Startup Scale Microgrid Solutions won a $300 million commitment from investment firm Warburg Pincus this week, an unusually robust vote of confidence in the tricky microgrid market.
SMS sells modular microgrid products to commercial and industrial customers. It tackles the problem of replicability: microgrids tend to be highly particular to each site and customer, which makes it difficult to scale production cost-effectively. SMS hopes to change that with its "Rapid Response Modular Microgrid," which combines solar, energy storage, gas generation and controls in modular blocks.
The new influx of equity allows SMS to finance projects on its own balance sheet, creating a one-stop shop for customers interested in power bill savings and resilient backup power, but unable or unwilling to pay for a microgrid up front.
“This transaction gives us the flexibility to go after projects without needing to line up or rely on third party financiers,” SMS CEO Ryan Goodman told Greentech Media this week. “When you’re talking to customers, I think it makes a big difference.”
Much of the SMS leadership team worked together previously at ENER-G Rudox, a distributed energy company sold to Centrica in 2016. The founders invested their own money in SMS and raised one round from outside investors prior to Warburg’s investment. The company did not disclose its previous funds raised, but the $300 million, if fully disbursed over time, would make Warburg the largest shareholder by a wide margin.
The capital-intensive nature of a fully financed microgrid product aligns better with growth equity than venture capital, Goodman noted.
Making microgrids faster
SMS has been working with more than 10 microgrid customers already, Goodman said. The company does work on larger, more bespoke microgrids, in the $20 to $50 million range, but its signature innovation is standardizing the product for rapid delivery of smaller microgrids, which typically tally up to $15 million or less.
The Rapid Response Modular Microgrid runs on controls developed in collaboration with Schneider Electric, a company which pioneered the "no money down" microgrid-as-a-service approach for larger-scale projects.
The solar and battery components improve economics by delivering power and mitigating time-based charges when the grid is running. When a blackout hits, those tools work alongside dispatchable gas generators to keep the lights on. The everyday bill savings pay down the cost of resilience.
The product launched last May with financing provided by Generate Capital. The launch focused explicitly on recent instability of the California grid, with utilities shutting off power to avoid starting deadly wildfires. Companies that want to continue operating through the blackouts need to invest in resilient infrastructure, and the financing eliminated the need to pay out of pocket.
Generate Capital specializes in understanding and investing in clean energy technologies that other lenders aren't yet comfortable with. That relationship will continue on several projects, but going forward, Warburg's investment will enable SMS to finance projects by itself.
Big chunk of change
SMS found a well-capitalized partner in Warburg Pincus, a New York private equity firm with $58 billion under management. Most of the firm's energy investments skew to the traditional oil and gas or power industries, though it did venture into cleantech with Mosaic, a leading residential solar loan provider, and CleanMax Solar, a commercial solar leader in India.
“We’ve been following the market closely for a long time and have seen a large opportunity set related to distributed energy,” said Warburg Pincus Vice President Steven Kantowitz. “We determined that, with efficient financing and access to capital, this industry could really accelerate.”
Indeed, $300 million amounts to a more substantial commitment than most any grid edge startup has claimed recently. A few energy storage companies have pulled in rounds greater than $100 million — companies like C&I storage specialist Stem or unconventional grid storage Energy Vault — but that's a rare achievement in the sector.
Then again, full-fledged backup power has attracted serious investors in a few cases.
Schneider Electric, an innovator in the microgrid arena, is a multinational giant based in France, and therefore not in the running for outside investment. PowerSecure, a backup power provider active in the Southeastern U.S., went public and then got acquired by utility Southern Company in 2016 for $431 million. Enchanted Rock, a gas generator specialist prominent in Texas and the Southwest, raised an undisclosed equity investment from Balfour Beatty Infrastructure Partners in 2016. It later raised $10 million from the utility-backed fund Energy Impact Partners, in what was described as the first institutional financing round for the company.
Those companies have found a much broader geographic market than the venture-backed commercial battery companies, which have largely converged on California and a few other states.
The California resilience market will be a major near-term focus, but SMS won’t stop there.
“We see the opportunity being broader than that, with attractive opportunities in the Northeast and across the rest of North America as well,” Kantowitz said.