Why investing in energy storage is risky business

While some batteries makers have turned away from selling into the slow moving electric car market and looked to power grid customers recently, here’s the catch with that move: selling energy storage technology to utilities can itself be a risky business, according to a group of venture capitalists at an energy storage conference in Silicon Valley Wednesday.

Abe Yokell, a principal at RockPort Capital Partners, said he thinks it’s easier to identify sales opportunities and determine potential return on investments in the consumer electronics and electric car markets compare to grid storage, given the utility industry seems to loathe embracing change and new technology.

“It’s very difficult to pin down a broad market where you can take a product and sell that product at a clear price,” Yokell said about the utility market. “It’s very ambiguous,” right now, he noted.

Utilities have started to consider installing energy storage as more solar and wind farms are built in their service territories. These renewable energy projects are materializing mostly as a result of state policies that mandate renewable electricity generation. But solar and wind farms can’t provide a steady supply of power that is critical not only for meeting customer demand but also for running the electric grid smoothly (the grid needs to operate at a frequency of 60 Hertz).

Energy storage can provide on-demand power to help balance the supply and demand of the grid. It also can allow renewable energy power plant owners to bank electricity and sell it when prices are high. Adding energy storage can even enable utilities to delay building more power plants and transmission lines because the storage systems – batteries or otherwise – can be recharged at night when electricity demand and price is low, and can add more power to the grid during the day when demand peaks.

But the reality is that market is so new that many potentially suitable technologies are still under development and too pricy. Utilities also want to maximize their investments by figuring out more than one way to make money off storage, and in many cases major regulatory changes need to take place for that happen.

“We’ve been looking for stationary storage (opportunities) for three years now, and we are crying out for companies that will fit our criteria for investments,” said Andrew Chung, a principal at Lightspeed Venture Partners. Lightspeed has invested in lithium-ion battery maker Leyden Energy, which is targeting laptop and tablet PCs as its first market.

Here are some other risks involved with investing in energy storage technology:

1). Are we there yet?: VCs like to say they want to see returns on their investments by at least seven years after they put up their money. But developing marketable storage technology can take longer than that. Battery startups, for example, often need to spend at least several years to investigate different materials to figure out which combinations can deliver the highest energy output. They also typically have to design the battery system with proper software to manage it. Then they have to show that their technologies can perform well in real-life settings and generate several years of data, or else they could have a hard time lining up the money to build a factory and win over utility customers.

2). It takes a lot of money to make money: By now, VCs have learned that commercializing cleantech, such as building the next best solar cells, often requires a lot more capital than they initially anticipated. They are happy to see the federal government ponying up the money to fund research and development. But they aren’t so sure they want to take the big risk by investing early themselves.

3). The missing link: The potentially lucrative energy storage space already has attracted many entrepreneurs and early-stage investments from public and private sources. But there is something amiss that delays efforts to commercialize technologies: private capital providers who can give that last push to launch products or get expensive projects built. In contrast, the solar industry has seen some of these players come in to help finance giant solar power plants

“The call to us is let’s reach out to the financial community and use our policy and regulatory tools and pull in decision makers and thought leaders in the capital world,” said David Wells at Kleiner Perkins. “Let’s create that missing player at the table that allows this emerging technology to become multibillion dollar biz like wind and solar.”

4). Too many me-too technologies: The promise of a large electric car market and renewable energy market, along with billions of dollars in federal funding in the last two years, has attracted oodles of startups and established battery makers to the grid storage market. Many of them are experimenting with same materials and announcing results that aren’t dramatically better than their competitors.  Startups will have to come up with something great in order to compete with long-time battery makers who also are working on next-generation technologies.

Photo courtesy of International Battery