Stem Sees Solar-Plus-Storage-Plus-AI as Winning Combo: Q&A

By Richard Stubbe, BloombergNEF editor. This article first appeared on the Bloomberg Terminal

Batteries, solar, wind and computing keep getting cheaper, opening up a new range of options for companies that buy and sell power. The retail energy market is moving beyond a straight count of kilowatt-hours, and customers want or need to know when and where the power was used, whether the source was renewable, how they can reduce their use when demand is peaking, and how they can be good “grid citizens.”

Stem Inc., based in Millbrae, California, is trying to take advantage of all those trends. The company’s signature product, Athena, combines batteries and artificial intelligence to manage energy use for commercial customers, enabling them to buy power when prices are low and limit use during expensive peak-demand periods. Chief Executive Officer John Carrington said Stem, which now operates in six U.S. states as well as Japan and Canada, has grown from four sites to more than 900 installed or under contract since 2013.

Stem also may benefit from regulatory changes in the works. In the short term, battery makers are pushing Congress to clarify that the investment tax credit for solar power also applies to storage. In the longer term, states and system operators are adjusting their rules to make a place for batteries.

Carrington and Polly Shaw, Stem’s vice president of regulatory affairs, answered questions from BloombergNEF in a phone interview in late November.

Q: How was Stem’s 2018? And where does Stem fit in the changing landscape of energy use and efficiency?

A: It’s been a good year. We think of the company as building and operating the largest digitally connected network of intelligent energy-storage solutions. Our software platform called Athena manages these battery systems that we put in commercial and industrial buildings, all behind the meter. When you look at the key metrics of a behind-the-meter company — number of projects, number of customers, most geography, most interconnections, utility contracts — we are the clear leader in every one of those categories. When I joined this company in December 2013, we had four sites, so it’s been quite a run.

Q: How does 2019 look?

A: 2019 is going to be more characterized by our engagement in solar-plus-storage. I think you’ll see us in another international market or two. We’ve done a lot in Canada and we’ll continue to build that out. We were fortunate to have Ontario Teachers Pension Plan invest in the company this year, and that’s brought a tremendous amount of credibility to the company. We did a C$200 million project finance fund with them that lets us offer customers a financing option that makes it an operating-expense deal instead of capex.

Q: What’s changing faster in solar-plus-storage, the pricing or the technology?

A: People are starting to understand what storage can bring to projects. There’s greater control and flexibility, and the ability to access new value streams. Without storage, they weren’t able to impact demand charges. Cost is certainly a piece of it, as well as regulatory activity.

Q: What regulatory activity are you seeing?

A: MA Smart, which is starting in Massachusetts, is a compelling program to drive more storage. We see tremendous interest in other states. It’s been somewhat slow to take off relative to solar because regulators are being a little bit more thoughtful on how they want to put together the legislation around storage.

Q: Is the regulatory structure an aid or a hindrance right now?

A: Probably a little of both. The California PUC has been a big advocate trying to help with storage — [Commissioner] Carla Peterman, specifically — but they’re managing so many different things. The bigger issue is legacy policies. Now you have a storage asset that doesn’t act like a generator, it’s a unique animal. That’s what they’re trying to piece together and put the right legislation in place.

Q: California is probably the state friendliest to your business as a regulatory environment. Is that accurate, and how far behind are the other states?

A: California has been at the front of most regulatory activities. They required utilities to add storage and took other actions to help the industry get off the ground. New York and Massachusetts have come on strong; in Canada there’s an opportunity. Hawaii, Texas, Arizona and Nevada are looking at doing some more things.

Q: What other trends are driving storage?

A: You have increased renewables, which have the intermittency issue. You have increased grid efficiency. There’s a big push around empowered customers. These companies have chief sustainability officers and ESG pressures from their shareholders, and they are going to legislators and commissioners and saying, “We want to participate in markets. We want to control energy spend.” They’re demanding things that storage has a very good fit for. They say things like, “We want to be a better grid citizen, and the way we can do that is to participate in markets and help the grid be more stable.”

I think you’re going to have a big upswing of large Fortune 500 companies that are very, very smart around energy because it’s such a large piece of their spend. If you get into the lower-margin type companies, it’s a material part of their earnings.

Q: What other threats and opportunities do you see?

A: One threat is tariffs. We do a lot of work in the U.S., and a lot of our batteries come from overseas. In the long range, those tariffs don’t benefit any country very effectively. An opportunity is educating the broader community about the attributes that storage can bring, and doing that faster.

We are pursuing a storage investment tax credit [the same credit solar now has] in Congress.

Q: What’s the case you make to a legislator on why storage should benefit from the ITC?

A: First and foremost, other technologies have it. For a solar company to have it and a storage company not to have it is upside-down. The storage industry employs 70,000 people so it’s a pretty good-sized and growing industry. We believe that the ability for us to participate with both existing storage and new storage is a compelling opportunity for both industries to grow quickly.

Polly Shaw: Especially at the federal level, there’s a lot of bipartisan interest in grid modernization and infrastructure. Both sides of the aisle see storage as an intelligent solution that helps the infrastructure picture. We’re optimistic that this bipartisan support will turn into a clarification of that policy for storage that would apply to solar-plus-storage and to stand-alone storage.

Q: You recently announced a joint venture with Ontario Power Generation. What’s that going to mean for the company?

A: They represent a little over half the generation in Ontario. We’re excited about that because they have a good customer network, they’re a crown company, it’s such an aggressive market and competitive market.

Q: Is there a timetable for Stem to go public?

A: Right now we’re focused on executing our plan, so we’ll see. The Bloom Energy Corp. IPO was an interesting comp for us, and I think it’s done well. It’s been a fairly limited IPO market in this space, from a straight storage player standpoint it’s been zero. Whatever the exit might be that’s best for our shareholders and employees I’m on board with. But right now the board’s view and my view has been let’s go continue to execute.

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