If energy-storage technologies were perfected to the point where they could be cheaply deployed on an industrial and residential scale, then this would be a revolutionary change for the electric power industry. And these technologies could even be transformational in a far broader sense, on par with the invention of the printing press, the automobile, the personal computer, and the Internet.

Energy storage would allow for greater use of green-energy technologies that are intermittent, such as wind and solar; spur wider adoption of electric cars; and help the energy system balance supply and demand more efficiently. In addition to accelerating the world’s move to a more environmentally sustainable future, these technologies could usher in an era of cheap energy, becoming a catalyst for the economic revival of the US.

Beyond that, storage technologies make possible distributed applications that could allow individuals, even cities, to be completely independent from large, centralized power systems. Energy storage could even grant consumers the same choice and independence that they enjoy in traditional retail arenas, such as when buying a car, computer or smartphone.

And like the Internet, the smart grid that utilities are developing in tandem with these technologies could be the backbone of this new era of sustainable energy. Indeed, as the graphic below shows, analysts at Citibank believe that renewables will increasingly dominate the world’s energy resource mix.

Chart A: The Ages of Energy

And these changes could happen relatively soon. After more than two years of contentious debate, the California Public Utilities Commission (CPUC) has finalized a decision that requires the state’s investor-owned utilities (IOU) to begin buying a combined 200 megawatts of energy-storage technology by 2014, with the goal of reaching 1.3 gigawatts (1,325 megawatts) of capacity by the end of 2020. This is the most ambitious target in the world, and its achievement would boost California’s installed capacity sixfold.

CPUC’s move was prompted by the passage of California Assembly Bill 2514 back in 2010. This was the first state law solely focused on incorporating energy storage into the electrical grid. It calls for the integration of renewables and the reduction of greenhouse gas emissions (GHG) to 80 percent below 1990 levels by 2050.

All five CPUC members voted in favor of the decision. Specific details about how CPUC will regulate customer-owned storage assets, beyond existing programs such as the state’s Self-Generation Incentive Program, will be addressed in future rulemaking.

According to news reports, the ruling creates three separate classes of storage at each type of grid connection point: transmission (shipping power over long distances), distribution (delivering power to individual consumers), and consumer applications, such as battery storage connected to a home’s solar-panel array.

Renewables experts believe this approach will incentivize the creation and use of diverse storage applications. And ample storage capacity should afford grid operators flexibility in how they use it.

At present, large-scale energy storage doesn’t really exist beyond massive pumped hydro projects. But California’s aggressive renewable-energy goals and GHG-reduction mandates will be hard to meet without a lot more energy storage to help balance intermittent wind and solar resources, while keeping the grid stable.

Energy Storage: A True Beginning After Many False Starts 

As such, we believe this new mandate could help fledgling energy-storage technologies achieve commercial scale and then penetrate the wider US and global power markets. And if mass deployment were successful, it could help keep future energy prices in check by expanding the delivery of low-cost renewable technologies.

As Chart B shows, gas dominates the first quartile of the integrated cost curve, largely thanks to the prolific US shale plays. However, the gas curve itself is very long, with the lower end of the solar cost curve impacting the upper end of the gas cost curve. Moreover, solar steals the most valuable part of electricity generation at the peak of the day when prices are highest, according to a report by Citibank’s analysts.

Chart B: Integrated Energy Cost Curves for Power Generation

Though some experts point out that natural gas is currently more competitive than some renewable technologies, this technology is being driven by increased adoption of renewables along with the possibility of higher energy prices in the future. Naturally, this would have significant implications for some utilities that have suffered declining revenues due to low power demand, cheap natural gas and greater adoption of renewables.

Of course, at present, no dominant energy-storage technology has emerged, and independents and utilities alike are still testing various types in California–from utility-operated sodium-sulfur and lithium-ion batteries to cabinet-sized battery arrays sitting inside solar-equipped buildings and homes.

