Largely out of sight, tucked into building basements and stashed in garages, a new generation of energy storage technology is poised to help our aging grid not only avoid outages, but enable vast new flows of renewable power, all while saving some serious money. Call it the smart storage revolution.

California is ground zero for this trend. Across the Golden State, costs for electric power are high, renewables are multiplying, and key grid links are overloaded. But rather than rely on longstanding industry practice to fix grid problems by building more power plants or transmission lines, California regulators are encouraging customers and utilities to innovate.

At two InterContinental Hotels in the Bay Area, new storage technology is helping to reconcile these many challenges. The hotels’ secret weapon is a pair of fridge-sized boxes loaded with lithium-ion (Li-ion) batteries. Day to day, they’re able to cut the hotels’ electricity costs by up to 15 percent.

They do so by taking advantage of California’s complex power pricing regime. Smart software recharges the batteries when power is cheap, typically at night. When rates head up, the system seamlessly switches part or all of the hotels’ load to the batteries, thereby avoiding the need to purchase power at the costliest times, explains Salim Khan, CEO of Stem, the Millbrae, Calif.–based startup that built the systems.

The technology helps the broader grid, too, by reducing the risk of outages. Grid gurus call it “peak shaving.” It’s a nifty trick in which stored energy displaces active generation during key moments. On the hottest days, even a tiny sliver of this kind of savings can make the difference between a blackout and business as usual.

For now, the InterContinental Hotels’ storage units are an exception, but they’re set to become a rule. In February, California became the first state to order investment in smart grid storage, initially calling for 50 megawatts (MW) in the Los Angeles basin area.

The rule doesn’t detail what kind of storage to deploy. Rather, it aims to spark more market innovations, like Stem’s, that improve grid performance while saving money. “This is a huge signal to the market that storage is ready to play” on par with conventional power plants, says Janice Lin, executive director of the California Energy Storage Alliance.

Goldilocks Storage

To be sure, storing electricity isn’t anything new. Cell phones, e-readers and laptops, all integral to daily life, let us use a little of the grid’s generation on the go.

Storage is well established at the macro scale, too. A little-known backbone of the U.S. grid is more than 20,000 MW — equal to the capacity of some 22 nuclear power plants — of “pumped hydro” storage. Scattered at scores of remote sites around the U.S., these systems comprise some 99 percent of today’s storage capacity.

At night, utilities use low-cost energy to pump water from a lower reservoir uphill to a higher basin. The next day, as demand peaks, the water is sent back downhill to generate power. Think of pumped hydro as the biggest battery we have. It’s capable of delivering city-sized volumes of power for hours in a row. That’s why grid operators are pushing to install thousands more megawatts of capacity.

But, as California is finding, on today’s grid, the sweet spot for smart storage is at scales somewhere between these two extremes. Much bigger than handheld phone batteries, but smaller than gargantuan lakes of hydropower, smarter storage solutions can be an ideal fit for critical niches where a midsize dollop of power, supplied for minutes or hours, is all that’s needed.

Sharing California’s Problems

California’s problems aren’t unique. Similar problems are surfacing across the U.S.

Transmission constraints. L.A.’s biggest problem isn’t inadequate supply of power — most of the time there’s enough juice available from regional generators. The real problem is funneling all that power through aged transmission lines that can’t handle the load.

In most markets installing new transmission cables, or even upgrading existing lines, is a no-go. As populations have grown, the cost of new grid links has skyrocketed; likewise, public patience with big construction projects is scant. New York City and Long Island face similar transmission constraints.

Storage offers a tidy solution. At night, utilities can use existing transmission lines to fill up batteries positioned near demand hot spots. Later, if demand peaks beyond power lines’ ability, batteries can fill in the necessary excess. “Energy storage helps you do more with less infrastructure,” says Bill Acker, executive director of NY-BEST, an energy storage technology consortium based in Albany, N.Y.

Waste and reliability. To meet peak levels of demand, the grid has been massively overbuilt. The Electric Power Research Institute estimates that one-quarter of all high-voltage distribution lines and about one-tenth of all power plants are used, on average, just 5 percent of the time, or 33 hours per month.

That means hundreds of billions of dollars in assets go unused the vast majority of the time. Utilities are recognizing that carefully targeted storage can cost-effectively replace these least-used assets, says Haresh Kamath, program manager for energy storage at EPRI.

