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Intro

Over the next decade, about a trillion dollars long-duration storage needs to be built. We make that next trillion dollars of pumped hydro storage possible. The supply chain you need to solve a trillion-dollar problem doesn't just show up overnight, unless it already exists.

Announcer

Welcome to the Decoding Innovation Podcast series brought to you by the EY-Nottingham Spirk Innovation Hub, where we explore the innovative technologies, business models and ideas that are shaping the future of industries. During each episode, Mitali Sharma, a principal in the EY-Parthenon Strategy practice, meets with stakeholders at the cutting edge to discuss innovations in their space, challenges they need to overcome and their outlook on the future.

Mitali Sharma

Hello, I am your host Mitali Sharma and today's topic is clean energy — in particular, clean energy storage and grid balancing. Our guest today is Joe Zhou, the CEO of Quidnet. Quidnet uses innovative geomechanical methods to deliver long-term storage. Welcome to the show, Joe.

Joe Zhou

Thank you, Mitali. Thanks for having us. I'm excited to speak with you today.

Sharma

Joe, for the benefit of our audience, could you talk a little bit about your background, your journey so far and what got you to Quidnet?

Zhou

Absolutely. I spent my entire career in the energy space. Prior to joining Quidnet, I actually led the business development team at a battery storage company in the Bay Area, where we looked all over the world for the underlying market structures and revenue mechanisms for energy storage on the power grid. That company was acquired in 2016 by a French power company and having been on the inside, it became apparent just the scale of the problem that they’re tackling when it comes to grid storage and just what we need in terms of the profiles of the solutions to solve this problem at scale. That led me to leave after the acquisition. I spent a year looking for other technologies to benefit the thesis and that's when I came across Quidnet. I've been with Quidnet since 2017 and I'd be happy to tell you more about the company throughout the show.

Sharma

Let us start with the basics. What is grid balancing, why is it important and how does energy storage play into it?

Zhou

Maybe the first sub-question would be just what is the US grid? The US grid is a multitrillion dollar machine and essentially, it's delivering about a terawatt of electric energy to run the country. Contextualize what a terawatt is. Watts would be an LED light bulb in your home. A thousand times that would be a kilowatt, that's about how much power your home needs. A thousand times that would be a megawatt, that's about how much power a neighborhood needs. A thousand times that would be a gigawatt, gigawatts would be the power consumption of a city. And then, a thousand times, that's a terawatt. So, that's then the country. Out of that terawatt, 40% is being consumed by residential, 35% is about being consumed by commercial and then, the remaining quarter, industrial. That terawatt is supplied by 60% coal and gas — fossil-thermal assets. Just under 10%, nuclear. Just under 10%, hydro and the rest of that's renewables. Where we need the grid to go, really, the objective is actually quite clear. Decarbonize electricity generation and use that decarbonized electricity as the energy platform for other sectors to decarbonize as well. But in practice, it’s actually a lot more complex and a lot more stressful on the grid. We need to meet more demand. That's number one. Over the next 30 years, estimates range up to 80% more demand than what is being served today. That's largely driven by electrification of transportation, heating, industrial uses and just general growth of the economy. We need to meet a lot more demand with supply that's a lot less certain. So today, we're powering the grid largely with coal and gas. They're very dispatchable assets. We need those electrons. They will come on, and we're going to transition that to a group that's dominated by wind and solar, which tends to produce at the whim of weather. So, when you meet a lot of demand with supply that's a lot less certain, all while losing our ability to inventory energy. The main inventory of energy for the grid today is actually in the form of gas molecules and caverns. That's the balancing system for the grid today. You burn those gas molecules when you want to produce electricity. But as we shift away from gas generation, as we shift to a more renewable generation mix, we're going to lose our ability to call on those gas molecules to balance the system. So, one of the biggest challenges in decarbonizing the grid is going to be about maintaining reliability. Balancing the grid, maintaining reliability and where are you seeing that manifest, financially and physically across the country? Very recently, rolling blackouts in Texas and California, extreme price volatility and power markets all across the country. We're not even at high levels of penetration yet. This is just starting. So, there's really no path to deep decarbonization of the grid without just an immense amount of long-duration storage to inventory to buffer, to balance this trillion-dollar machine. We also need that storage to be at a cost that fundamentally doesn't upset the cost structure of the US economy and at a scale that matters to just the true size of the problem we're trying to solve.

