Stem sells its battery energy storage system as a way to reduce electricity bills. Now it can offer commercial customers a new option: no money down.

The Millbrae, Calif.-based startup today announced that it has secured $5 million in financing from Clean Fleet Investors to bankroll installation of up to 15 megawatts of customer-sited battery systems. For Stem -- and for the distributed energy storage industry as a whole -- it's a significant step toward making on-site energy storage financeable like solar and efficiency projects.

Stem makes a lithium-ion battery device connected to cloud-based analytics that can determine when it's best to draw energy from the battery and cut the demand charges that come during peak usage hours. Its customers are mostly in California, where there are relatively high demand charges and subsidies for energy storage. A single battery box, each of which is taller and narrower than a household refrigerator, provides 18 kilowatts for one hour and can be linked together for more capacity. The company currently has 6 megawatts installed.

The InterContinental Hotels Group, for example, installed the battery to provide power to the Mark Hopkins hotel during peak hours rather than changing thermostat settings through demand response.

Today, Stem’s customers either purchase the gear or lease it. With the financial backing of Clean Fleet Investors, Stem thinks it can work through its backlog of customers and grow more quickly, said Prakesh Patel, the firm's vice president of capital markets and strategy. Patel joined Stem earlier this year, hailing from the finance industry.

More broadly, the deal offers a business model for financing storage systems that could be replicated by institutional investors, much the way solar and efficiency projects are today.

"In the early days with solar, it was individuals who were financing projects. But then larger banks rushed in, and we're now are seeing that in storage. This is just the first step," said Patel.

Clean Fleet Investors specializes in small- to medium-sized renewable energy and energy conservation projects. Among its principals is Jigar Shah, who pioneered the power purchase agreement in commercial solar as the founder of SunEdison.

Stem’s system compares favorably to solar as an investment, Patel argued. In addition to the demand charge savings, Stem generates revenue by selling customers access to its energy management applications, which predict energy usage trends and can inform facility managers when it is best to perform maintenance on equipment.

Longer term, the company wants to aggregate the multiple distributed battery systems it operates to monetize the capacity they can provide. Stem could sell that capacity directly to the wholesale markets; it’s also talking to some California utilities about alternative models, Patel said.

California remains the hotspot for Stem because of the self-generation incentive program for distributed storage. The state's new utility energy storage mandate should generate revenue as well, Patel said.

But by securing third-party financing, the company can now expand to other places outside of California.

"We're already in discussion with major banks to expand and move along the evolutionary path that solar did, moving from one-off financing deals to more institutional financing," said Patel.