ESS is betting the world is ready for a billion-dollar battery disrupter

Clean energy startups that toiled in obscurity for years have been going public and becoming billion-dollar companies. Oregon-based ESS wants to be the next one.

Instead of storing clean electricity in lithium-ion batteries, ESS makes a ​“flow battery” that moves electrons with a liquid mixture of iron and salt. ESS stands to capitalize on a few trends in the clean energy market:

• The rapid adoption of wind and solar makes storing electricity for later more valuable.
• Lithium-ion batteries, the current market leader for new grid storage, have notable downsides that include fire risk, supply-chain concerns and operational limitations. 
• The Biden administration says it’s time for an American manufacturing revival and unprecedented investment in grid infrastructure.

Ten-year-old ESS announced in May that it would go public by merging with a special-purpose acquisition company (SPAC), a recently popular alternative to a traditional initial public offering. The transaction should wrap up this fall; the exact timing depends on when the Securities and Exchange Commission completes its review.

If all goes according to plan, ESS will be traded on the New York Stock Exchange with a valuation north of $1 billion and the ticker symbol GWH. It will pocket some $465 million to spend on expanding its factory, sales efforts and delivery capabilities.

“What the SPAC market really allows you to do is just accelerate time,” CEO Eric Dresselhuys told Canary Media. ​“You can just go a lot faster.”

The anticipated surge in funds would let ESS set aside fundraising and focus on executing its mission to become the leading alternative to mainstream grid battery technology. Then it just needs to deliver batteries on a radically larger scale than it ever has and find ways to get paid for a type of storage that the market is just beginning to support.

Real factory, real products

Electric truck maker Lordstown Motors went public with a SPAC last fall, but now it’s at risk of running out of cash before it ever produces a commercial product.

ESS won’t face that problem. It already has a factory pumping out flow batteries just south of Portland, Oregon.

Its core product is the Energy Warehouse, which fits a rotund tank and several stacks of battery materials into a shipping container, along with the necessary electronics. ESS can customize discharge capacity and duration of storage. A customer could ask for 50 kilowatts for four hours or for 12 hours, for instance.

The company built out the factory with a $30 million Series C raise in 2019, led by SoftBank’s SB Energy and Bill Gates–backed Breakthrough Energy Ventures. During a June visit, I saw a test line in which robots prepared cells to be glued together into the battery stack that the proprietary iron liquid flows through.

That’s the first-generation automated line; the second generation will produce a cell every minute, said co-founder and President Craig Evans. Once several new lines are built, the factory will be able to produce more than 1.5 gigawatt-hours of storage capacity annually.

Technicians take the pieces from the robots, compile them and load them into cargo boxes docked along the wall of the factory. After hooking up pipes and electronics and loading the tank with the dry powdered version of the iron liquid, a truck carries away the finished Energy Warehouse.

ESS facility used to occupy half of this commercial complex, but it recently took over the remainder as well, gaining a number of additional shipping bays. After starting 2020 with 57 employees, ESS now has a workforce of 115 and growing.

One of those new hires was Dresselhuys, who started as CEO in April, ahead of the SPAC announcement. He founded Silver Spring Networks in 2002, pitching a vision of networked ​“smart” grids. That company went public and later was acquired by competitor Itron for $830 million in 2017.

Leveraging cheaper materials than its competitors

ESS didn’t choose an easy problem to tackle, but it is a potentially lucrative one.

Lithium-ion grid batteries have been able to garner massive investment and scale thanks to the electric vehicle revolution. Startups challenging lithium’s stranglehold on grid storage need to get cheap and excel where lithium-ion falls short.

Then a startup must leap from the lab into commercial production and win early customers to establish a track record in the field. 

In the hype-addled world of Silicon Valley venture funding, startups often trumpet customer pipelines that are wildly disproportionate to the deals they have actually closed.

ESS stayed modest. It avoided rash predictions about cost targets or prospective sales volume. The company’s SPAC announcement made several calibrated and verifiable claims about the product, such as:

• “An environmentally friendly, low-cost, long-duration storage battery engineered to support renewables and stabilize the electrical grid.”
• “Built from earth-abundant materials.”
• “Poses no explosion risk.”

Those are credible assertions for a system that stores energy with the help of rusty water.

“If it ultimately comes down to the cost of the raw materials, I’d challenge anyone to beat iron, salt and water,” Dresselhuys said.

Lithium-ion batteries benefit from massive economies of scale, but their bill of materials includes costly metals. Conventional batteries become overly pricey when scaled up for many hours of storage; all ESS needs to do is add more rusty water to the tank, which makes the incremental cost of additional storage much smaller.

“Iron might not be sexy, but there’s lots of it around,” said James Frith, head of energy storage at market research firm BloombergNEF. ​“What I’ve always liked about ESS is it’s a relatively simple technology when it comes to flow batteries.”