Sharma

How is Quidnet addressing these challenges?

Zhou

Over the next decade, about a trillion dollars long-duration storage needs to be built. What Quidnet does is we make that next trillion dollars of pumped hydro storage possible. We eliminate the reliance upon hydro on mountains and we strip more than 50% of the capex out of the system. How do you do that? Just like pumped hydro, we also store energy in the form of high-pressure water. But unlike pumped hydro, instead of pumping the water to the top of the mountain, we apply oil and gas techniques to effectively put the weight of the mountain on top of the water. So, we store energy in the form of high-pressure water, but just underground. Not only does this technology give us a cost entitlement that I talked about before, but equally important, this gives us a scale entitlement because the scale of the problem is just very, very large. The supply chain you need to solve a trillion-dollar problem doesn't just show up overnight, unless it already exists. All our scale entitlement comes from our ability to channel upstream oil and gas supply chain to deploy this technology. As it happens, that upstream oil and gas supply chain does have the scale. Between 2010 and 2020, that supply chain deployed multiple trillion dollars’ worth of projects. Put differently, just the spare drilling capacity alone in the United States is enough to transform entire regional grids with our technology within a matter of years. That's why we're working so hard to bring this to market.

Sharma

All right. Let's get into the technology in more detail. How is Quidnet addressing these challenges and how efficient is it?

Zhou

With this technology, the round-trip efficiency is actually quite comparable to traditional pumped hydro storage. It has very similar analogous opponents. We also have a pumping turbine. We also have a pipe that the water traverses through. The only difference is, instead of going up to the top of the mountain, we pump this water in between layers of rock. So, there's some friction as the water flows in between layers of rock. Net-net, we expect there to be maybe plus or minus a few percentages of difference in the overall round-trip efficiencies of the two systems.

Sharma

In terms of scale, hydroelectric tends to have huge plants. What are we talking about here? Does it vary?

Zhou

We are going to be a grid-scale solution, but built in modular pieces. The easiest way to think about the architecture of the Quidnet technology is to think about how wind farms are deployed. Single megawatt modules spread across a field, electrically daisy-chained to a single point of interconnection to the grid — that would be very similar to what we do. We are going to be single-digit megawatt wells, daisy-chained across the field to a single point of electrical interconnection as well.

Sharma

Okay. How do you quantify the energy storage by each well? Single-digit megawatts? Is it more?

Zhou

Yeah. Each well would be in the size range of single-digit megawatts. Where we see the long-duration market emerging is going to be in the 10-hour duration range, longer over time, but that's what we see is starting and so our initial product configurations are for that duration range, which means if you have a one megawatt well, it would then be a 10-megawatt-hour storage.

Sharma

Interesting. How do you choose the location?

Zhou

There're a few factors that factor into how we choose the location. The types of rocks that we work in for this technology is extremely abundant. Whereas oil and gas is looking for the perfect confluence of geological properties, we are not. We're primarily just looking for rock that's impermeable. We're primarily just looking for rock that's impermeable and shallow. There is a tremendous volume of bedrock available across the world that is one of the most common types of rock across the world. So, we start with the rock. Then, we look at how it ties onto the electrical grid. The intersection of those vin diagrams lay out where we focus our development.

Sharma

You mentioned a tie-in. What is this tie-in that you're talking about? Is this the proximity to the grid? Other things?

Zhou

By tie-in, I mean proximity to the transmission network.

Sharma

Okay. So, is there a distance from the transmission lines that you look for? Like a certain distance it becomes viable or better?

Zhou

There's no really magic formula and you see a lot of renewable project developers think about that answer. What is the length of their generation tie line? Is it a few miles? Is it tens of miles? Really just depends on the size of the project, and the value of the project and that location.

Sharma

Interesting. What are some of the limitations of this technology? Is it pressure because you said it's high-pressure stored underwater? Security? Other limitations?

