Advanced Microgrid Systems, a company almost no one had heard of until last fall, announced a landmark partnership with SunEdison this week to finance and develop 50 megawatts of distributed energy storage under a 10-year capacity contract with Southern California Edison.
AMS and SunEdison will deploy storage projects at commercial sites across the West Los Angeles Basin as part of SCE’s 2013 Local Capacity Requirement solicitation, intended to substitute generation from the now-shuttered San Onofre nuclear plant. AMS is working with SCE from the outset to deploy storage where the grid is most stressed -- such as in solar-rich areas with a steep rise in evening demand. The utility will be able to call on an aggregation of batteries to reduce load at hybrid electric buildings by megawatts at a time.
“Energy storage is the enabling technology here. We’re using energy storage as the mechanism to integrate and unlock the power of the demand side of the meter as a grid resource,” said Susan Kennedy, CEO and co-founder of AMS, in an interview.
“What is so unique about Susan’s projects is that they’re a hybrid between a distributed generation behind-the-meter project, and a traditional grid-tied utility-scale project,” said Tim Derrick, general manager of advanced solutions for SunEdison. “It serves customer needs [by reducing peak energy use]. But what really drives the value of the project is the capacity contract…the utility’s 10-year commitment to buy services from that battery, which is the primary financing mechanism.”
The partnership comes on the heels of an $18 million funding round led by DBL Investors, a firm that also backed Tesla and SolarCity.
AMS has also announced a 20-megawatt PPA with Shell Energy North America and has several other projects in the works. Overall, AMS has analyzed more than 1 gigawatt of building load in the last six months, said Kennedy.
Unlike startups that begin from scratch, AMS launched with an experienced team of energy experts led by Kennedy, a former California Public Utilities Commissioner and chief of staff to former Governor Schwarzenegger, and co-founder Jackalyne Pfannenstiel, former chair of the California Energy Commission and a 20-year veteran of Pacific Gas & Electric.
AMS hasn’t built a single project to date, but it is lining up the pieces in short order. In addition to the partnership with SunEdison, AMS already has a contract to install up to 500 megawatt-hours of Tesla batteries and an engineering services contract with Black & Veatch, and it is developing its own proprietary software to be combined with technology from existing suppliers, which have yet to be announced.
That’s a lot of action in a short period of time, especially for a new market player. Greentech Media spoke with Kennedy and Derrick to learn more about the new development partnership, their “hybrid” business model, and how distributed storage fits into future of the power grid.
GTM: How has AMS been able to advance so quickly?
Kennedy: The reason you’re seeing Advanced Microgrids come out of the box in a huge way is because we are developing projects that are utility-facing, and by necessity that means they are scaled. These are large projects that can capture the cost efficiencies of a scaled project, and are designed for grid support -- we are not selling technology to a single building owner. That scale is a really important part of what’s making the technology affordable and competitive with other resources, and it’s what makes AMS unique in this space.
Part of our success is also being smart enough to partner with an entity like SunEdison, in order to be able to leverage their expertise in development and construction and financing to carry out these projects on such a large scale.
This deal with SunEdison is probably the biggest announcement we will make in the near future. They’re positioned in the market as an undisputed leader, and the fact that they’re leaning in on the distributed side of energy storage is a huge statement about where this market is going to go.
[GTM Research anticipates the energy storage market will grow 250 percent in 2015.]
GTM: What gave SunEdison the confidence to make such a big investment in AMS and energy storage?
Derrick: We prioritized energy storage as a strategic initiative last September, and have been making a number of small bets in storage trying to learn about and develop projects. Our goal is to ultimately put storage assets and a new asset class into TerraForm.
When we first learned of the SCE contract awards last year, this was the first time a lot of us had gotten to know Advanced Microgrid. But it really was a strong fit from the beginning in terms of what Susan and her team bring to the table. Certainly it’s the contracts, but it’s also a lot more than that -- it’s a deep, deep understanding of the regulatory space that will drive these markets and this opportunity.
GTM: Energy storage always seems to be a few years away from commercial viability. Has that changed, and if so, why?