In contrast, vanadium flow batteries, a perennial contender in the lithium-ion challenger category, suffer when vanadium prices skyrocket, as they have in recent years.

“Vanadium is roughly 100 times more expensive than iron” in these types of applications, said Cyril Yee, who scrutinizes long-duration storage tech as head of investments and research at climate accelerator Third Derivative. (Third Derivative and Canary Media are both supported by climate think tank RMI.) ​“Flow-battery technologies that utilize low-cost redox species such as iron will have a cost advantage over vanadium.”

The challenge with iron flow

Iron flow batteries have problems of their own, however. The concept hasn’t yet achieved widespread adoption, even though it’s been around for decades, noted Yee.

“One known challenge with iron flow batteries is hydrogen generation at the negative electrode that eventually leads to cell failure,” he said. ​“A commercial iron flow battery will either prevent the generation or mitigate it somehow.”

ESS dealt with that by inventing what it calls a Proton Pump, which connects to the tank and passively mixes the unwanted hydrogen back into the solution. That maintains the balance of pH and states of charge in the liquid electrolyte circulating through the system.

“The battery is the heart, the electrolyte is the blood, and the Proton Pump is the kidney, which is keeping everything in balance,” said ESS President Evans.

That invention is a key commercial differentiator for ESS. Other flow chemistries need to cease operations regularly to rebalance their electrolytes, said Hugh McDermott, the company’s senior VP for business development and sales. A flow battery can’t make money while it’s down for scheduled maintenance.

“This is doing it continuously, so you’re never out any cycles,” he said of the Proton Pump.

Another general hangup for flow batteries is the cost of membranes or separators that allow electrons to pass but keep other materials from mixing. But ESS uses off-the-shelf separators from the battery industry — ​“it’s nothing exotic,” Evans said. That sidesteps risks associated with designing and manufacturing a new piece of material.

Then there’s the worry that a system that pumps liquid for decades eventually will leak.

In the latest product iteration, ESS reduced the number of pipe connections per Energy Warehouse from 170 to 36. Instead of relying on threaded pipe connections that need to be tightened just right, the new pipes get ​“thermally fused,” which means they are melted together.

Remaining risk: Growing fast

There are two remaining risks that ESS can’t solve in the lab: its ability to scale and the size of the market it hopes to capture.

Robust international supply chains deliver lithium-ion batteries capable of discharging hundreds of megawatts of capacity. ESS has yet to supply a project greater than 1 megawatt, though Evans said the company has signed contracts for projects above that threshold.

The executives didn’t seem particularly worried about jumping to the next level. That’s because they will have more competitive economics when the SPAC cash allows them to increase their manufacturing capacity.

“Ours is a volume business,” Dresselhuys said. ​“You get a lot of cost efficiencies from an automated manufacturing line, from optimizing designs and from volume. It’s not a terribly complex formula.”

Cash left over from the manufacturing buildout strengthens the corporate balance sheet.

And for winning over customers to the technology itself, ESS points to an unusual program hammered out with German reinsurance giant Munich Re. That firm studied the technology and decided to offer a performance warranty, which covers costs if the technology doesn’t perform as promised.

“Munich Re helps address the technology risk for the first few score buyers,” McDermott said. ​“The balance sheet helps address the commercial risk that you’re going to be around long enough to support that warranty.”

Remaining risk: How deep is the market?

Ultimately, ESS’ ability to deliver on a $1 billion valuation depends on the market that materializes for long-duration storage.

Lithium-ion battery plants routinely store four hours of power, but exceedingly few customers have installed systems designed for significantly longer-term storage. The theory, according to ESS and companies like it, is that the proliferation of exceedingly cheap renewables will trigger a knock-on market for devices that can cheaply store that power and turn it into a round-the-clock resource.

California, for one, has already committed to purchasing 1 gigawatt of long-duration storage by 2026 to keep lights on after sunset hobbles its ample solar power fleet.

“The long-duration [storage] market is here to stay,” Evans said. ​“It’s growing much faster than the shorter duration market.”

The uncertainty is that mechanisms for procuring and paying for long-duration storage have yet to be devised.

“There is going to be a need for it, but some of those critiques about how…you [should] incentivize that in the market, how [to] reward it — that’s the missing piece of the puzzle,” said Frith of BNEF.

Then again, lithium-ion batteries entered power markets before many structures existed to compensate them, Frith added. They competed effectively in the beachhead frequency regulation market, managing moment-by-moment grid fluctuations. Success there paved the way for batteries to compete for other roles; a decade later, they are a go-to capacity source in California and have found increasing success in other markets.

That history suggests that the present paucity of opportunities need not constrain the size of the long-duration market a few years or decades from now. But forecasting ESS’ likely share of that market will soon be a puzzle for public market investors to solve.

Lead photo: ESS co-founder Craig Evans inspects the flow batteries being loaded into shipping containers at the Oregon factory.