Jim Fiske would like to take a century-old energy storage technology and turn it upside down.
The founder and CEO of Gravity Power LLC plans to bury large tubes vertically underground and fill them with water. The water lifts large concrete and iron ore pistons that force the water through the blades of a turbine when released. The result will be electricity at costs far lower than the lithium ion batteries and other new technologies vying for a role in the 21st Century energy grid, Fiske says. It also could rival the competing water-based storage of today, which makes use of above-ground reservoirs.
“I’m pretty sure we’re going to get the next round of funding,” Fiske says of the $6 million he is presently seeking from venture capitalists. If so, Fiske won’t be the only energy storage entrepreneur cashing VC checks.
There are good reasons to think large-scale electric grid storage could be the next money magnet for cleantech investors. The potential market is massive, the need for storage urgent and investment opportunities are clearly on the radar of venture capitalists.
With utilities almost certain to spend tens of billions of dollars over the next decade to modernize an electrical grid that has operated largely unchanged for 100 years, entrepreneurial juices are flowing, and the number of seed companies making the rounds is on the rise. Money will begin to flow. The question is: How much?
So far, energy storage investments remain fairly small. VCs invested about $250 million in 16 energy storage startups this year, with most of the capital going to battery developers, but also into startups working on fuel cells and storage systems built around water, ice and compressed air, according to Thomson Reuters (publisher of VCJ). (See table: Energy Storage Investments for 2010)
Most cleantech investors consider grid storage a top priority and say they expect to invest in the space over the next several years, if they haven’t done so already.
“It’s a huge opportunity,” says Maurice Gunderson, a venture partner at CMEA Capital. “Large scale grid storage is the game changer. We can only imagine the products right now.”
In many respects the market is ideal for venture investing. Several competing technologies are set to face off, with no clear winner, and market niches could evolve to absorb those that don’t become dominant. Costs at present are high, so innovation has clear goals.
It also is early. According to ABI Research, utilities and other organizations will have installed 150 gigawatts of storage capacity in five years, with an annual growth rate of 2.6 percent. (A gigawatt of energy can provide enough electricity for about 300,000 homes for a year.)
But that is only a start. The world is projected to exceed 5,000 gigawatts of electrical generating capacity by 2015. Creating storage for 5% of that is a market opportunity of 250 gigawatts, nearly all of which will go to new technologies.
The key to cracking the market will be lowering storage costs and increasing capacity, or energy density. “The right amount of storage in the right place with the right response time is going to create enormous value,” says Jeffrey Byron, a commissioner at the California Energy Commission.
Large scale grid storage is the game changer. We can only imagine the products right now.”
For venture capitalists, the importance of energy storage is hard to overstate. In an environment where returns have come hard for cleantech investors, it is the next horizon, a potential moneymaker for startups that will mature in five to 10 years, as today’s generation of solar, energy-efficiency and electric car investments play out.
There is likewise a certainty to the market that goes hand-in-hand with the introduction of large-scale renewable power. Utilities across around the globe will add gigawatts of energy from wind turbines and solar panels, following the lead of states like California, with its 33% renewables mandate, and countries like China, which hopes to double renewable generation to 8% over the same decade.
Storage is an obvious companion. When the wind blows at night across west Texas or through southern California’s giant Tehachapi wind farm, storage will save the energy for peak period daytime use. The need is so great that California adopted a bill this summer requiring utilities to add energy storage. Democratic senators introduced a similar measure in Congress that relies on federal tax credits.
Storage has other important uses, too, some that could prove especially lucrative. It could add stability to the transmission grid by simplifying the ability to balance supply and demand. It could help avoid congestion on high traffic power lines and time shift low-cost power for use during high-priced peak periods. All these are opportunities could justify premium-priced products.
So far, risk averse utilities are approaching energy storage with caution. Many are hedging their bets and examining alternatives. “We’re going to need storage, [but] we’re going to have to have a lot of different types of technologies to integrate renewable energy,” says Michael Montoya, director of grid advancement at Southern California Edison.
And while venture opportunities are plentiful, the investment landscape is complex. Some technologies are too capital intensive to lend themselves to venture investing. This includes the most widely used and oldest storage technique, referred to as pumped hydro. Others have already drawn considerable interest: lithium ion batteries, for instance, the main power source for electric cars. Among today’s leading technologies are the following:
Utilities have a tendency to rely on what they know best and that has given a boost to pumped hydro. The relatively simple 100-year-old concept calls for pumping water up a hill to a reservoir when power is cheap and letting it run down through a turbine when electricity is needed. As much as 110 gigawatts is installed around the world today, making up the vast majority of all installed energy storage, with plants in California, New York and Virginia.
Southern California Edison operates a 200-megawatt plant at its Big Creek facility in the Sierra Nevada. Pacific Gas & Electric (PG&E) applied in August for permission to build a new facility in the Sierra Nevada foothills. Pumped hydro is the least expensive technology, at about $125 per kilowatt hour. But significant upfront capital costs and years of effort to secure environmental permits will likely curtail its use in the future.
