery, that have a lot of infrastructure in place. And on top of all that, this approach, which is to say, "Well, why haven't people done this?" And I had joked to some people on our team, it's like, why are there no outstanding minor league baseball players? And the answer is they go to the majors. So it's like, why are there not a lot of people doing this in the mid-market? And I think that one of the ways to do this is to focus on automation. So being able to do site studies and scour town records for approvals or moratoriums, understanding a tremendous amount about the state of the grid now. So I think that automation can help bridge what had been a very labor-intensive project. First bring in something to NTP, notice to proceed, and then eventually to commercial operation. So this automation can find these sites, of which there are many across America, and by applying automation to ultimately build and deploy them, we think we can produce really compelling returns, high teens or even low twenties.

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[00:11:57] Keith Zakheim

And I think where I'd like to start or certainly frame the age of adoption question, which is the point of this entire episode and format, and I know that you are eager to come on because like everybody else, you want to answer the age of adoption question. But with every business, what's the pain point you're trying to solve? And when I think about your business, there's a couple that you mentioned, but to me, the one that's the most vexing is the fact that interconnection capacity is such a scarce asset, right? And in a world of data centers and AI and energy producers and the demand for electricity, interconnection capacity being that bottleneck is just an incredibly vexing problem for the economy. Like at the end of twenty twenty-five, I think I've seen, according to Berkeley Lab, there's eighty-two hundred projects that are actively seeking grid interconnection. I mean, that is a huge queue. Huge queue. And so a company like yours that's gonna go and develop these utility scale battery projects at underutilized grid connections right away solves so much of that in terms of on the generation side and being able to get that energy onto the grid more quickly.

And so, one other point that I'd love to hear when you do reflect on the age of adoption question is when you quickly look at your website, you're like, "Ah, it's another battery company," but it's not a battery company, right? So that's your principal asset. But ultimately, it seems like where you've cracked the code is figuring out where those batteries should go. And with that, Patrick, I'm gonna ask the question, and then the floor is all yours again. Patrick, what is your age of adoption story?

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[00:13:42] Patrick Flannery

Yeah. So, I think that like for me to answer what's different about what we're doing is the two equally important is where to put them and how to bring them to market quickly. I think that that's the fundamental thing that we're trying to solve. I think that those start us on a process of being able to answer much more importantly, like in order to make a big impact on climate, we need incredible amounts of really affordable electricity. And I think that the aspiration for my company is that we can use technology to ultimately make energy more affordable, right? And you could start to do that locally if you can solve the problem at all, right? Like right now, the trend is undeniably that electricity always just gets more expensive.

And if you can say, "Well, in this one particular location, we've been able to put these things together," right? "And we've been able to use technology to do it," we might be able to find a particular consumer that doesn't need a hundred percent availability, right? You might be able to find something where they're gonna pay less, but their needs might be, you could think of EV charging or Bitcoin mining was not something that I care about, but it was a great example of something that doesn't need to run all the time. You could think of desalination or other sorts of workflows that don't need perfect reliability. So the way that I've thought about the company is like, there's this great big goal, but if you can just start somewhere, right? So like, how do we start to have an influence on the world?

And it's like, if you can get going and generate money, which we're showing that we can do, and then you can start to think about how you get better and better and better at all that. And so I think for businesses too, what I learned particularly as a second time entrepreneur, is that when you're starting out a lot of times people are gonna be like, "Oh, what's different or what's unique?" And we'll say, "Oh, well, we're using computers for this. We found these sites for that, and the returns look like that." And that's good, and that's enough. We've got real significant interest in partnerships. But what a business becomes over time is ultimately a manifestation of the founder's personality and effectiveness and work ethic. So it's like if you wanna build something great, it's about how you can drive that over time. Like, nobody really when they start with anything have anything other than their hopes and what they desire it to be. So, I guess that's the way that I started by thinking about it.

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00:16:19] Keith Zakheim

Yeah. And if we could just maybe zoom in a little bit around the economics of it and why that IRR can be so attractive, and I guess crudely, and I'd love to get the, obviously more expertise and get a little more granular, but it seems to me there's two arbitrage opportunities here. So the one is the grid infrastructure that's underutilized, and that really seems to be what you've developed is the ability to identify that and leverage it. And then, of course, the usual arbitrage opportunity of batteries that you store it when it's cheap and sell it when that demand is higher. So can you talk more about that, the business of what you do—and why those economics are so interesting?