Zhou

There is something we work on a subsurface, primarily you got to think about what is that subsurface environment. For us, where for example we wouldn't go, we wouldn't go into the areas that are mountains. Underneath the mountains, rocks tend to actually be quite complex, highly fractured. A lot of leakage pathways would make it hard for us to retain that pressure for the storage of energy. The other place that we wouldn't go is, early on especially, we would not be pursuing projects in the middle of dense urban areas. Just land is too expensive there. There're other uses of land that's much more valuable. So, it's hard for us to justify building a pond and buying land to build that pond in a dense urban area. So, where you'll see us focus on is rural deployments. Very similar again to the architecture, and how wind has deployed and scaled as an industry.

Sharma

Could you tell us a little bit about Quidnet’s journey so far?

Zhou

Yes, absolutely. I'll take you through that journey and I'll break that down into three parts. Part one. Part one is what one of our founders fondly calls, “earning the electrochemical badge occurs.” So, electrochemical storage, batteries, have been around for a while, and our phones, our cars and more recently, grid applications. Just about everyone who has gone into the grid battery industry at one point has thought, “How much of the grid application can I really pencil with batteries? They're pretty expensive.” Our cofounder and venture experienced this when the flavor of the industry was advanced lead acid batteries in 2000s. I experienced this while trying to sell the PMI batteries all around the world more recently. Same conclusion. Manufactured batteries have embedded cost structures that are just too expensive to solve the grid-scale storage problem at scale. So, that's part one. Part two of the early days of Quidnet is the “aha moment” that many startups tend to have, that lead to the creation of startups. In our case, and I'll tell you a bit about the person who came up with this, the cofounder and the inventor of this technology is a gentleman by the name of Howard Schmidt. Fascinating person. Grew up in the South Texas oil patch. Worked on frontier technologies all his life, including building spaceflight hardware, developing advanced lead acid batteries, trying to introduce nanotechnology into the oil field. It was the connection of the battery and the oil field synapses that led to the invention of the Quidnet technology. So, as we all know, we talked about this before, pumped hydro’s a dominant form of grid storage. At its core, a pumped hydro, what it is, it's just gravitational storage using a mass that is already put in place by mother nature — water. So, Howard's thought is, “What if instead of using water as that mass, we used another naturally abundant matter — rock?” So, the shale boom has developed these brilliant geologic techniques that Howard realized could be adapted to turn wells into hydraulic springs, each essentially pushing against the weight of a few hundred billion pounds of rock that existed in place. We don't need to manufacture that mass. We don't need to move that mass. We just have to drill and pump against it. This would just be like pumped hydro, but without the need for mountains and the cost burdens of building on top of mountains. That “aha moment” translated into a patent — a pretty incredible patent actually — and that became the kernel of Quidnet. So that's part two, the “aha moment.” Then, part three is taking that “aha moment” and making it a reality. So, Howard partnered with a phenomenal water and geothermal entrepreneur called Aaron Mandel, to start the company. Prime Coalition and a group of angel investors from Boston took the first risk in the company to fund a test in a Texas well to show that the concept was possible. Just as that field test was wrapping up, the battery company I was with was acquired. I was spending that year looking around for non-battery alternatives. I joined Quidnet as a board member and CEO in 2017. We brought on breakthrough Energy Ventures and Evoke Innovations as the founding venture investors to the company in 2018. We've since raised about US$30m in private capital and won over US$10m to government contracts to pilot this technology across North America. We’ve built up an immense supply chain, over 200 vetted oil and gas contractors across the continent to build these pilots. We just signed a 15-year commercial agreement with the largest municipal utility in the country, called CPS Energy in San Antonio. We're now gearing up to take these technologies from pilot to commercial.

Sharma

Let's talk a little bit about the funding process. What does it take to get something of this scale and proportion off the ground?

