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Beacon’s Flywheel Power Storage System May Avoid Solyndra’s Fate

By Zachary Tracer
October 21, 2011 7:00 AM EDT 1 Comments

Beacon Power Corp. (BCON), a struggling energy storage company that’s received $43 million in backing from the U.S. program that supported the failed Solyndra LLC, may get a lifeline from a regulatory ruling.

The Federal Energy Regulatory Commission approved yesterday a rule providing incentive payments to companies such as Tyngsboro, Massachusetts-based Beacon, which makes flywheels that manage energy moving through the grid.

Beacon, which has warned it may not remain a “going concern” and faces delisting of its shares, is fighting to avoid the fate of Solyndra, which filed for bankruptcy after receiving a $535 million loan guarantee from the U.S. Energy Department’s program designed to spur alternative energy development.

FERC’s ruling wasn’t aimed at rescuing Beacon, according to agency spokesman Craig Cano. “It’s an industrywide final rule addressing compensation for any provider,” he said in a phone interview after the unanimous vote.

The decision may double the company’s revenue, boost its share price and make it easier to arrange financing, Walter Nasdeo, director of research at Ardour Capital in New York, said in an interview.

“For companies like Beacon who every day wake up with their fingers crossed and say ’Hey, maybe they’ll pass it today,’ it’s a big deal,” Nasdeo said.

Beacon’s first grid-scale plant, with 200 flywheels, began operating in January. The 20-megawatt facility in Stephentown, New York, was funded using the $43 million Energy Department loan guarantee.

Solyndra’s Failure

Solyndra used its loan guarantee, the biggest provided by the Obama administration for solar-power manufacturing, to build a $733 million factory in Fremont, California. The company’s failure is being investigated by congressional committees and the Federal Bureau of Investigation.

FERC’s ruling has been in the works since February and applies to storage methods such as batteries as well as Beacon’s flywheels. It changes the way grid operators pay companies that provide frequency regulation, a service that rapidly delivers electricity to the grid to ensure it remains at a constant frequency of 60 hertz.

Operators will be required to pay for the amount of power the service-providers keep available and the amount that’s used, according to a statement yesterday.

They will also pay for performance, based on how effectively the frequency regulation systems can deliver the precise amount of energy needed, exactly when it’s in demand. The rule will take effect 60 days after it’s published in the Federal Register.

Rotating Cylinders

Beacon’s systems use 2,500-pound (1,134-kilogram) carbon fiber cylinders rotating as much as 16,000 times a minute to store kinetic energy. The power can be converted into electricity quickly when the grid needs an immediate bump to meet surges in demand. It also works in reverse when the grid has more power than it needs.

Beacon’s market value dropped to $11 million yesterday and its shares haven’t closed above $1 since Aug. 17, after going public in 2000 at $6. The company conducted a 1-for-10 reverse- split in February and warned in an August filing that it may not be able to generate enough cash to remain in business beyond the end of the year.

“The sad part is what they’re doing is really cool and I think it’s really needed and I think it’ll absolutely benefit” grid operators, said Nasdeo, who rates the shares a “hold” and owns none. “It would be a shame if they were not able to attract the financing to keep them moving this forward.”

A123 Systems, AES Corp. (AES)

Beacon gained as much as 14 percent to 44 cents in New York trading after the FERC ruling, it’s biggest intraday gain since June 13, before closing down 1.8 percent at 38 cents. The stock has dropped 83 percent this year through yesterday and the Nasdaq Stock Market warned Beacon several times, most recently on Sept. 30, that it may be delisted because its share price has fallen below the $1 minimum.

The FERC ruling may also benefit A123 Systems Inc. (AONE) and AES Corp., which are both developing battery storage to provide frequency regulation. AES received a $17.1 million Energy Department loan guarantee to build a 20-megawatt project in Johnson City, New York, using batteries. A123 Systems offers a battery system that provides frequency regulation, according to its website.

Batteries and flywheels are alternatives to regulating frequency using electricity from standard power plants.

Flywheels’ Advantage

Flywheels have advantages over batteries and power plants, Theodore O’Neill, an analyst at Wunderlich Securities in New York, said in an interview. Batteries wear out faster than flywheels, and power plants respond more slowly and less efficiently.

Frequency-regulation systems may become increasingly important as more intermittent sources of energy such as wind and solar plants are connected to the grid, Nasdeo said.

Two flywheels at Beacon’s Stephentown plant have failed in the past three months. One broke down July 27, the company said on a conference call with analysts Aug. 9, and another failed Oct. 13. Six other flywheels came from the same batch as the two that failed and are running at slower speeds, a company spokesman told the newspaper.

Gene Hunt, a company spokesman, said the failures weren’t unexpected, and the company’s maintenance reserves will cover the replacement costs of both flywheels that failed.

In addition to the federal loan guarantee, Beacon received $29 million in grants from the U.S. and Pennsylvania for a 20- megawatt plant in that state and hired Group Robinson LLC to help it raise additional funds for the $53 million project. Group Robinson, a Menlo Park, California-based renewable energy consulting company, is also helping Beacon find customers outside the U.S.

Start-Up’s Nature

The consultant is making progress on raising funds for the company, Hunt said, declining to provide specifics.

Beacon had $5.4 million in cash at the end of June, down from $10.9 million at the start of the year. That’s enough to fund its operations into the last three months of the year, the company said.

After that, Beacon “may be unable to continue as a going concern,” the company wrote in an Aug. 9 filing. Hunt said that warning reflects “the nature of what’s a start-up company.”

Beacon needs to build more plants to generate enough revenue to survive, Nasdeo said. “They just have to raise money for the projects and get the projects up and running,” he said. “It’s going to be dicey,”

Tripling Revenue

The FERC incentives may attract investors by as much as tripling the amount of revenue Beacon’s projects generate, Judith Judson, the company’s vice president of asset management and market development, said on a conference call with analysts in August.

The electrical grid would benefit from faster and more accurate methods of regulating frequency, said Stu Bresler, a vice president at regional grid operator PJM Interconnection LLC. Changing compensation rules would encourage the development of technologies such as batteries and flywheels, he said.

“The more we incentivize better regulation, then the more efficiently we can provide the service, and then the total cost goes down,” he said.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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