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A123 Looks to Grow the Lil' Business That Could: Grid Storage

A123Systems (s AONE), the lithium-ion battery maker that opened the floodgates on greentech IPO filings with its $371 million public offering last fall, collected a $5 million loan commitment this week from its home state of Massachusetts. Awarded to help A123 expand its research, development and manufacturing operations (and create 250 new jobs) in the state specifically for large-format battery systems that connect to the power grid, the loan offers a little more government-sponsored fertilizer for the seeds A123 has been planting to grow its grid storage business.

Electric grid services have made up a growing portion of A123’s revenue during the last few years, and over the long term they could hold increasing importance for a battery maker that has generated much of its revenue to date from deals with consumer product makers — chiefly power tools — but never turned a profit.

A123 sold its first products for the consumer market in the first quarter of 2006, followed a year later with sales into the transportation market. But according to A123’s regulatory filings, the company has “only recently” shipped its first products for the electric grid services market.

Sales in the consumer market made up as much as 93 percent of A123’s revenue in 2007, dropping to 76 percent and then 26 percent in the next two years. Transportation accounted for just 7 percent of the company’s product revenue in 2007, rising to 19 percent in 2008 and 59 percent last year. By contrast, sales in the electric grid market contributed zero revenue three years ago, but grew to 5 percent in 2008 and 15 percent in 2009.

As Katie has explained in our FAQ on Energy Storage for the Smart Grid: “Until recently, energy storage has been largely ignored — overshadowed by clean power generation or information technology for the smart grid,” and the sexier market of batteries for electric and hybrid vehicles. On the automotive front, however, A123 has seen mixed results when it comes to getting its batteries in actual vehicles.

The company has lost at least one battery deal (for General Motors’ Chevy Volt) to battery giant LG Chem and seen another one (for Chrysler’s lineup of electric vehicles, now significantly scaled back) dissolve. As part of its latest automotive supply agreement, A123 opted to invest $23 million in plug-in hybrid vehicle startup Fisker Automotive, partly to “help galvanize” additional funding that the startup will need to meet its production goals (and potentially become a major customer for A123).

A123 isn’t going it alone with grid storage tech. The company partnered in 2008 with AES Energy Storage to engineer, manufacture and install large battery systems for the grid (currently dubbed Smart Grid Stabilization Systems). Last year AES contributed 9 percent of A123’s revenue, and A123 expects the company to account for a “significant portion of its 2010 revenue.” As stimulus funding for smart grid technology works its way through utilities, A123 anticipates that they’ll ramp up investments in batteries and battery systems.

In addition to the loan from Massachusetts this week, A123 secured a $2 million grant from Michigan to demonstrate an SGSS in combination with energy from renewable sources, such as solar and wind, to help power its federal- and state-backed manufacturing project in Livonia, Mich. A123 also has deals to provide batteries for three smart grid projects funded under the Recovery Act.

The SGSS tech, which uses a battery originally developed for a series of DeWalt power tools, is meant to provide services such as standby reserve capacity and frequency regulation (helping to even out minute-to-minute fluctuations in frequency caused by changes in supply and demand). A123 explains in its S-1 that the systems can quickly deliver power to the grid, effectively offsetting supply shortages caused by generator or transmission outages.

A123 says its first SGSS — a 2MW system housed in a 53-foot-long trailer — has been installed at an AES facility in California, and another 16MW-worth of units have been installed at AES Gener’s substation in Chile’s Atacama Desert, and California utility Southern California Edison has ordered two units for pilot testing.

A123 has so far been able to ride a wave of unprecedented government funding for lithium-ion batteries and smart grid technology. Yet it remains a small fish in a pond that includes giants like Johnson Controls-Saft, Panasonic, LG Chem and Samsung. The company faces tough competition from firms that, as A123 notes, boast “greater market presence, longer operating histories, stronger name recognition, larger customer bases and significantly greater financial, technical, sales and marketing, manufacturing and other resources,” as well as developers of new technology, like Beacon Power (s BCON) with its flywheel-based grid storage system and $43 million federal loan guarantee.

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