If you've talked to me recently, you'll know I’m bullish on energy storage opportunities in New York, and am currently writing a blog post highlighting recent trends and development activity in NYISO. It’s been taking quite a bit of time to research, so in the meantime, I thought it’d be fun to re-introduce Clean Energy MBA readers to a well-known energy storage project (i.e. the 20MW Stephentown Flywheel developed by Beacon Power) and also provide an intro to energy storage along the way. It’s a fascinating story, and goes to show the difficulty in commercializing new technologies and how market economics can rapidly change.
Intro to Energy Storage (and Flywheels in Particular)
Flywheel energy storage is another type of energy storage, just like lead acid, lithium ion, flow batteries...etc. Unlike lithium-ion, flywheels store energy as kinetic energy through a rotor, which accelerates at a high speed and collects energy as rotational energy. When the flywheel slows down, it discharges energy back into the grid. Since flywheels can’t hold much energy capacity, we say it has a limited energy duration (energy storage capacity divided by power capacity), and is more suitable to power applications rather than energy applications.
Source: Beacon Power
Energy applications are those that utilize the battery’s ability to charge and discharge over a longer period of time – e.g. storing solar energy during the day and discharging during the night, and thus require greater battery capacity and duration (e.g. 4-6 hours).
Power applications are designed to discharge energy rapidly to provide near-instant grid support, and are commonly used as backup power for utility grid applications. The Beacon presentation slide indicates their flywheel has a power capacity of 265kW, more than 10x the energy capacity of 22kWh, and thus is well-suited for power applications such as grid backup power.
Source: Beacon Power
If you’re trying to learn about energy storage and various use cases, I highly recommend the Rocky Mountain Institute’s Economics of Energy Storage. This white paper got me hooked on energy storage during my MBA program and is the best resource for understanding energy storage.
Part I: Beacon’s Early Years
Beacon Power was founded in 1997 as a subsidiary of SatCon Technology Corporation and went public in 2000 (For interested bankers out there, it raised ~$45MM in proceeds, but the price range was lowered from $6-8 from $11-13 in an IPO led by Salomon Smith Barney). The IPO Prospectus / S1 states the initial use case was power backup for the booming telecommunications / internet industry rather than utility-scale energy.
“We are a leading designer and developer of flywheel energy storage systems that we believe will provide highly reliable, high-quality, uninterruptible electric power for communications networks, computers, the Internet, industrial manufacturing, commercial facilities and distributed generation applications. The broad use of digital electronics and computers throughout the information economy is causing a dramatic increase in the demand for more reliable, higher quality power. Alternative powering technologies, including flywheel energy storage, are emerging to meet this need. – Beacon 10-KBeacon’s flywheel use case eventually pivoted towards frequency regulation, a type of ancillary service used to support the wholesale electric grid. (Note to readers: Wholesale energy markets are typically categorized into energy markets, capacity markets, and ancillary markets. It’s be important to review these concepts if you’re applying to any utility companies or MBA leadership programs). Frequency regulation, in particular, involves balancing minuscule movements in grid energy supply and demand.
Levels of power supply and demand on the power grid change from second to second and minute to minute. The need to balance electricity supply and demand on the grid requires a special service to maintain stable power frequency called frequency regulation.” – Beacon 10-K
In summary, Beacon Power was developing a new energy storage technology and betting on the growth of frequency regulation markets in New York and other ISOs. The current market opportunity was $800MM, and was expected to grow to over $1Bn per year due to various factors, as noted in their 10-K:
In North America, the frequency regulation market in areas that were accessible via open-bid auction mechanisms was valued at approximately $800 million in 2007. Before the end of 2008 (by which time Midwest ISO's regulation market is expected to be in operation) the addressable open-bid regulation market on an annualized basis is expected to exceed $1 billion per year. Based on global electrical production, we believe that the worldwide frequency regulation market is several times this amount. Significant growth in the US open-bid market is expected due to a combination of factors, including:
· Greater use of renewable energy sources—especially wind generation and solar
· Anticipated expansion of open-bid grid operating regions such as the Midwest ISO
· Increased demand for electricity
· Increased natural gas prices.This strategy seemed reasonable to investors – Beacon survived the dot com bubble and spent the decade following developing its flywheel technology.
In the mid 2000-s, the NY-ISO frequency regulation market and revenue opportunity looked especially bright. Pricing for frequency regulation in New York had grown from ~$50/MWh in 2006 to $56.32/MWh in 2007, to $59.46/MWh in 2008. The company continued to invest millions in R&D in the hopes of commercializing the flywheel for multiple wholesale markets.