“We’re not using most of our assets most of the time,” says Johannes Rittershausen, managing director of Convergent Energy + Power, a developer of energy storage assets. “The challenge is to find ways to address infrastructure needs most efficiently and at the least cost to end users. A well-designed energy storage project can do just that by taking advantage of slack capacity in targeted locations.

“The U.S. grid will require massive investment over the coming decades as infrastructure ages and our society’s peak electricity demand continues to grow,” he adds.

Renewables’ risks. As a rule of thumb, grid experts believe that when intermittent power sources such as wind and solar surpass 20 percent, grid instability soars. And where that figure once seemed high, it is routinely being surpassed in many regions.

Storage boosts the value of renewables in two ways: by stepping in to provide power when renewable output drops off, and by mopping up excess output when solar or wind power exceed demand.

In February of this year, wind output set a record in Texas, briefly cranking out more than 28 percent of the power demands of the Electric Reliability Council of Texas, which manages the flow of about 85 percent of the state’s electric power. California’s goals for renewables are the nation’s highest, with a mandate to hit 33 percent by 2020. Roughly 20 more states, home to the majority of the U.S. population, have set goals of 20 percent or more.

Storage boosts the value of renewables in two ways: by stepping in to provide power when renewable output drops off, and by mopping up excess output when solar or wind power exceed demand.

“For the first time, the growth of renewables means we’re facing unpredictable supply,” says Lin. Demand will also grow less predictable as more electric vehicles come on line. “Plus it’s hard to find locations for new plants or transmission lines,” Lin adds. “Storage speaks to all these problems.”

Top Contenders

A menagerie of exotic new storage technologies — including thermal storage, flywheels and compressed air storage — are developing fast, but haven’t yet achieved commercial-scale viability. For now, advanced battery-based storage is the hottest of the grid’s newcomers, thanks to rapid declines in the price of Li-ion batteries.

Serendipitously, a key impetus for this trend started in the auto sector, where rising sales of battery-packed hybrids and electric vehicles are driving carmakers’ appetites for advanced Li-ion batteries. This is spurring new manufacturing capacity, driving prices down globally. Driven largely by rising demand from car companies, industry and utilities, the global Li-ion market is slated to double over the next four years, to around $24 billion, according to a recent Frost & Sullivan report.

As prices fall, Li-ion batteries are finding new niches. For now, at around $2,000 per kilowatt-hour, battery backup remains too costly for most applications. But they do pencil out for deep-pocketed utilities in key situations, where their ability to deliver large pulses of power is highly valued.

In January, for example, Duke Energy completed a 36 MW energy storage system at its Notrees Windpower Project in West Texas. Designed and installed by Austin-based Xtreme Power with funding from the U.S. Department of Energy, the $44-million system is the world’s largest wind-linked storage unit, made up of thousands Li-ion battery cells.

According to financial service company UBS, the cost of storage dropped by 40 percent over the past two years, and analysts expect the slide to continue, or even accelerate. At around $500 per kWh, EPRI estimates more than 40,000 MW of potential demand will enter the market. At that price point, residential-scale battery backup may become a reality. Pilot trials of such household-scale backup appliances are underway near Sacramento, Calif.

Installed in the garages of 15 solar-powered homes, Li-ion battery packs the size of small file cabinets hold enough juice to supply a few hours of power. The systems are designed to let the homes go off grid during periods of peak demand, saving homeowners money while reducing stress on the network.

And at $250 per kWh, consulting firm McKinsey & Co. predicts automakers will be able to build electric vehicles that would be competitively priced in comparison to conventional cars, but with much lower fuel costs. With an eye on a future where there’s a Chevy Volt, Nissan Leaf or the like in every garage, utilities and carmakers are beginning to test vehicle-to-grid systems where EVs’ big battery packs are enlisted to back up the grid.

Powering Ahead

Innovative startups and companies from outside the utility sector are leading the shift towards smart storage. It’s not that utilities won’t play a big role here, but historically they tend to follow, says GreenTech Media smart grid analyst Zach Pollock. “Utilities’ adoption of nascent technologies is typically constrained by cautious regulators, conservative cultures and long budget cycles.”

And maybe that’s okay. Smart storage offers a rare opportunity, says Rittershausen. “We can do a project that makes a profit, saves the consumer money and reduces inefficiency,” he adds. “If this is done right it makes sense for investors, end users and utilities too.”

UPDATED 03.02.13: This article has been updated to remove reference to the cost of energy storage declining to $300 to $600 per kWh by 2020.