Investors are pouring money into grid storage startups

After a sluggish start, storage is finally coming into its own as a business.

Key Capture battery plant
A Key Capture battery plant (Key Capture Energy)
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A flurry of high-value acquisitions and investments in recent weeks and months suggests that energy storage is no longer the nerdy younger sibling to the renewables industry but a full-grown business in its own right.

​The demand is really hard to wrap your head around,” said Kelcy Pegler, CEO of Durham-based FlexGen, which recently raised $150 million to grow its grid battery technology business.

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Renewables are expanding their market share throughout much of the world, delivering cheap power that fluctuates throughout the day. The rise of electric vehicles creates new patterns of consumption across space and time. Put those trends together and you get a greater need for flexibility than the electricity system has traditionally been able to provide. 

Energy storage creates that flexibility. It’s not new: Legacy pumped-hydro projects still account for the vast majority of the storage available on the grid today. They store and release energy by shuttling water between lower and higher reservoirs. But high construction costs and concerns around siting have all but frozen new hydropower construction.

Hence the battery craze. Lithium-ion batteries are mass-produced on a supply chain built out for consumer electronics and electric vehicles. They can be packaged with inverters and digital controls to become power plants, capable of instantly sucking in electricity or discharging it as needed. Since they emit no local pollution and fit in a tight footprint, they can slip into populated areas where electricity is consumed but where it would be impossible to build a new gas-burning plant. 

Over the last decade, enterprising innovators willing to take a risk on new technology and unproven business models have demonstrated a few things. Battery plants work — they’ve been responding to utility or market signals and providing tangible value to the grid for years now. And batteries can be lucrative — if you develop smartly and anticipate market needs before like-minded peers saturate a particular niche.

Now the industry is graduating out of its scrappy entrepreneurial phase and turning into an infrastructure investment play. The early entrants who figured out how to build successful smaller batteries suddenly need far more capital to enact their surging ambitions. And they’re finding it, as new classes of investors grasp for a piece of a market expected to triple over the course of 2021.

Adding a zero: $10 million to $100 million

Numerous companies bear out this trajectory in microcosm. One is called Key Capture Energy.

Key Capture launched in 2016 to build small utility-scale batteries for New York’s grid — 10- or 20-megawatt plants, just a fraction of the capacity of a typical gas power plant. To learn how to build and operate energy storage, you have to just do it, CEO Jeff Bishop told me this week. So he started small.

Since then, Key Capture moved into the ERCOT power market in Texas to build some of the largest batteries in that territory. Now it’s preparing for construction of a 200-megawatt battery near the recently shuttered Indian Point nuclear power plant outside of New York City, among other projects. 

In practical terms, that tenfold jump in project size means that instead of needing tens of millions of dollars to build something, companies now need hundreds of millions. That’s not a bill that bootstrapped entrepreneurs can pay. It requires finding a partner with a lot of cash and who is comfortable with the risk profile and returns of grid infrastructure.

Now we — and the rest of the industry — are all scaling,” Bishop said. We’re getting to that place where the projects are being incorporated more into the mainstream, so it’s a very different capital structure that [is seeking out] those projects for the long term.”

Key Capture found its partner last week when it was acquired by SK E&S, a Seoul, South Korea-based energy and power holding company founded in 1999. The parties did not disclose sale price or terms, but Bishop confirmed to Canary Media that the new parent company pledged $1 billion to build out and grow Key Capture’s pipeline, which currently sits at 3,000 megawatts.

Until 2020, the entire annual U.S. storage market wasn’t worth $1 billion. Now that’s just one company’s budget, and Key Capture is far from alone in seeking, and winning, new investment.

The new picks and shovels”

Key Capture’s acquisition is a case of investor interest in that company’s core skills of acquiring land, winning contracts and developing battery plants. But other storage companies that engineer and program the battery plants have also started attracting suitors like Queen Penelope of Ithaca.

Three weeks ago, FlexGen raised $150 million in equity investment from Apollo Global Management and others. FlexGen had raised about $25 million previously, said CEO Pegler.

Pegler, who led several solar startups prior to joining FlexGen, believes that storage is crossing an inflection point that the solar industry hit about a decade ago.

​It went from if’ to when,’” he said. “​There was disproportionate upside for those that could move quickly. And we’re seeing that in the battery storage space.”