Zhou

There's the adage of, it takes a village to raise a child. It really is the same for startups. Startup in many ways is a child and it just takes a lot of people coming together around the idea to get it off the ground. It really depends on which phase of the company you're talking about. There're many key financing moments for trying to bring a startup to reality. The first, people call these financing moments or values of debt, the first one is really building the team and the business plan. Called this and the hundreds of thousands a single-digit million dollars. Generally, this is actually space that's well served — accelerators and incubators, angel investors, or if you're in position to bootstrap yourself. There're a lot of good jungle guys to help you navigate through that part of the system. The next key financing point for business is trying to now take that concept and bring it to a proof of concept for minimum viable product. For hardware businesses, that's really the first major valley. Usually in the tens of millions is the amount of money that's needed to get through that phase. In that environment, some of the key things are to make sure you raise enough money to get to the other side without question, budget for contingency, and not just like 10% to 20%, but like, what if things cost twice as much or four times as much to solve these problems along the way. Make sure the scale steps that we're taking make sense. There's a tremendous ecosystem of non-dilutive partners. Department of Energy is the obvious one. We've been a huge beneficiary of them and I think that's a key piece for helping people trying to get through this phase. Depending on how well-known the product in the market is, that will dictate how big of a lift you need on the commercial side to try to attract investors for this phase. If it's a well-known product that has a well-established set of specifications in the market, you may be able to just go this alone, focusing just on the product. If it's a novel approach, a novel business model that needs market validation, then you have both the commercial and technical lift necessary to get the investors comfortable with funding the company through all the way to proof of concept, or minimum viable product. So, that's the second round. Once you get to that, once you get through that valley, you've already done a lot. It's really hard to get through that first valley. If you've gone through that valley and the MVP doesn't have too many question marks, and you, the thesis and the team remain intact, that's a fantastic outcome. The next thing you have to do is go from MVP to commercial scale. Now, you're entering that next valley which is probably going to be, it really depends on the technology and the company, and the tens of millions to hundreds of millions. Here again, governments are still continuing to be a big source of funding to get through this next phase, but now, there're probably some serious options for customer financing, partner financing, as well as growth equity. The other thing I would observe at this juncture is that you're starting to have meaningful diversions, or optionality in how the business is built and who invests. That optionality exists in the form of, “Do you do merchant revenues or contracted revenues depending on the market you're selling into? Do you partner or do you go full stack and build your full supply chain yourself? Do you bring people on at the Topco, at the parent company level, where you are able to now capitalize the effort at just the project level?” This will now be highly specific and dependent on what the underlying technology is, what the market looks like, and what that industry structure looks like in terms of who the customers are and who the partners could be for helping the company get through that next phase. Once you arrive at the commercial scale, that's tremendous. What's left is to go from partial to bankable. That typically involves some additional scaling, and just execution reps and operating time. Frankly, not many start in the second wave of clean tech have made it here just yet. But things that can really help you through this phase, again, there are government programs, like loan guarantees, to help you with financing large projects. Corporates will be leaning in or should be able to lean in a big way where their balance sheets are at this point. There're a lot of early project finance firms that're able to lean in, like Generate Capital, Spring Lane Capital and so on. Then, you could also try to sell more capital equity or look at more blended financing approaches where you have an underlying project that has a component of very mature technology, as well as the incremental technology that you bring to this, to help blend out the risk profile for infrastructure financiers to get comfortable.

Sharma

Which state is Quidnet on?

Zhou

I would say we are currently trying to get to commercial scale.

Sharma

Okay. You've been through the MVP stage already?

Zhou

We've deployed this technology into the field and validated that the core component necessary to make this technology possible is doable in the field. We need to take that, continue to improve it and scale it up to first commercial scale.

Sharma

As you’re going in the commercialization stage, is there a pivot to the current technology that you have to take which is diverging from the MVP that you had developed during the second stage?

Zhou

When the concept hits the field, you learn all sorts of things, right? In the early days, we thought we were going to be able to use old oil and gas wells. It turns out that they are not big enough and they typically aren't at the quality necessary for us to operate. And so, that went away. So now, we pivoted to doing greenfield drilling and it turns out the cost structure is something that we can bear. We also thought that the rock behaves a certain way and in large part of that thesis, it is correct, but in other parts we figured, “Okay. There's some additional engineering that was necessary.”

Sharma

As you were going through the first and the second stage, were you involved in both the stages of the valleys? Now that you were in the commercial stage, were you involved in the first and the second? It seems like you were.

Zhou

I was. Although, I should say that building the team and the business plan, I joined that halfway. Aaron and Howard had got the initial seed funding for the company and then, I came in at the end of the second seed round.

Sharma

How would you describe your business model? Is it a product-driven with some kind of service element to it or it's one and done? How are you thinking about it?

