Energy storage software company Stem will operate a 345-megawatt-hour portfolio of distributed batteries in Southern California Edison utility territory. But it didn’t develop or build these batteries — it’s taking them over from long-time competitor AMS.
The owners of the portfolio, Swiss infrastructure fund manager SUSI Partners and South Korean power producer SK E&S, will pay Stem to control the fleet of 87 batteries at commercial properties, in order to meet their obligations to SCE. AMS is exiting that role to focus its resources on a newer business, a bidding algorithm for energy markets.
“AMS is working hand in hand with the team at Stem to ensure a smooth transition of the projects, after which AMS will be 100 percent focused on our AI [software-as-a-service] trading products,” CEO Seyed Madaeni said in an email.
Managing these batteries isn't a simple task. Stem will be balancing their duties to provide capacity to the utility with managing demand charges for their host customers. They'll also be tracking their operations to ensure they're neutral in terms of greenhouse gas emission to comply with the terms of California’s Self-Generation Incentive Program. That medley of obligations and revenue streams is referred to by storage startups as “the value stack.”
Transitioning control is largely a matter of updating software and networking, with some minor hardware changes, Stem CTO Larsh Johnson said in an interview. The switch will require site visits and could take a few months, given the number of sites and complications related to coronavirus safety.
“We’re spending a fair amount of time upfront making sure we have all the details worked out,” he said.
First of its kind
Owners have swapped out batteries and controls for specific projects based on performance needs. And Stem had picked up a couple of dozen sites from another operator previously, Johnson said. But a wholesale software swap at the scale of 345 megawatt-hours is unprecedented for the storage industry.
In part that’s because the model of building networks of commercial battery portfolios first took off in California with Stem, AMS and Green Charge (later acquired by Engie). Taken together, supportive state policies and utilities willing to give it a try turned California into the foremost nonresidential storage hot spot over the last five years.
Stem and AMS won capacity contracts with SCE in 2014, then signed up commercial customers to host the batteries and receive bill savings by dodging demand charges. AMS plans to install the final 6 percent of the portfolio in the third quarter, Madaeni noted.
Both companies eventually grappled with the challenges of funding a grid infrastructure development business as a startup; both shifted to emphasizing their software services. For Stem, that involved partnering with solar developers to assist them with battery storage. AMS shifted more radically to building wholesale market bidding software for a range of power plants.
As AMS changed its business model, the investors that had acquired its SCE portfolio sought competitive bids for a replacement software operator. Stem had a unique advantage in that contest: a track record of operating distributed batteries to deliver peak capacity to Southern California Edison, from its own contracts with the utility.
“It makes sense that [a company] like Stem would be a candidate to step up and take on management of this portfolio,” said Brett Simon, who tracks behind-the-meter storage for Wood Mackenzie.
After winning the deal, Stem engaged in months of detailed discussions with the owners about how the unprecedented transition should unfold, Johnson said.
"Support system in place"
The transfer of control cements Stem’s leadership among commercial storage operators. But there likely won’t be follow-up opportunities to take over similarly massive commercial battery portfolios any time soon.
The Southern California value-stacking business model did not proliferate elsewhere. Installations in New England have focused more on pairing batteries with solar power, eliminating the need to predict and manage customer demand profiles. Ontario’s market sustains large batteries for demand-charge management at industrial facilities, without the need for layering grants and utility deals.
Stem would be hard-pressed to find another existing nonresidential battery fleet of this size. But this deal could help solidify the market down the road.
“Especially as developers work to make the case for fleets of storage to supply grid services, proofs-of-concept like this portfolio will be integral to showing that storage can perform as it's been pitched,” Simon said.
AMS' original pitch to the utility did not include the pivot to a new market six years down the road. But the fact that another provider could step in when AMS wanted out says something about the maturity of the energy storage market.
“As an owner or investor in the space, knowing that this kind of transition is possible and there's a support system in place to take over operations, should it be necessary, helps to legitimize the market and industry,” Johnson said.
The storage industry is still working to clarify rules for aggregated fleets of batteries to compete in wholesale markets across much of the country. Clear regulatory pathways could open up greater investment in distributed battery fleets, in which case, owners may be glad to know it’s possible to switch operators if needed.