Last month, we predicted that one of the country’s big vertically integrated solar companies would make a move into the energy storage business this year by acquiring a U.S.-based storage company. Here’s the first. 

On Thursday, solar (and wind) giant SunEdison announced it was acquiring the project development team, four existing projects, and roughly 100 megawatts of project pipeline of Solar Grid Storage. The Philadelphia, Pa.-based startup specializes in packaging lithium-ion batteries and inverters with commercial solar PV projects -- and paying their way by providing lucrative frequency regulation services in the market run by mid-Atlantic grid operator PJM.

But under its new ownership, Solar Grid Storage will look to provide a much broader variety of storage-based services in support of solar and wind power, CEO Tom Leyden told us in an interview.

“What SunEdison is looking for with their investment in us is to jumpstart their strategic imperative to have storage co-located with their wind and solar projects,” he said. “It’s a matter of adding value for their customers and investors, and a matter of enabling greater penetration of renewables on the grid.”

Terms of the deal were not disclosed. Leyden, who will take on the role of vice president of energy storage deployment in SunEdison’s Advanced Solutions group, said that gaining access to SunEdison’s lower cost of capital will enable Solar Grid Storage to grow its project pipeline much faster than it could as a standalone startup.

“It’s not like there’s an easy path for anyone in this business, but we think we have a two- to three-year head start against others, at least in the ancillary-services frequency regulation market,” Leyden said.

GTM Research analyst Ravi Manghani, author of the just-released U.S. Energy Storage Monitor report, noted that access to SunEdison’s financing might be a critical factor in bringing down the barriers to battery-based grid storage projects. “The cost of capital, in my opinion, is the biggest factor in this acquisition, at least from the Solar Grid Storage point of view,” he said.

Solar Grid Storage has not announced new projects beyond its first four over the past 18 months or so, and “that’s an indication not that they don’t have customers lined up, but that they couldn’t line up financing at the economic level that would work out.”

“Now with SunEdison’s acquisition, their cost of capital has gone down to maybe half of what they were able to access before,” he said. “That improves the economics not only for them, but also for their end customers.”

Solar Grid Storage’s existing pipeline of projects are in PJM territory and focused on frequency regulation for their primary source of revenues, Leyden said. That’s been a major market for many of the country’s biggest battery-based grid storage systems, although Solar Grid Storage has stood out from the pack with its model of integrating with commercial solar installations and taking on the costs and responsibilities of managing those projects’ inverters and grid interconnections.

But under SunEdison's ownership, the company will be expanding into new U.S. markets including California, as well as overseas, said Leyden, who previously served as vice president of PowerLight’s East Coast operations before it was acquired by SunPower.

Different markets will have different imperatives, of course. “It’s a different product and model on the West Coast, where you have utility storage procurements and where demand reduction is king,” he said. He’s referring to California, where the state’s three major investor-owned utilities are under mandate to procure 1.3 gigawatts of energy storage by decade’s end, and where state incentives and high demand charges have allowed behind-the-meter battery startups like Stem and Green Charge Networks -- as well as SolarCity’s energy storage business in partnership with Tesla -- to thrive.

SunEdison CEO Ahmad Chatila, who hinted at his company’s acquiring a “business-model-based” storage company in a recent interview with Greentech Media, said that he considers Germany to be an important market for energy storage as well, given that the country’s feed-in tariffs for customer-owned solar systems are set to fall to below the price of grid electricity in the coming years.

SunEdison will also be looking beyond frequency regulation for ways to turn stored energy into revenue, Leyden noted. These could include using batteries to manage electricity demand costs for PV-equipped commercial customers, or to store energy when grid energy prices are low and then use that power to reduce their use of grid power when prices rise, he said. Emergency backup power could be of value to some commercial customers as well, as could batteries to support SunEdison's plans to bring solar micropower stations to poverty-stricken communities in developing nations.

Solar Grid Storage is also working on aggregating lots of separate storage projects to increase their ability to serve grid needs -- a capability that companies like Stem and SolarCity are also targeting. In October, the startup won a $968,120 grant from the Department of Energy’s SunShot Initiative to fund development of a “solar-storage operations center” to tie both smaller and large-scale projects into a single block of charging and discharging capacity, and “with enough aggregated storage that you could bid into capacity markets,” he said.

As for large-scale renewable projects, energy storage could improve their ability to deliver dispatchable power to the grid and receive compensation as capacity resources, he said. “That could be very valuable. Right now solar projects on the grid side only get a certain percentage of capacity credit, and if you have storage, you can get a higher value.”

Tim Derrick, General Manager of SunEdison Advanced Solutions, said in a prepared statement that “our strategy is to increase the value of the solar and wind projects that we finance, develop, own, and operate by improving their availability and ability to interact with the grid. With this acquisition, we have added the capability to pair energy storage with solar and wind projects, thereby creating more valuable projects and positioning ourselves as a leader in the rapidly growing energy storage market.”

GTM Research’s Manghani noted that a few of the solar projects now competing under California’s renewable auction mechanism are rumored to be including storage in their bids, for similar reasons as those that Leyden laid out.

“With storage, you can firm that capacity in terms of when it will be available, and there are other things you can do in terms of when you charge versus discharge the storage system, and improve the overall capacity factor itself,” he said. “That could enable you to participate in capacity markets that have otherwise been closed to solar and wind, because both are considered to be non-dispatchable.”

One important question for SunEdison’s new storage-solar projects is whether they’ll be able to be folded into the company’s YieldCo, TerraForm Power, or the new YieldCos it is said to be planning. YieldCos allow SunEdison to retain the ongoing income from projects and attract investors looking for steady income and dividends, rather than the revenues from projects developed and sold to third parties.

Energy storage projects are far more uncertain investments than are solar projects at present, but Leyden said that “we’re working on creating the conditions that will allow those projects to go into the YieldCo. YieldCos, as you know, are very strict about what they bring in. We’re not quite there yet, but we’re looking at various structures to be able to do that, and it’s very important to do that to be able to scale.”

While SunEdison may be the first big solar company to buy its way into the storage business, it likely won’t be the last. Pretty much every major solar player is lining up storage partnerships, seeking to prepare for the growth in what GTM Research projects will be a $1 billion U.S. market for battery-backed solar PV systems by 2018. SunPower and storage startup Sunverge announced in December that they’ve formed an exclusive agreement to make an integrated solar-battery system commercially available this year, hinting at the potential for an even more exclusive arrangement for the two companies.

At the same time, the SunEdison-Solar Grid Storage combo will face its fair share of competition in landing projects. That ranges from established players like AES Energy Storage, which has a portfolio of 200 megawatts of grid battery projects, to upstarts like Alevo, which says it has $1 billion in investor backing to go after 200 megawatts of storage projects in U.S. markets.