This is an energy storage startup you need to know about

Inside a sunlit, cramped office near San Francisco’s financial district, entrepreneur and former political operative Susan Kennedy has been leading a team that is at the forefront of the emerging market for energy storage. The company, Advanced Microgrid Solutions, was in stealth mode until it became one of a handful of companies that recently won contracts — and a whopping 50 MW order — to build and manage large installations of batteries in buildings for utility Southern California Edison.

But unlike other companies on that list, Advanced Microgrid — founded in 2012 and funded with private equity from undisclosed sources — isn’t a big energy company, nor has it otherwise built a history of delivering on projects. And, on a side note, in the male-dominated energy industry Kennedy’s executive team boasts more women than men.

Susan Kennedy

An advisor to Advanced Microgrid Solutions, Nancy Pfund, described Kennedy as “a talented individual” who “has a good lay of the land in terms of knowing what’s compelling for utilities.” Pfund is a managing partner with DBL Investors, a San Francisco venture capital firm that invested in Tesla Motors and SolarCity. Tesla is building a large battery factory for both its cars and the kind of energy storage projects that Advanced Microgrid is developing.

The backgrounds of Kennedy and her co-founders shed some light on the startup’s stealthy sprint into the market. Kennedy was the chief of staff to former California Governor Arnold Schwarzenegger, who signed the Global Warming Solutions Act of 2006 that created a master plan for reducing California’s carbon emissions. Kennedy also was Gov. Gray Davis’ deputy chief of staff and cabinet secretary; communication director for U.S. Sen. Dianne Feinstein; and a commissioner on the California Public Utilities Commission.

Kennedy’s co-founder, Jackalyne Pfannenstiel, was the assistant secretary of the U.S. Navy in charge of its energy strategy. Pfannenstiel also chaired the California Energy Commission and before that worked at utility PG&E for twenty years.

Tesla investor Nancy Pfund with Tesla CEO Elon Musk at the launch of the Model S.

Tesla investor Nancy Pfund with Tesla CEO Elon Musk at the launch of the Model S.

Standing around the kitchen table in one corner of the San Francisco office, the petite Kennedy spoke with great energy about transforming where and how electricity is sourced and how the grid is managed.

Why energy storage is emerging now

California is at the forefront of clean energy generation, and it is undergoing two parallel tracks of change: one defined by the rise of giant solar and wind power plants in remote locations and the other by the proliferation of solar panels on homes, offices and industrial buildings.

But along with the increase in renewable energy generation on the grid comes headaches for utilities in managing the grid, which needs to be able to maintain a balance of supply and demand to avoid blackouts. That worry was one of the reasons that California began carrying out a mandate over the past year that requires its three big utilities to buy 1,325 MW worth of energy storage services by 2020 (with projects completed by 2024).

Energy storage systems can discharge quickly onto the grid to deal with any supply imbalance caused by the intermittent infusion of solar and wind energy. They can also reduce the need to build a type of natural gas power plant that ramps up quickly and is used mostly when demand spikes, but that is inefficient at burning natural gas and spews emissions.

power grid

Kennedy is keenly interested in developing and owning storage projects on commercial and industrial properties. These systems can generate a variety of sources of revenue for the company.

Battery systems can bank solar electricity for use at night or when power from the grid is expensive during certain times of the day, say a hot summer afternoon. Even without solar, the battery system can still take in energy from the grid when electric rates are low and discharge it for onsite use during the day.

Aside from making money by helping businesses use energy more efficiently, Advanced Microgrid also hopes to get paid by utilities when it curbs the amount of electricity drawn from the grid for certain minutes or hours when the utilities call for it and uses its batteries to meet the buildings’ demand during those times (this is called “demand response.”).

Having multiple streams of revenue is particularly important in these early days of building the energy storage market, when advanced batteries are expensive and there aren’t enough installed yet to reach the lower manufacturing and project development costs that will come with scale.

“The opportunity to develop energy sources at the customer side of the meter will be the next-generation change in energy,” Kennedy said. “If we succeed, then we will change demand response forever. We will make it valuable to utilities. We won’t add congestion to the grid.”

How it works

Advanced Microgrid won four contracts totaling 50MW with Edison, which still needs to secure the utilities commission’s approval for them. The startup won the contracts because it understands how to customize projects to meet Edison’s needs.

Kennedy recruited Audrey Lee, who previously worked at the utilities commission as an adviser to the commission’s president, to lead software development and battery system designs. The company’s chief commercial officer, Katherine Ryzhaya, was a power purchase agreement negotiator at Pacific Gas and Electric.

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One of the challenges for Advanced Microgrid is to figure out the size of the battery systems that are needed to meet the projected needs of the commercial buildings and the utility. There’s a penalty to be paid if Advanced Microgrid fails to deliver what Edison needs.

The startup plans to install the first 10MW of lithium-ion battery systems in clusters of commercial buildings in Orange County, Calif. Those systems will run from several hundred kilowatts to up to 1 megawatt. The company has developed in-house software for analyzing energy and other data and designing battery systems.

