Startup Battlefield Finalists pose onstage at Day 3 of TechCrunch Disrupt SF 2011 held at the San Francisco Design Center Concourse on September 14, 2011 in San Francisco, California.

Low natural gas prices in the US have slowed momentum in the development of grid-level energy storage solutions, an expert panel gathered from venture capital, power generation and utility companies said last week.

In the absence of official targets on costs, energy storage companies would have to compete “at a unit below” the price of natural gas, currently trading at around $2.50MMBtu said Hanns Anders, an associate in the energy technology practice at Claremont Creek Ventures.

“When I talk about costs coming down, it needs to come down in order of magnitude difference,” he said. “If it’s an order of magnitude, it’s probably not worth looking at because it really needs to be compelling from an investors’ standpoint.

“The reason VCs have been attracted to storage historically is that this is a massive market. If you get a hit, chances are it will be a home run, but getting a hit is going to be hard.”

Despite the high capital costs and the long-term horizons to exits, a diverse range of energy storage companies had raised $630.5 million in the past 12 months, according to the Cleantech Group’s i3 figures, which segments the market into consumer-scale electronics and electric vehicles and utility-scale storage and power management systems.

Draper Fisher Jurvetson, Kleiner Perkins Caufield & Byers and the US Department of Energy were the leaders in terms of deals, while European energy technology companies such as BASF in Germany, Schneider Electric in France and ABB in Switzerland have so far led on acquisitions.

Claremont Creek’s cleantech investment portfolio focuses on the intersection of energy and software technology, said Anders. But it had also joined Bill Gates with an investment in Energy Cache’s “gravel ski lift” storage system.

Anders, who recently joined Claremont Creek after managing battery storage projects at Pacific Gas & Electric, said that investors were taking flight to less risky off-the-shelf technologies. Energy Cache did not suffer the same permitting and siting problems as pumped hydro or compressed air, he said.

“It’s like a ski lift with rocks – when energy is cheap and readily available you’re pumping rocks uphill and bringing them downhill when power is expensive.

“Batteries are taking 5 to 10 years to come out of the lab to commercialisation – that’s about the timeframe where you need a return. If you’re just getting to the market at that point, then you’re going to have some problems. Your investors are looking for a return in a reasonable time frame.”

In 2009 natural gas prices were twice today’s prices after a year of double-digit trading in 2008. Costs for renewable energy projects were benchmarked against gas-fired electricity, portfolio standards were mandated in many states based on high natural gas prices and energy storage was seen as a “gamechanger” in managing the intermittency of wind and solar. Natural gas prices have since dropped to a level that has undercut competition from energy storage.

Lee Burrows, a partner at VantagePoint Capital, said that exits from energy storage startups required more patience than VCs had previously been used to.

“We look at a lot of energy storage,” he said. “We always try to have the companies map out
the levelised cost of energy versus gas peaker, versus demand response, versus energy efficiency, etc. At the end of the day, that’s what you’re competing against. You’ve also got to scale solutions to manufacturing. No utility is interested in one, two or ten of these things.”

The San Francisco Bay Area has around 30 energy storage startups alone; many of them struggling to scale and looking to strategic partnerships with large energy technology companies such as Siemens, GE and ABB. CalCEF, the influential fund of funds, has been in discussions with Lawrence Berkeley National Laboratory that would lead to a consortium aimed at leveraging finance and expertise.

Many companies now are calling for a market price signal similar to that used in Renewable Portfolio Standards or the US Department of Energy’s Sunshot initiative which aimed to reduce the cost of solar to $1/watt.

Burrows said that despite headwinds from record-low natural gas prices, energy storage companies in the US had great market potential in Asia and Europe.

“The US utility industry is a great market and there is a lot of potential,” he said. “But the US energy storage market will be slower to mature and evolve. There are real markets now elsewhere in the world that are much more motivated to integrate these solutions and will be great potential markets for US companies.

Daidipya Patwa, from the renewable integration unit at PG&E, said that California’s largest public utility would soon announce a location for its new compressed air energy storage (CAES) project to add to its 1.2 GW Helm’s pumped hydro plant.

PG&E would also finally flick the switch on a delayed NGK battery storage project in June, he added, while startup A123 was working with Southern California Edison on a lithium ion battery storage 8 MW pilot for a wind project in Tehachapi.

“The big hurdle now is to get some highly publicised and successful pilot out into the field,” said Lee Burrows. “We’ve had some highly publicised failures in multiple technologies and that’s not good for anyone.

“The industry looks at energy storage outside of pumped hydro as a risky endeavor. If you want to make the deployment and financing easier you’ve got to have some good examples of deployments.

“This is a great time to be in the industry. Pilots will crack things open and help utilities write their business case for wider deployment.”