FlexGen’s sales pipeline grew 300 percent since the start of the year, as existing customers came back for more and new market entrants sought out their first battery project. 

With the size and scale and pace of the transition we’re in the midst of, we’re seeing a need for capital,” Pegler said. 

The FlexGen investment was the largest bet on grid storage to date for Apollo, according to Orme Thompson, a principal in Apollo’s private equity business unit focused on natural resources. But the overall company, which handles some $472 billion worth of assets, has already invested billions of dollars in various facets of the transition to clean energy.

We see grid storage as a key market that is benefiting from the growth in renewables and broad decarbonization trends, enabling greater build-out of intermittent renewable resources by supporting reliability,” Thompson explained. Apollo’s considerable experience in the power sector gives us an appreciation of just how important these assets are and the economic value proposition of energy storage.”

The private equity business liked FlexGen’s potential to scale rapidly as a picks-and-shovels” supplier to the storage industry, Thompson added. But battery plants could prove attractive as an infrastructure investment for other divisions of the company.

Part of the pack

Until recently, a $150 million investment would have broken the y-axis on a graph of early-stage grid startup investments. 

FlexGen still leads the pack for garnering the single largest investment in a company working on lithium-ion batteries for the grid (as opposed to car batteries, which have raised much more). But in the heady days of 2021, it’s one of many nine-digit sums finding a home among energy storage innovators hungry for growth. 

Fluence, the grid storage integrator co-owned by Siemens and power producer AES, kicked off the year by selling a 12 percent stake to the Qatar Investment Authority, a sovereign wealth fund. QIA paid $125 million, which happened to place Fluence’s valuation north of the $1 billion line. The company already had financial backing from two giants in the power industry, but it jumped at the opportunity to raise additional capital and grow faster.

Another leading battery integrator, Oregon’s Powin Energy, closed a $100 million investment in February. That money bolstered the company on its way to delivering an expected 2 gigawatt-hours of storage plant capacity this year — more than triple its total installed capacity prior to 2021.

The list of eye-popping storage deals has to include Form Energy, which closed a $200 million Series D from global steel conglomerate ArcelorMittal this summer. That makes it a venture-capital darling among the contenders for long-duration storage; Form is working on iron-air batteries that it says can store power cheaply for days on end. 

Then there’s a growing list of storage companies heading to public markets via special-purpose acquisition companies, dodging the old financial gatekeepers and their pesky demands for track records and proof of commercial viability.

Who’s next?

With seemingly every storage contender seeking cash or an acquisition from a growing but still small pool of interested parties, competition within the industry could flare. But some of the recent recipients sound pretty zen about it.

When an industry is in growth mode, everybody plays nice in the sandbox because there is plenty of sand,” Key Capture’s Bishop said. 

FlexGen’s Pegler agrees: The market has such a spike in demand that there’s plenty of room for everyone to succeed.”

Indeed, competition may become more fierce on the financiers’ side, as more firms wake up to the potential of storage only to find a shrinking pool of companies still seeking a funder. 

Private equity is now sinking its teeth in as well, but conventional energy giants aren’t ready to bite. American oil majors have largely rebuffed calls to branch into renewable power markets in general, in contrast to their European counterparts. 

Even the more enthusiastic European majors have remained modest in their grid battery activities.

  • BP’s solar development subsidiary, Lightsource, lists storage as an offering, but its U.S. project roster only includes solar plants.
  • Shell targeted smaller project sizes when it bought sonnen, a German home battery company.
  • Danish wind giant Ørsted (formerly the oil and gas concern DONG, which rebranded to get oil and natural gas” out of its name) says it has a 40-megawatt/40-megawatt-hour battery operating at a solar farm in Texas.
  • French company Total owns legacy battery manufacturer Saft but hasn’t done much large-scale storage development of its own.

The legacy oil and gas [firms] and huge power companies, I think they’re figuring out how they invest into and participate in an unequivocally transitioning grid,” Pegler said.

The scale of investment heading to storage right now is colossal compared to the industry’s very recent infancy. But even the new check sizes are inconsequential for oil and gas titans that regularly drop billions of dollars on a single project.

Julian Spector is an editor at Canary Media and reports on the rise of clean energy. He worked at Greentech Media for nearly five years, and before that he reported for CityLab at The Atlantic.