Advanced Microgrid is looking at buying batteries and the software for running its projects from companies that already have deployed their technologies commercially, said Kennedy. But she declined to say which companies are under consideration. Using proven technology also will be key to lining up project financing, which is also a subject she’s mum about.

If all goes well, Advanced Microgrid expects to bring online the 10MW project in Orange County by Jan. 1, 2017 and the rest of the 40MW in Los Angeles by the end of 2017.

The pressure is on for the startup to deliver. “We passed the first test by winning the bid. Now we have to prove that we can build them and create values on both sides,” Kennedy said.

Is the solar panel & battery combo ready to change energy markets?

The big idea right now for solar and batteries is this: put solar panels on your roof, a battery in the backyard (or basement), and become utterly independent from the power grid, using free electricity from the sun. Batteries have long been looked to as a way to store energy solar energy during the day to be used at night, but they have long been too expensive to be used widely. But many companies are looking at 2015 as a very important year for the solar and battery partnership and I’ve heard the word “tipping point” being used repeatedly about this intersection recently.

Why all the excitement and why now? First off, traditional lithium-ion batteries — the kind being widely used in cell phones and laptops — are becoming cheaper than ever before. Electric car company Tesla and Japanese battery giant Panasonic have been working closely on lowering costs of their lithium-ion batteries significantly, and with Tesla’s “gigafactory” the companies expect to be able to reduce the lithium-ion battery cost by another third.

solar panel

Navigant Research estimates that Tesla pays about $200 per kWh for its Panasonic battery cells today, and that price could drop as low as $130 per kWh by 2020 when Tesla’s massive factory — which is expected to more than double the world’s lithium-ion battery production — is fully up and running in Nevada. Several years ago, lithium-ion batteries cost closer to $1,000 per kWh. Tesla plans to sell some of the batteries from its factory into the power grid market, and SolarCity (the installer company chaired by Tesla CEO Elon Musk) already uses Tesla batteries for a solar panel energy storage system.

Lithium ion batteries are becoming such a clear low cost platform for energy storage that other startups beyond Tesla are adopting this idea, too. At CES last week, a startup called Gogoro launched an electric scooter and battery swapping infrastructure based around modular lithium ion batteries designed also in conjunction with Panasonic. Owners of the Gogoro scooter will some day be able to swap out their two depleted batteries at a nearby battery swap station, and they will likely pay a subscription for access to the batteries.

Gogoro's electric scooter and battery station

Gogoro’s electric scooter and battery station

But it’s not just the economics of lithium ion batteries that are driving the pairing of solar and batteries. Other startups have been developing newer, low-cost battery chemistries that are optimized for the power grid, like Aquion Energy and Ambri. Aquion Energy last week announced that one of its largest battery installations to date (2 MWh) is going into a solar system on the Kona coast of Hawaii.

The surge in solar panel installations is one of the main drivers behind this grid battery trend. There’s a lot bigger market these days for solar: More than a third of all new electricity installed in the U.S. in the first three quarters of 2014 came from solar panels, both utility-scale solar and solar panels on residential rooftops. That’s second only to new natural gas plants.

Battery stacks and modules in Aquion Energy's factory. Image courtesy of Katie Fehrenbacher, Gigaom.

Battery stacks and modules in Aquion Energy’s factory. Image courtesy of Katie Fehrenbacher, Gigaom.

Solar companies, like SunPower, SolarCity, Sunrun and others, are doing deals with battery makers, looking to offer new services. Startup Stem, which uses distributed battery packs to work like virtual power plants, is working with Kyocera Solar.

Then there’s the grid battery market that’s being opened up by the state of California’s aggressive mandates for energy storage. California utilities are being asked to buy 1,325 megawatts of energy storage services by 2020, and utility Southern California Edison has already said it will buy 250 MW of energy storage systems. Part of SCE’s plans will be made up by a huge 100 MW battery plant from AES Energy Storage and a 85 MW contract from Stem.

Tesla's image of its clean powered factory. Courtesy of Tesla.

Tesla’s image of its clean powered factory. Courtesy of Tesla.

So clearly, utilities aren’t worried about energy storage in general, because they will some day be major users of this technology. But in the short term, some are worried about so-called grid defections. If your solar panels and battery offer you all the electricity options you need, why do you need the utility?

However, according to a recent report from Moody’s, batteries and clean power are just still too expensive to be too threatening right now. Moody’s said that even with battery prices at $200 per kWh, and solar panels at $3.50 per watt, these technologies are “an order of magnitude too expensive to substitute for grid power.” Battery prices would have to be closer to $10 per kWh to $30 per kWh range to be cost competitive widely for the power grid, said Moody’s.

Those costs might be difficult for (most) residential customers to justify, but it could be a different story for commercial building owners. GTM Research says the market for solar panels paired with batteries will surpass $1 billion in annual revenue by 2018 (up from just $42 million last year), with collectively 318 MW of solar and storage capacity installed in the U.S. by that time. One in ten new commercial solar customers will opt for an energy storage addition by 2018, predicts GTM Research.