A three-year-old, well-connected San Francisco startup has signed a contract to buy and install a whopping 500 megawatt hours worth of grid batteries from Tesla. That size of deal is the equivalent of installing tens of thousands of Tesla’s Powerwall batteries, many in California, over the course of the next five years. The startup is called Advanced Microgrid Solutions and the company installs batteries in buildings and uses smart software to manage the collective battery energy to help utilities better run the power grid.
The company is led by co-founders Susan Kennedy and Jackalyne Pfannenstiel, who each have long history in the energy industry. Kennedy is the former chief of staff to California Governors Arnold Schwarzenegger and Gray Davis, and former commissioner for the California Public Utilities Commission. Pfannenstiel previously chaired the California Energy Commission, worked at utility PG&E for twenty years, and was the assistant secretary of the U.S. Navy in charge of energy strategy. In addition to Advanced Microgrid Systems’s well-connected founders, the company also has an important advisor—DBL Investors’ Managing Partner Nancy Pfund, who was also an early investor in Tesla.
Kennedy described the partnership with Tesla as “a big deal” in an interview with Fortune and said the company chose Tesla as the battery tech supplier for its projects after reviewing tech from all over the world because “frankly, Tesla was the most powerful and scalable and in a class of its own.” Tesla is currently using lithium ion batteries from Panasonic and has developed its own power electronics and battery management software system. The batteries it sells to utilities and partners like Advanced Microgrid Solutions is called the Powerpack, while the battery systems for homes and businesses is called the Powerwall.
During peak usage times, or periods of fluctuating production from renewable energy sources, batteries can reduce the burden on the power grid or provide a continuity of service. In this way, utilities can use batteries to replace tapping into peaker power plants, which are expensive and dirty power plants that are turned on during periods of very high power grid usage. When batteries are utilized in conjunction with renewable energy, the storage systems could offer needed energy on the grid when the sun starts to go down or the wind suddenly stops blowing.
For commercial building owners, such as a Walmart for example, battery energy can be turned on when power grid rates are high, lowering a company’s monthly electricity bill in a process called peak shaving. The energy storage industry calls these installations in buildings “behind the meter” energy storage.
Advanced Microgrid Solutions isn’t the only player in town building projects using software, power electronics and other vendor’s batteries. Others include startups like Stem, Greensmith Energy and GELI and big companies like GE. Tesla is also working with a variety of battery projects and software developers including large public companies AES and EnerNOC.
Still, Advanced Microgrid Solutions stands out from its many competitors in that it combines both these utility and commercial applications in its installations and system management. The company’s software aggregates the collective load from the buildings connected to the system, creating what the startup calls “fleets of hybrid electric buildings.” It’s like how a hybrid car switches from gasoline to electric when needed; the buildings can move on and off of battery energy when needed.
The company surprised the energy storage industry last year when it came out of stealth and revealed a big 50 megawatt deal, (across four contracts) with utility Southern California Edison. That’s 50 megawatts of four-hours-worth of capacity, so the project will make up about 200 megawatt hours out of Tesla’s total 500 megawatt hour contract.
Tesla’s deal with Advanced Microgrid Solutions includes supplying batteries for the Southern California Edison project in addition to other utility deals in the future. Advanced Microgrid Solutions plans to install its first 10 megawatt project in buildings in Irvine, California in 2016.
Southern California Edison is just one of California’s utilities that are attempting to fulfill the state’s mandate which says utilities need to collectively install over a gigawatt of energy storage by 2020. The utility announced 250 megawatts worth of energy storage projects last year and Advanced Microgrid Solutions won a deal for 50 megawatts of that.
The California mandate has kickstarted the state energy storage industry, and dozens of companies of all sizes have entered the space not only in California, but nationwide. GTM Research estimates that 220 megawatts worth of energy storage will be installed in the U.S. in 2015. There were already about 5.8 megawatts of energy storage installed in the U.S. in the first quarter of this year, says the research firm.
Advanced Microgrid Solutions has been quiet about both its equity financing and project financing that will support the installation of all of these battery projects. But, as I reported last week, the startup is in the process of raising a round of $18.8 million in equity from investors to run its business. The company plans to announce details of its project financing down the road.
The energy storage industry will be watching closely to see whether Advanced Microgrid Solutions’ unique combination of connections, experience, smart software, and its new Tesla deal can give them an edge in a rapidly emerging market.
[fortune-brightcove videoid=4242916567001]
Subscribe to Data Sheet, Fortune’s daily newsletter on the business of technology.