There are also thermal energy storage systems that turn rooftop air conditioners and campus-wide cogeneration plants into virtual-grid, energy-shifting arrays, and PG&E Corp (NYSE: PCG) is developing a compressed-air energy storage (CAES) system. Meanwhile, Southern California Edison, a subsidiary of Edison International (NYSE: EIX), is looking into using plug-in electrical vehicles as storage, and Sempra Energy’s (NYSE: SRE) San Diego Gas and Electric has focused on microgrid projects.

While all these technologies hold promise, we believe utility-scale batteries are the energy-storage technology to watch. According to a 2012 report by Navigant Consulting’s Pike Research, the market for advanced batteries could roughly double each year over the next 5 years, reaching $7.6 billion in 2017. Over the ensuing half-decade, growth will level off to a still-robust compound annual growth rate of 31 percent, and revenues in the sector could reach $29.8 billion in 2022.

Navigant notes that batteries offer “the promise of grid flexibility and generation asset enhancement at rapid speeds and varying levels of scalability.” At the same time, the consultancy acknowledges that the success of battery technology as a storage option is not assured, as it faces a host of challenges:

“Costs are high compared to traditional power generation resources; the regulatory environment remains ambiguous; no single optimal technology has emerged; and advances in grid infrastructure equipment, such as smart inverters, could accomplish many of the same objectives as advanced batteries.”

Who’s Poised to Dominate This New Era?

Regardless of which storage technology prevails in the marketplace, these developments have obvious implications for the future of utilities and independent energy firms, as well as the entrepreneurial entities that seek to replace them. Some believe the utilities industry will always play a role, even if reduced, as a vital backbone for these new technological developments. Others say that the advent of energy storage means the concept of centralized power could be at an end.

While we don’t know which distributed technologies could become the disruptive systems that change the value proposition for utilities, we also cannot completely discount utilities as possible beneficiaries of this new future. Indeed, there are utilities that have openly embraced this new paradigm. Even so, history has shown that fortune typically does not favor the incumbent when industries have undergone dramatic technological change, such as in personal computing and telecommunications, for example.

“The technological changes that damage established companies are usually not radically new or difficult from a technological point of view. They do, however, have two important characteristics: First, they typically present a different package of performance attributes–ones that, at least at the outset, are not valued by existing customers. Second, the performance attributes that existing customers do value improve at such a rapid rate that the new technology can later invade those established markets. Only at this point will mainstream customers want the technology. Unfortunately for the established suppliers, by then it is often too late: The pioneers of the new technology dominate the market.” That passage is excerpted from a famous paper, entitled “Disruptive Technologies: Catching the Wave,” by Harvard academics Joseph L. Bower and Clayton M. Christensen.

In this case, utilities may discover that energy storage and the deployment of renewables introduces new attributes that were not initially valued by customers: independence and reliability combined with an environmentally friendly and efficient technology. While the performance levels of renewables are low compared to traditional resources, they’re improving by leaps and bounds, specifically in the case of green technologies such as solar and wind.

Your correspondent has been on both sides of the table, attempting to implement renewable technologies at a major utility, as an equity research analyst covering green-energy tech companies, and as an adviser to emerging markets companies that have been interested in large-scale renewable adoption for industrial processes.

Whereas utilities’ ultra-conservative culture can make them blind to potentially disruptive changes, new technology firms sometimes attempt to commercialize too early and, therefore, fail to achieve scale and financial viability.

Although there are many variations in energy storage technologies at present, no single technology has evolved into an accepted standard due to its superior attributes. Furthermore, most of the companies involved in developing these technologies are privately owned and in the start-up phase of development.

So while the energy-storage space certainly bears watching, for now most investors should continue to focus on the sectors that can be more easily evaluated, rather than attempt to make venture-capitalist-style bets. To that end, we’ll be closely monitoring utilities’ strategies to adapt to this unprecedented transformation, while also examining companies that are already thriving in the renewables space, such as in the areas of solar and wind.

And this would be consistent with billionaire investor Warren Buffett’s approach to new technologies. In a 2009 letter to Berkshire Hathaway shareholders, Buffett wrote, “Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding.”