Gravity Power is one startup trying to innovate in this space. Company founder Fiske claims he can generate a gigawatt of power from an acre of land and lower costs to below $200 per kilowatt hour. He has already convinced two VCs, raising a $3 million Series A round from 21Ventures and the Quercus Trust.
Privately held Eagle Crest Energy Co. is also working on hydroelectric pumped storage. The Palm Desert, Calif.-based company has raised about $7 million over the past two years from GRP Partners, including a $3 million round in February.
For the next five to seven years, there will be a lot of opportunity [in grid storage] at whatever level you want to play at.”
This technology is expected to give pumped hydro a run for its money. Compressed air is pumped into abandoned gas fields and caverns and released and heated to spin turbines when power is needed. The storage truly qualifies as bulk. Energy generation can continue for days. Plants exist in Alabama and Germany and costs are reasonable, estimated at about $200 per kilowatt hour. New plants are planned in New York and California.
However, compressed air uses natural gas, so it is not carbon free and, therefore, is a target for innovation. Work is taking place to develop versions that do not require fuel for heating the air. SustainX Inc., one startup in the space, has raised about $4.5 million over the past two years from Angeli Parvi, Polaris Venture Partners and RockPort Capital Partners.
Lithium Ion Batteries
Another frontrunner in the storage market is lithium ion batteries. But they are expensive—with an estimated cost of $1,000 per kilowatt hour—and may not have adequate energy density for large-scale storage. However, they may be appropriate for higher value uses, such as smoothing out fluctuations in the energy supply. The enormous amount of production capacity coming online should drive down costs.
Utilities are taking a close look. Southern California Edison will begin testing an 8-megawatt lithium ion battery in the next couple months at a substation near the Tehachapi wind farm. “We will see if it lives up to what’s advertised,” says Montoya. The technology is being provided by A123 Systems Inc. (Nasdaq: AONE), which still counts VCs among its shareholders. (As of late April, North Bridge Venture Partners held an 8.5% stake in A123 and GE Capital held a 7.9% stake, according to an SEC filing.)
Additionally, 24M Technologies Inc. spun out of A123 this year to work on lithium ion for grid storage, raising $10 million in August from Charles River Ventures and North Bridge Venture Partners. The Cambridge, Mass.-based company also received a $6 million grant from the Department of Energy.
The major drawback to lithium ion batteries, experts say, is that improvements in their energy density will likely be modest, maybe just 2 to 3 times what it is today. That gives an opening to other battery chemistries.
There is no shortage of batteries using a variety of chemistries other than lithium ion that are being tested for grid use. NGK Insulators Ltd., a public Japanese company, has a sodium sulfur battery currently in use, and General Electric Co. (NYSE: GE) has promised to get in the market. Capacity is high and costs are lower than lithium ion, at $500 a kilowatt hour. But the batteries operate at high temperatures, which has raised safety concerns.
Zinc air batteries also hold the promise of lower costs and high energy density. Increasing manufacturing volumes to decrease costs is key. So is increasing the recharging cycles they can handle before degrading. Both public companies, such as Power Air Corp. (Nasdaq: PWAZ), and VC-backed startups, such as ReVolt Technology AS, are working in this area. (ReVolt has backing from Northzone Ventures, Sofinnova Partners and Verdane Capital, among others.)
A number of companies are working on “flow” batteries, including two with VC backing: Deeya Energy Inc. and EnerVault. Deeya has raised a total of $55 million since 2006 from BlueRun Ventures, Draper Fisher Jurvetson, Energy Partners, New Enterprise Associates and Technology Partners, while EnerVault raised $3.5 million in February from Oceanshore Ventures and U.S. Ventures.
Other players in the space include publicly traded ZBB Energy Corp. (AMEX: ZBB) and Red Flow Ltd., which is listed on the Australian Stock Exchange.
The signal we get from utility people is that lithium ion technology will be a major part of their future. We see there being ample demand for our products.”
Flow batteries are similar to large fuel cells and often make use of big storage tanks of electrolytes. Pilots and early deployments are underway, and the batteries are more scalable than lithium ion. The price is promising, at an estimated $400 to $450 a kilowatt hour. But the technology is immature and many of the batteries use the toxic chemical bromine.
These storage devices hold short bursts of power and can rapidly charge in seconds. They also don’t wear out from frequent recharging, so they are durable, unlike lithium ion batteries. Their efficiency and relative low cost make them appropriate for uses where quick response is necessary, such as capturing the energy from a gust of wind.
Researchers hope super, or ultra, capacitors can extend the lives of lithium ion batteries by taking over recharging duties for short power bursts. Large public companies, such as Maxwell Technologies Inc. (Nasdaq: MXWL) and Panasonic Corp. (NYSE: PC), make super capacitors.
Like super capacitors, flywheels produce short bursts of electricity and their fast response can be useful for grid stability. They absorb energy to spin with little friction at high speeds until they are harnessed to turn turbine blades and create power. Costs are high, at an estimated $1,500 per kilowatt hour, and maintenance has been an issue. Flywheel vendor Beacon Power Corp. (Nasdaq: BCON), a penny stock, claims flywheels have the ability to charge and discharge 120,000 times, compared with several thousand times for lithium ion batteries.
