Last October, vicious storms resulted in more than a week of rolling blackouts for the 20,000 residents of Broken Hill, a dusty outback town 850 kilometres north of Melbourne, Australia. The disruption brought condemnations of the regional utility and promises of compensation — and, for Toronto company Hydrostor, which specializes in long-duration energy storage, the expansion of a $660 million (U.S.) backup power deal.
That backup plan wasn’t exactly a bolt from the blue. Hydrostor was already developing an energy storage plant next to an abandoned mine near Broken Hill. This project is one of the latest examples of the growing push to decarbonize fossil-fuel dependent electrical grids; over the coming decade, global energy storage capacity is expected to increase by about 40 per cent. “If you are going to increase renewables and solve climate change,” says cleantech investor Tom Rand, a partner at ArcTern Ventures in Toronto, “you can’t do that without storage.”
For Hydrostor, however, it’s been a 15-year slog through research and development, small pilot projects and hustling up investors and prospective customers. “It’s definitely a challenging business to finance,” says Hydrostor CEO and co-founder Curtis VanWalleghem. But after inking a transformational deal with Goldman Sachs in 2022, the company has gone on to secure about $2 billion to roll out its first commercial-scale projects in Australia and California. The long-term payoff, VanWalleghem adds, will be considerable — about $150 million in annual cash flow from utility clients.
What’s more, Hydrostor’s story reveals that Canadian firms can produce transformative and export-oriented climate technology, provided they gain access to the capital needed to bring such innovations to fruition.
The challenges of scaling
Hydrostor belongs to an important subsector of the climate tech industry: hard tech, a field that involves developing highly engineered devices, materials and other physical solutions to deliver carbon savings. These innovations are crucial to the climate fight. Yet, as a new study from MaRS shows, Canadian hard-tech entrepreneurs face daunting barriers when it comes to finding the cash needed to hone, commercialize and export their technologies — particularly at the critical early stages of development.
“If you’re going to need to build large-scale commercial plants, you’re going to need a lot of capital,” says Leah Perry, the climate capital lead at MaRS. But, as Perry points out, these projects often involve lengthy development and testing timelines that extend beyond typical investment horizons (especially compared to software). As well, many investors lack the technical knowledge to gauge the true potential of these innovations. Some startups, in fact, have all but given up on finding Canadian investors with the patience and risk tolerance to help scale their solutions.
Hydrostor is one of Canada’s startup success stories. But it took technological inventiveness, serendipity and old-school persistence to push through those tenuous early stages of development.
Harnessing the power of water
VanWalleghem met Toronto-based inventor Cameron Lewis in 2010. VanWalleghem was working in business planning for Bruce Nuclear, whose operators were dealing with the challenge of how the plant could work in tandem with Ontario’s new wind turbines and solar farms to maximize efficiency. Lewis had developed an advanced air compression system that could store renewable power and then dispatch it when it was needed, thus avoiding the costly task of adjusting the output of a massive nuclear plant.
For years, utilities have relied on hydro dams to store renewable energy, using it to drive pumps that push water up into reservoirs to be released during peak periods. Lewis’s technology provides a variation on that theme. Hydrostor’s plants are designed to sit atop 600-metre-deep man-made caverns that are connected by pipes to large holding ponds. The water in these ponds serves as the battery: When power is needed, it’s released into the cave, powering a turbine to generate electricity that is fed into the grid. Unlike other emerging energy storage solutions, the system doesn’t rely on critical minerals and can be located in many different geological contexts.
Lewis had developed the idea through an incubator program at MaRS. At that stage, “it was a drawing on a piece of paper,” says Rand, who stepped in as Lewis’s adviser. Armed with a patent, they decided to try to commercialize the system and set out to recruit a CEO; VanWalleghem heard about the opportunity through a colleague and got in touch. Thus began the long process of scaling up the technology, working out the kinks, securing funding for demonstration projects and landing equity investors.
Lewis and VanWalleghem worked hard to raise capital from friends and family, and then wealthy investors with an interest in cleantech. They secured federal R&D tax credits and an Ontario government grant. “It took about three years before we were able to attract venture capital funding,” VanWalleghem says. “We pitched 100-plus venture funds before we ultimately got ArcTern.” Rand’s firm invested $3 million in 2013 and has continued to expand its stake.
To build a commercial-scale demonstration plant that could help them achieve the next level of growth, they tapped Alberta oil and gas investors who understood the risk — and the potential reward. Once the plant was operating (in Goderich, near the Bruce nuclear power station), VanWalleghem brought in a steady stream of visitors to show it off.
In 2022, all that effort paid off. Hydrostor scored a massive $250-million (U.S.) investment from Goldman Sachs — and another $25 million (U.S.) from the Canada Pension Plan Investment Board — a sum that provided enough ballast to secure large-scale commercial projects and so-called “power purchase agreements” with utilities looking to bolster their renewable portfolio.
Building a pipeline of projects
Construction on the first two plants, in California and Australia, begins later this year. Once it’s up and running in 2027, Hydrostor’s 200-megawatt facility near Broken Hill will provide up to eight hours of renewable backup electricity, reduce future investments in transmission lines and eliminate the use of diesel generators. Hydrostor also recently secured a $1.76 billion (U.S.) Department of Energy loan guarantee on a second California facility. “We have 15 other projects that are probably two years away from construction,” VanWalleghem adds. “You construct it, which takes about three years, and then it operates for 50 to 100 years.” But getting here took a lot of time and persistence, he says.
While the bulk of Hydrostor’s project pipeline is outside Canada, VanWalleghem hopes to land customers at home, too. Ontario has called for bids to build out an extensive long-duration storage network. “It’s the same size as that one in California: 500 megawatts, eight hours. We’ve partnered with a local First Nation near Kingston,” says VanWalleghem. “We’re doing bore holes, starting permitting. We’re really excited about moving that project and finally building a big one in our own backyard here in Ontario.”
For hard-tech entrepreneurs, Hydrostor’s trajectory is at once aspirational and yet also uncomfortably familiar. Those journeys necessarily involve loads of capital. Indeed, investors like Rand understand that fighting climate change requires massive extensive financing to replace the carbon-addled energy infrastructure that encircles the globe. “You can’t solve climate change without building and replacing big machines,” he says.
Yet when those hard-tech innovations do reach a certain threshold — the space where the business case, the investor returns, the climate benefit and the technology all line up — the opportunity becomes almost limitless. As VanWalleghem says, the end point in Hydrostor’s growth plan is nowhere in sight. “Once those first projects start running, we will sell down a stake and recycle that capital into future projects, and keep trading capital down the line.”
John Lorinc writes about technology for MaRS. Torstar, the parent company of the Toronto Star, has partnered with MaRS to highlight innovation in Canadian companies.