Zhou

So, I mean, at the end of the day, we are bringing a new class of infrastructure to the market. This is another way to store energy for the power grid. There're really two methods for transacting that product. One is you sell it to the counterparty outright, and operate it and maintain it overtime. The other is you build it, you own it and the counterparty offtakes. Where and which business model drives business really is going to come down to the underlying market structure. In some markets, there is a propensity for utilities and other large players to own. We will absolutely be looking for that as the preference because in the early days for a startup, you just don't have that much capital to be able to build these large infrastructure projects. What you want to do is demonstrate it to get everyone sufficiently comfortable and then, find much more mature balance sheets to be owning these assets and building these assets onto. That is absolutely the preferred way and the more capital-efficient way for startups at our stage to go. Once we get to a sufficient level of maturity, of strength, of size, then, I think optionality opens up, in terms of, at the end of the day, how we finance these — whether the customer owns it, or whether we own it and we just provide a service in the form of energy storage services to the customer.

Sharma

I should have asked this earlier when you were describing the technology. You described storing the energy under very high pressure. How do you seal it? Have you developed the sealants internally or are you working on externally for that?

Zhou

So, there're a couple of components to it. One, as we pump the water down into the well, that water is going to be sitting under the weight of, in that entire column of rock above it. So, that's finally what's driving pressure into the system. Then, the key thing is, how do you make sure this water doesn't leak off? There it's about selecting the right type of rock, so that they're inherently impermeable. Remember, rocks have kept oil and gas molecules underground for millions of years. They're absolutely okay or capable of trapping pressurized fluids. So, it's about selecting the type of rock that has that level of low permeability and then, making sure that where there are weak points, that we're able to apply sealing treatments to those leak points to make sure that they don't become leakage pathways.

Sharma

Interesting. So, did you work with sealing companies or was that internally developed?

Zhou

It's a bit of both. So, we're working with products that are widely available across the oil and gas supply chains, and we're just repackaging them to solve this particular sealing problem.

Sharma

You are doing something that is very fundamental in the energy storage space. You're obviously engaged with a bunch of parties, developing an ecosystem that can solve the problem. Tell us a little bit about how you're bringing together diverse people with landowners and financiers and people interested in clean energy, and how's that journey been?

Zhou

Look, a lot of startups have the luxury of building their gadget in a lab and then, taking it out into the real-world environment. Because our technology is fundamentally harnessing a real-world resource, we had to skip into the field pretty quickly. So, over the past four years, we've had to work with regulators to determine how these walls should be permitted. We've had to work with local communities to help them understand exactly what we're doing and to lease the necessary land to do our tests. We have to work with financiers to get them comfortable with the risk profile and excited about the reward at the end of the rainbow for this technology. A lot of that is just taking the time to properly and transparently communicate what we're doing. I think one theme that tends to come up when you look at ecosystems is how startups can partner with large corporates. I mean, that is a recurring thing regardless of which company that you work on and the obvious things that corporates bring — the resources to bring the market access and bring the capital. Startups, they bring the ideas, the agility and the intensive session with solving the problem. So, the right partnership can be extremely valuable for both parties and it just takes time to do that right. It takes time and it takes a certain orientation to see that value. Especially, where there are startups and corporates, there’re just thousand things going on. So, partnering takes just a tremendous amount of effort and time, and folks just have to be prepared for that, in terms of that effort in time, and also have the mindset that having the right partner, for example, for startup, who can lean into your vision with their resources while preserving the upside can be just an incredible accelerant to the business. The last thing I would say is that ecosystem partnering is just so important for us because at the end of the day, there is a trillion-dollar storage problem in the energy transition. We don't have that much time to solve it. With our technology, we can essentially put that trillion-dollar storage problem into a format that the upstream oil and gas industry and supply chain is exactly set up to solve, and has a track record of solving at that scale. So, I think we've done a pretty good job to date of activating that supply chain to our mission and we're excited to find even more ways for that industry to lean in.

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The Decoding Innovation podcast series is a limited production of the EY-Nottingham Spirk Innovation Hub, based in Cleveland, Ohio. For more information, visit our website at ey.com/decodinginnovation. If you enjoyed this podcast, please subscribe. Leave a review wherever you get your podcasts and be sure to spread the word.

 

The views of third parties set out in this podcast are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

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