When Beacon Power applied for the Section 1705 loan guarantee program, they probably had no idea that that painted a target on their back. After all, they weren’t even a solar or wind business. Beacon had perfected and patented adaptations to an old nuts-and-bolts flywheel technology, spending $200 million to engineer reliable energy storage and frequency regulation for the electrical grid.
But their mistake was to be the second company after Solyndra to be awarded a Department of Energy (DOE) loan guarantee under the Section 1705 Loan Guarantee Program. By October last year, a few months after Solyndra, they were bankrupt. Here’s the tale.
The grid needs energy storage that can ship power on and off the grid — faster — as it adds more solar and wind. Even without renewables, the technology is needed for moment-to-moment grid stability to prevent blackouts. Gas peaker plants can’t do that in five minutes. Beacon Power developed a technology that could do it in five seconds. Again and again. And not wear out like a battery.
The Federal Energy Regulatory Commission (FERC) has recognized this increasing need for faster energy storage. Under FERC Order 755, which comes into effect in October 2012, grid operators must pay more for faster storage.
So, how could a company that is making faster storage fail?
That’s what I asked Scott Harlan, managing partner at Rockland Capital, the private equity company that bought Beacon’s assets after it went bankrupt.
“Under the old FERC pricing regime they just weren’t getting paid enough to service the debt,” Harlan told me. “The pricing system just didn’t work for Beacon — or any kind of fast-response system regulation service, in the past.”
Beacon thought FERC’s long-heralded higher payments for fast storage would have been in place earlier. “Once the FERC order is implemented,” he pointed out, “the pricing will be much better in this country for these fast-response resources. At that point, the market across the country is much improved.”
But even so, to make it till this October, Harlan said, Beacon would have needed only “something on the order of ten million, not a lot of money.” They just needed to cover operating expenses of the company and service the debt till the FERC order was implemented, and they couldn’t raise outside capital to do it.
So, why didn’t they go back to the DOE and say we just need $10 million till the FERC order comes into effect?
“I suspect that would have been a tough conversation, given everything that was going on with the DOE at the time,” explained Harlan. “Unfortunately, events at the time conspired against them.”
This was last September, just as the Solyndra witch hunt was in full swing, and the DOE was having to testify in front of almost weekly hearings. The hysteria made it difficult not only to get more help from the DOE, but also in trying to raise further funds in the market. Former Beacon CEO Bill Capp told AOL Energy after the bankruptcy that remarks Paul Ryan made at the time were particularly unhelpful.
“In addition to Solyndra,” Paul Ryan said on Fox News in September of 2011, “Beacon Power and First Wind Holdings offer examples of other instances in which the federal government backed risky and financially unstable firms, using taxpayer money to fund an ideologically driven pursuit of unproven energy sources.”
There’s nothing “financially unstable” about a company that invents and builds a product that out-competes gas peaker plants. I don’t know much about investors, but surely the “invisible hand” is smarter than to listen to a rabid politician before investing?
“When you have stuff in the press that’s very negative, it can become difficult to convince the public markets to invest the money,” Harlan told me. “You’re at the mercy of retail investors like teachers unions and such.”
As a private equity company, he said, they are different. “We’re able to make a rational decision, based on real information. As a private company, we make the decisions. There are a few of us, we talk to the company to decide when to put money into it and when not to. It’s a much simpler decision-making process.”
It seemed to me from what Harlan was saying, that Steven Chu’s DOE was right to have funded the company, that they had “picked a winner.”
“Oh, absolutely, yes,” he agreed. “The technology is great. It solves the problem the utilities have in balancing the grid; particularly as you have more wind and solar power coming on the grid — the ability to manage the frequency of the system is somewhat compromised.”
“This is going to prove to be a technology that was very worthy of the DOE’s choice to invest in. We wouldn’t have made the investment in the company if we didn’t think so, because if the DOE doesn’t make money then I’m not going to make money.” In the bankruptcy, Rockland Capital assumed the debts. Income from the now completed 20MW Stephentown flywheel project at the new FERC rate will pay back the loans.
“We plan to continue to own and operate Stephentown, which is fully completed now,” he explained. “It was mostly completed and we just put a little capital in to finish the project. I think it was one and a half million, something like that.”
So, it turns out Beacon Power is “another Solyndra” in that it was another attempt by the Obama administration DOE to use the Section 1705 Loan Guarantee Program to get more clean power on our grid, which is what the program was intended.
In any other time, an innovative company like this, that had been recognized by the DOE as a worthy investment, would have been able to borrow the small amount of additional money to keep going. We live in interesting times, however.
But the company gets to live on, and is expanding, anyway, given new life by Rockland Capital, which kept on 75% of the employees.
“It’s a good company that has great prospects and a great technology, and tremendous intellectual property,” Harlan concluded. “We’re looking to expand. Now we’re now looking at building a project in Pennsylvania using the flywheels and actively looking to expand it across the rest of the country.”
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