Derrick: Clearly the industry is going through a remarkable period of change. […] On the one hand, a key driver is the rapid reduction of cost on the battery side, which is a function of the automotive and energy industries' combined efforts. On the other hand, which isn’t talked about as much, is the increase in value, or the perception of value. This is being driven by an adoption curve and regulatory change that is allowing storage to the valued for the many services that it delivers (aggregated distributed storage assets to provide capacity, frequency regulation, etc.).
So with cost down and value up, we are systematically creating markets where storage is commercially viable. But it is still early days, and there’s still a long way to go.
GTM: How does AMS and SunEdison’s business model further improve the business case for energy storage?
Derrick: Storage assets are following a similar path to solar. Years ago, the only option was for a customer to buy solar by paying large capital costs upfront. […] SunEdison’s role was to really champion and make affordable a model where a third party could come and own and operate the system.
Fast-forward 10 years to storage. Storage, to date, as a new asset class, has largely been rate-based or financed by utilities as they take pilots or RFP projects onto their own balance sheets or, frankly, rate base. But what we have seen that’s missing in the storage space is the opportunity to finance projects through a third party. […] Ultimately, that drives down the cost -- to the customer and to the utility -- and makes storage more of a viable solution.
So this is a landmark project for us…in that it may be the first project financed by a YieldCo at a cost of capital much lower than the traditional options in the market today. In the development phase, SunEdison will be the entity providing financing…but for the take-out financing, or permanent financing, TerraForm would be the buyer of these projects. We will work together with AMS to meet the conditions to place them into TerraForm long-term. But it’s something we’ve vetted very carefully, and we can say with a high degree of confidence that these projects will be financed by TerraForm.
GTM: AMS recently announced an agreement with Tesla (valued at roughly $125 million based on Tesla’s pricing) to install 500 megawatt-hours of the Powerpack -- more than double what the SCE contract calls for. There’s been a lot of hype around Tesla’s battery products. What made them the best long-term partner?
Kennedy: First of all, lithium-ion is the consensus technology for short duration applications, and the EV market has really fostered advances in lithium-ion that have made the technology modular, mobile and with cost curves coming down.
We had a very robust RFP process with pretty much every supplier in the world after we won the Edison contract, so we had a pretty good look at the technology that’s out there, and Tesla’s was by far the best. Their batteries are dense, their performance level, their cost -- they’re on the leading edge, and they’re being very aggressive about maintaining that leading edge.
But we’re not exclusively tied to any one technology. What that does is allow us to set up a supply chain that gives us the economies of scale and preferred pricing that allows us to be very competitive. But we certainly expect to be working with other technology providers over the course of our lifetime. And some of the applications in our Edison contract will require longer-duration batteries. So we apply the technology to the specific application.
GTM: How does this type of project fit into the larger discussion around the evolving power grid?
Kennedy: A really important part of this market [transformation] is how much utilities are struggling with developing new business models that incorporate these distributed resources. This is probably the single biggest factor in terms of grid adoption of storage and distributed resources -- how quickly utilities can resolve their future business model and create viable revenue streams through these distributed models, and what role regulators will allow utilities to play.
We don’t see this type of deployment of distributed storage as a threat to utilities; they need these fast and flexible resources. And that’s really an important part of our strategy, to make sure it can be cost-effectively used by the utility. […] But there is a learning curve involved for the utility.
So what Edison did was truly groundbreaking. They bought this hybrid resource for the first time as a capacity resource where they compared it to peaker plants and demand response and other types of resources. Normally, utilities are very siloed; they buy demand response or they buy peaker plants, and they don’t really know how to buy something that’s a combination of those two things. […] Other utilities are now learning how to integrate them and have contacted SCE for more information.
Derrick: What you see here is effectively part of the solution to replace large central station power plants, which I think is the definition of grid 1.0: unidirectional power flows from a big power plant centrally located to the end user. Here we’re turning that on its head with generation and capacity located at the customer site, which can be pulled on by the utility to deliver capacity to the rest of the grid.
There are as many questions as there are answers about how utility 2.0 will be defined, but in general, it will include bidirectional power flows and substituting distributed resources for central power resources. And, really, there’s no better example of that than the projects AMS is putting together.