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[00:16:57] Patrick Flannery

Power's kind of interesting. You can make money in a handful of different ways from energy. No small part of the potential for certain batteries is resource adequacy. So in many jurisdictions you'll have—this used to be a little bit, before there was as many batteries, it was a more significant portion of the revenue. But you had ancillary services to the grid, like frequency regulation. So the power grid will sometimes need batteries to kick in really quickly and help to regulate and you'll get paid for those services. So you're gonna get paid. Above that, you might get paid for capacity, and you could think of the most typical example would be really, really hot days, right? So, like, the grid may say, like, a watt avoided is similar to a watt produced. And so on these really hot days, they may say, "You'll agree to not consume power, and you may also agree to put power into the grid," right? So you'll get paid an amount of money to be available. Those are similar to peaker plants.

We think that these are really, really much better versions of that. So you can get paid a fair amount of money, and that contracted revenue can help finance the debt. And on top of that you might have, one potential path is you have guaranteed offtake or someone might be willing to, in the case of batteries, they use the term tolling, which is essentially to lease it. So you might be able to find a significant offtaker that wants that infrastructure that'll pay you a regular amount of money. And then the last part, which is what people oftentimes think of a lot, is the arbitrage. Some markets are super volatile. Texas is known for that, huge deployments there.

Different markets have different structures. In the case of a place like California, they have a really pretty vibrant market for what's known as CCA, Community Choice Aggregators. They're great offtakers that are willing to buy capacity some number of years out. And so those all fit together where you may have a mix of the potential, your revenue stack may be mixed. In New York State, they have a program up to five megawatts known as VDER, which is the Value of Distributed Energy Resources, and it's a set of tariffs that value renewables, which is solar and batteries. And they do it in a couple ways, which is its location value, its environmental value, its energy value, and the VDER stack is actually really compelling, particularly for small projects.

So, the VDER has a fair amount of merchant exposure, merchant being that kind of arbitrage component where you're gonna get paid based on what the market prices are doing. In today's market I think that the merchant is probably a little bit undervalued because it's harder to finance than guaranteed revenues, right? So, I think that part of the ideal portfolio construction—these batteries, by the way, very different than solar. A lot of solar deployments have returns in the high single digits, and you'll see, like in New York State, a curve where, when a lot of solar is producing, everyone's solar is producing, so energy prices in the wholesale market are relatively cheap in the middle of the day. And then as it goes to evening, as solar production goes down, energy prices will go up. And from the bottom to the top, the price can range by a factor of three X. It depends on the day and the time of year and other elements. And so, if you take existing solar deployments, and this is—we have a couple of projects that we're working on.

So you can think of smaller, mid-size C&I solar developers. By deploying a battery on their existing infrastructure, it comes online quickly. They may own the underlying land and were able to make this battery available quickly. And then you'll also have the same VDER agreements. They'll have existing infrastructure, and then right away they're using—basically making an asset that they have more valuable. You could just shift the lower performing, the lower earning portion of the day to be a higher earning portion of the day. And so we've seen a lot of interest from C&I type developers.

And one of the reasons for that, that they like to partner with a company like ours, and we think our company's pretty unique, is that actually running the battery requires work. It's very different than solar. So in the case of solar, a lot of these deployments, you build them and then you have an offtake agreement, and then whatever power you produce just goes straight out to the grid. So that's, I think, ripe for changing. And that goes to this core idea of like, if we can help people make more money, ideally a lot more money, then we will build more renewable infrastructure. And whether that persists over time, well, I, to some extent, I hope it persists over time, but I think ultimately markets evolve, and we know it'll become more competitive and more difficult.

And thinking about how to run the business, it's always about building new things and innovating and doing the next thing. So I hope that answers your question at least partially.

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[00:21:52] Keith Zakheim

It does, Patrick. No, it does. And thank you so much for that. And congratulations on all of your success to date, and we look forward to continuing to follow all the great things that are happening at Ground Floor Energy, and hope to see you soon.

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[00:22:06] Patrick Flannery

Have a great Climate Week next week in New York. Take care.

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[00:22:10] Keith Zakheim

The Age of Adoption podcast features CEOs, investors, entrepreneurs and policymakers sharing their climate and sustainability business transformation stories. Episodes can be found on your favorite podcast apps including iTunes and Spotify. The Age of Adoption podcast is brought to you by Antenna Group. Antenna is the home of conscious brands.

We partner with companies that don't wait for change to happen. These brands shape the future, are awake and already moving. Unsure if you are a conscious brand or even if you are one, whether you are positioned as one, please visit our website at www.antennagroup.com and take the Conscious Compass Assessment, a groundbreaking tool that enables enterprises to assess their brand against the eight traits of brand consciousness.

At Antenna, we partner with companies big and small, from growth-stage to Fortune 100, to tell their climate and sustainability stories. So once again, if you're interested in joining the conscious brand movement and learning more about Antenna Group, please check out our website at www.antennagroup.com, ping us on LinkedIn and make sure to visit the Conscious Compass.

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