December was a happy time for Beacon Power (Nasdaq: BCON), which develops large discs called flywheels that spin like tops to store energy as motion. The company's new prototype was spinning at its top speed of 16,000 rotations per minute in a test, with no problems.

But, as engineers began powering down the 25-kilowatt-hour flywheel to end the test, a circuit breaker in the building tripped, cutting power to a magnetic bearing that supported the flywheel. The result was a sudden increase of air pressure that damaged the flywheel's test cell and the surrounding area.

Beacon's stock price fell 5.3 percent to 89 cents per share when the company announced the malfunction in January and said it would cause delays. The failed test added uncertainty about what would happen if all the power cut out in real life, said Gene Hunt, Beacon spokesperson.

The problem turned out to be some parts in the lower portion of the cylinder that rests on the magnetic bearing system, which levitates the flywheel in the air so its speed isn't slowed by friction, he said. When the power was cut off suddenly, the cylinder dropped.

So the Massachusetts-based company set its engineers - and some outside specialists - on the problem. The result was some new base parts and changes to the software and circuitry that controls the motion of the system.

This week, Beacon announced the new design has put the company back on track. The Smart Energy 25 flywheel passed all its performance tests, including the critical "lift-circuit failure testing," in which power was cut off abruptly instead of gradually.

"This is a tremendous accomplishment by our engineering team, representing thousands of hours of design, development and testing," CEO Bill Capp said in a press release, adding that he expects the flywheels to be running in the company's manufacturing plant in January and to be connected to the grid via Beacon's first commercial facility in April.

Investors apparently also thought the successful tests bode well for the company. On Wednesday, the day of the announcement, share prices rose 10.2 percent to reach $1.83 per share with 7.7 million shares traded, which represents one of Beacon's most active trading volumes of the year. The stock settled to $1.78 per share Thursday, still up 8.5 percent from Tuesday's closing price.

It's an exciting time for Beacon, Hunt said. "Beacon spent 10 years in development and now it's six to eight months away from commercialization," he said. "I think of it as the little company that could."

A Bit of Background

Originally meant to recapture energy from hybrid cars' brakes, flywheel technology has stumbled along as companies have struggled to find the right market, and Beacon is no exception (see A Short History).

But Farah Saeed, a senior consultant for Frost & Sullivan, said the market turned in 2004, when it began to see double-digit growth in sales every year.

Flywheels make up less than 10 percent of a worldwide backup-power market that also has seen double-digit growth, reaching an estimated $6.56 billion in revenue in 2006, Saeed said. That growth has been driven mainly by new data centers, she said.

But this growth hasn't included Beacon, which hasn't yet commercialized.

"They kind of dropped out of the picture for some time," Saeed said.

Most flywheel companies are now targeting large data centers and other high-tech markets, like semiconductor manufacturing, that lose value if the power goes out even briefly. Flywheels can bridge the gap between the beginning of a power outage and the time it takes for a generator to kick in.

Beacon is taking a different approach, targeting frequency regulation instead of backup power.

In the United States, electricity needs to flow over the grid at a constant 60 hertz, or cycles per second, to run household appliances and electronics. Grid operators are tasked with keeping the frequency steady, and they do this by sending out signals calling for frequency-regulation providers to supply or absorb power for or from the grid when needed.

About 1 percent of all power produced in North America is used to maintain the energy balance of supply and demand, to regulate frequency, said Chet Lyons, Beacon's director of marketing and sales.

Next Steps

Beacon thinks it can provide that regulation at a lower cost than power plants and tap into the $2-billion frequency-regulation market.

The company already has been accepted by three different grid operators after completing trials in California and New York, and is finalizing design plans for its first commercial plant, which will include a 200-flywheel project that would provide up to 20 megawatts of power for as long as 15 minutes. An unusual feat considering most flywheels only provide power for seconds, not minutes.

Those 20 megawatts would have produced $9.2 million per year in revenue at 2006 prices in New England. Beacon expects the plant to cost about $37.5 million to build, bringing a return on investment in less than four years, Hunt said. Subsequent plants are expected to cost less, with the third plant costing about $25 million for the same size, Hunt said.

With the Smart Energy 25 flywheel tested and certified, Beacon is finalizing design plans for the plant and expects to announce those designs -along with the location of the plant - by the end of this month, Hunt said.

To fund the plant, Beacon closed a $10-million financing deal last week, for stock sold at market price, and plans to raise another $10 million before the end of the year, Hunt said.

The company expects to have 10 to 20 megawatts of frequency regulation in service by the end of 2008.

While Beacon is trying to distinguish itself by looking at a market that other flywheel companies aren't addressing, Saeed said she expects the biggest markets for flywheels will continue to be sites that already have generators, such as data centers and manufacturers, and that require 20 to 30 minutes of backup power to shut down their systems.

Beacon said it doesn't plan to stop at frequency regulation. While focusing on frequency regulation for now, Beacon is also looking to refit its flywheels for other applications, one of which could be backup power, Lyons said.

"Instead of being a bridge, ours could replace batteries," he said. "Fifteen minutes is enough time for an orderly shutdown [in some applications], so we wouldn't need batteries."

He retreated a bit, saying backup power is only one of hundreds of potential applications Beacon is working on.