In 2009, Beacon Power got its big break, receiving a $43MM Department of Energy grant to build the 20-megawatt flywheel plant in Stephentown, NY a small town with a population of just 2,903. In total, the flywheel storage plant would cost $69MM, so the $43MM DoE grant paid for the majority of the project’s costs. (Note: that’s close to $3,500/kW, more than 10x the cost to develop lithium ion today!).
Part II: The Collapse of Frequency Regulation Prices
In 2009, the NY-ISO market energy and ancillary prices collapsed over 50%, due to the i) deterioration of the overall economy resulting in lower load, ii) significantly lower fuel prices, and iii) newly-built efficient CCGTs coming online. Beginning in 2009, load levels, energy prices and regulation prices dropped drastically due to the financial crisis. Furthermore, highly efficient CCGTs – such as the 675MW Empire Generating Plant – were coming online, increasing system-wide generation capacity. These highly efficient CCGT plants reduced the need for additional frequency regulation, resulting in fewer price spikes and lower regulation prices.
In summer 2011, Beacon finally completed the world’s first 20MW flywheel plant. When the Stephentown facility became fully operational, market prices for frequency regulation had fallen by over 80%. That year, Beacon generated only $2mm of revenue, with a net loss of $69MM. Between 2004 and 2011, Beacon lost over $174MM in net income.
In October 2011, Beacon Power filed for bankruptcy, just months after completing the Stephentown plant. It was the second major DoE grant recipient (after Solyndra) to file for bankruptcy, and received a lot of press coverage…
As part of bankruptcy proceedings, Beacon and its portfolio was sold to repay the DoE loan. The company found a buyer in Rockland Capital, who acquired Beacon Power’s 20MW flywheel energy storage plant and the Company’s other assets for a paltry $31MM (compared to several hundred million of development-related expenses).
That’s why renewable energy projects, and energy storage in particular are can be risky, and typically require some type of contracted payment (e.g. PPA). Betting on capturing volatile revenues from energy prices once operational is crazy, which explains why you almost never see merchant renewable assets getting built. Beacon Power, for example, had hoped to capture frequency regulation prices of >$100/MWh, but prices had fallen to $10/MWh by the time the plant came online.
Part III: Beacon Power (2011 – Today)
Under Rockland Capital’s ownership, the company hired back most of the former employees, and invested additional funding into growth. The company also successfully developed a second flywheel project in 2014, a 20MW flywheel project in Pennsylvania that provided frequency regulation to the PJM market.
“Following the acquisition, Beacon focused on strengthening the economic case for owning and operating flywheel plants for frequency regulation. For several years, the company has been a leading advocate of pay-for-performance tariffs in deregulated electricity markets. Those efforts led to new market rules that are expected to provide Beacon fair compensation for its regulation services, while decreasing the overall cost to consumers for the regulation services required by the market. At the same time, the company implemented an aggressive internal cost reduction program and, where necessary, invested further to realize opportunities.”
Source: Rockland Capital
I didn’t find too much information on Beacon between 2012-2018. From what I can tell, the company continued to deploy its flywheel technology with limited success. A few articles came out during this period, but nothing significant.
Seven years later, Beacon still had only ~40MW of total storage projects across PJM and New York. NYISO frequency regulation prices never recovered. Rockland Capital, which had acquired the company in 2011, decided to cut its losses and sold the company and assets in 2018.
In May 2018, Beacon’s operating flywheel assets were sold to Convergent Energy + Power, an energy storage startup based in New York. Beacon’s IP and patents were sold to RGA Labs, a R&D company focused on the nuclear, electrical energy, and aerospace environments. A year later, Convergent Energy and its portfolio was acquired by Energy Capital Partners, a large energy infrastructure private equity firm.
The Stephentown energy storage project is still in-operation today, but likely not highly profitable given current frequency regulation prices. The Beacon flywheel IP is currently owned by RGA, though its uncertain whether it’s being advanced in any meaningful way.
The story of the Beacon Power and Stephentown is fascinating, and illustrates the difficulties of bringing new technologies to market. Investors don’t like funding emerging energy storage projects due to the high degrees of technology risk and market revenue risk. Some investors, such as Breakthrough Energy Ventures, fill this much needed gap. Both Form Energy and Quidnet, for example, are particularly interesting and are tackling ultra long-duration use-cases for energy storage.
I hope you found this post on Beacon Power interesting, and hope you learned a bit about energy storage along the way! As always, please feel free to email me with any feedback or comments.
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