Perhaps the best known and largest ice storage demonstration is being conducted in southern California by VC-backed Ice Energy Inc. (Ice Energy closed a $24 million Series C in October from Energy Capital Partners, SAIL Venture Partners and Second Avenue Partners.) The company’s Ice Bear air conditioning units make ice during the night when power is cheap and use it during the day to cool buildings. Power demand is transferred from expensive daytime periods to inexpensive off peak. Privately held Calmac Manufacturing Corp. also is active in the market.
Experts predict that at present, batteries and compressed air appear to hold the greatest immediate promise for large scale energy storage. This explains the interest general partners show in battery startups. However, costs remain a big challenge and no clear path exists to quickly bring them low enough to compete with generating new power from natural gas plants. Many large entrenched companies—General Electric, for instance—also pose a challenge Longer term, technological creativity may change the calculus considerably.
Ripe for Innovation
Across the industry, innovation is proceeding at a fast pace.
On the flywheel front, Beacon Power of Massachusetts hopes to cut the cost of a plant in half over the next several years, to $30 million. It broke ground last November on the construction of a $69 million 20-megawatt flywheel facility in Stephentown, N.Y., that it claims will be the first grid-scale flywheel installation in the world.
The holy grail in energy storage really is getting a system down below $100 a kilowatt hour [or a battery system below $200 a kilowatt hour].”
Super capacitors also are hot. “There’s still plenty of R&D that’s necessary,” says Gary Rubloff, director of the University of Maryland’s NanoCenter and Energy Frontier Research Center. But Rubloff’s laboratory tests already show a 10-fold improvement in energy density using miniature carbon nano wiring that enables a million capacitors to fit in a dot one-eighth of a millimeter in diameter. He expects a prototype in two to three years.
A lot of venture investing is presently focused on batteries. One venture capitalist with money at work is Lee Burrows, a managing director at VantagePoint Venture Partners. VPVP has backed Premium Power, the maker of a zinc bromide flow battery.
Burrow says he believes flow batteries will find a market in key applications, such as providing local grid stability and reducing the need for power plants that run only during periods of peak demand.
But batteries are just a start. “For the next five to seven years, there will be a lot of opportunity at whatever level you want to play at,” says Burrows. “We have been tracking [grid storage] for quite some time,” and expect to make more investments.
However, new battery startups will meet tough competition. Alex Bok, senior director of business development at VC-backed Boston-Power Inc., says his company already has grid-adapted lithium ion prototypes going out to utilities for testing. Boston-Power, which raised a $60 million Series E in June led by Foundation Asset Management and Oak Investment Partners, expects to have pilots in place next year.
“The signal we get from utility people is that lithium ion technology will be a major part of their future,” Bok says. “We see there being ample demand for our products,” with most utilities eventually having hundreds if not thousands of units.
Another promising area of innovation has less to do with storage and more to do with managing it. Sierra Ventures Partner Robert Walker, who considers grid storage a top investment theme, says he is interested in management and control systems for complex storage projects, such as battery installations that might include a thousand cells or more. Switches will be needed to bypass cells that go bad and to keep them from taking down entire strings. At least one company that is working on integrated power management and storage systems is Xtreme Power Inc. The Kyle, Texas-based company raised $29.5 million in July from Bessemer Venture Partners, Dow Chemical Co., POSCO BioVentures, SAIL Venture Partners and Skylake Incuvest & Co.
But innovations in storage will ultimately boil down to dollars and cents. “The holy grail in energy storage really is getting a system down below $100 a kilowatt hour,” or a battery system below $200 a kilowatt hour, says Jacob Grose, a senior analyst at Lux Research. In many instances, particularly batteries, these breakthroughs are not around the corner. Another challenge will be figuring out how to charge for storage, a rate setting issue over which regulators in California are still grappling.
That’s why utilities are closely watching a series of 16 technology demonstrations just now getting started. The tests are being funded in part by $185 million in grants issued by the Department of Energy last November.
“It’s a waiting game,” says Eric Bloom, a research analyst at Pike Research. “I think a lot of [utility] people are waiting to see what the results of the demonstrations are before investing.” Bloom bets the demonstrations will take two to three years and the first big wave of buying may not begin for five years.
In the meantime, VCs say they recognize the danger of over investment. Walker says he will remain disciplined on investment size. The ideal hardware company might require $50 million to $65 million to get to scale. He plans to avoid deals that require more.
Still, some VCs say grid storage investing could unfold the way solar did, for good or bad. At first, scores, if not hundreds, of startups receive funding. Then as the sector evolves, consolidation takes place and leaders emerge. After the thinning comes the need for scale-up dollars to build factories and expand sales teams.
“It will not be as capital intensive [as solar],” insists Burrows of VantagePoint. To come up with expansion capital, syndicates of VCs will come together and maybe private equity will step in. But there are no guarantees.
For the moment, investors seem to be taking their time. They are listening to startups, digesting technologies and beginning to choose companies. “They are still weeding through the noise,” observes Fiske of Gravity Power. When they finish, expect the first wave of money to go out and the chance for another cleantech bubble to slowly inflate.