Over the past decade or so, we’ve seen a number of startups trying to build cost-effective compressed air energy storage (CAES) technologies that don’t rely on huge underground caverns as a storage medium. But building above-ground tanks or structures to hold compressed air was always a potentially costly and unscalable solution -- and now one startup working on it, SustainX, appears to be abandoning those plans.

On Monday, SustainX announced plans to merge its business with that of General Compression, a startup that’s focusing on bringing new technology to the traditional CAES model. The companies announced a “letter of intent to combine their businesses, subject to certain conditions, into a new entity to be called GCX Energy Storage,” and will focus on “combining fuel-free CAES technology with low-cost existing and developable salt caverns” in their future endeavors.

Both companies have existing CAES projects up and running, according to Monday’s announcement. But General Compression’s 2-megawatt, 300 megawatt-hour project in Gaines, Texas is much larger than SustainX’s 1.5-megawatt, 1 megawatt-hour project at its Seabrook, N.H. headquarters -- and bigness is where CAES really shines in comparison to batteries or other smaller-scale energy storage alternatives.

The world’s two first CAES projects -- the 290-megawatt plant in Huntorf, Germany, built in 1978, and the 110-megawatt McIntosh, Alabama plant, built in 1991 -- have been able to provide very cheap, long-duration energy over decades of operation, by boosting the output of natural gas-fired power plants at the sites. But much like the pumped hydro storage projects they compete with in terms of scale, they’re expensive and large, requiring hundreds of millions of dollars and years of lead time to develop. They also need to be coupled with natural gas power plants to return their stored energy to the grid effectively.

SustainX was founded in 2007 with the goal of removing these constraints by storing air in industrial pressure vessels, and using isothermal cycling -- keeping the compressed air at a constant temperature -- coupled with staged hydraulic compression and expansion to improve the efficiency of the process.

SustainX raised about $30 million from investors including Polaris Venture Partners, General Catalyst Partners, RockPort Capital Partners, Cadent Energy Partners, and GE Energy Financial Services, as well as $5.4 million from the Department of Energy to build its prototype facility. But it hasn’t announced any projects since that one, and was rumored to have laid off a large number of staff last year.

Another startup targeting above-ground, natural-gas-independent CAES, LightSail Energy, laid off staff last year due to what CEO Steve Crane said was a delay in one of the company’s projects. LightSail had raised more than $42 million from French energy giant Total, Peter Thiel, Bill Gates, Khosla Ventures, and Innovacorp, but it has only two announced projects. The first is a California Energy Commission-funded project to store solar power at a Ventura County naval base, and the second is a project to store energy from a wind turbine in Nova Scotia, Canada, with construction set to start next year.

Newton, Mass.-based General Compression, meanwhile, has stuck with underground caverns for storing compressed air, while seeking to link its storage capabilities with wind power instead of natural gas. Its Gaines, Texas project was built in partnership with ConocoPhillips, and stores excess wind power in times of low demand to release it when the grid needs energy. The startup raised a $17 million Series A round in 2010, and closed on $20.5 million of a planned $54.5 million Series B financing in 2011, with investors including Northwater Capital Management, U.S. Renewables Group, Duke Energy and Serious Change.

It’s not surprising that untested, above-ground CAES vendors would struggle to move forward in building their novel technologies, given that even traditional CAES projects have had trouble. In 2011, Dresser-Rand and Apex Compressed Air Energy Storage announced plans for a 317-megawatt CAES project in Texas, next to a Calpine natural gas facility, with construction set to start this year. But that project was put on hold late last year, according to an industry report.

Meanwhile, the broader grid-scale energy storage market continues to move ahead, with ever-cheaper lithium-ion batteries filling the needs of many short-timespan services like frequency regulation. AES Energy Storage, the subsidiary of power giant AES, is using lithium-ion batteries for longer-term storage needs in a 400 megawatt-hour project for Southern California Edison, one of the California utilities under state mandate to provide 1.3 gigawatts of grid storage by decade’s end.

Meanwhile, flow batteries, though they still lag far behind lithium-ion batteries in terms of market maturity, promise the ability to store energy for multiple hours in ways that could supplant the key benefit of CAES systems. And then there’s thermal energy storage, which uses the latent flexibility of air conditioners, chillers, cold storage facilities and other big electric loads to shift energy consumption to off-peak hours or mitigate the intermittency of wind and solar power. CAES technologies will have to compete with all of these contenders to gain market traction.