When we consider how much revenue a 20 MW flywheel frequency regulation plant would earn in the PJM Interconnection region, we base our calculations on a 12-month trailing average for "all-in" regulation payments. PJM’s all-in regulation price is the sum of the Regulation Market Clearing Price (RMCP) and the Lost Opportunity Cost (LOC) payment, as defined below:

• Regulation Market Clearing Price (RMCP), which is paid to all regulation suppliers, plus
• Lost Opportunity Cost (LOC) payments, which are only paid to some regulation suppliers. LOC is only paid to resources assigned by PJM to provide regulation (i.e., not self-scheduled), and payments are made on a resource-specific basis based on how much of a resource’s lost opportunity costs are not covered by the RMCP. LOC payments are, in effect, out-of-market "make-whole" payments for non-self-scheduled resources.

Although LOC payments are currently made on a resource-specific basis, there are two separate proceedings before the Federal Energy Regulatory Commission, either of which when ruled upon (expected this year for both cases) would cause the LOC payments to be included in the RMCP, resulting in a single all-in regulation price. All indications are that there will be an all-in regulation price in PJM in 2012, in time for the 20 MW plant we plan to build there to benefit from the increased revenue.

For the 12-month period from August 2010 through July 2011, the average all-in regulation price in PJM was approximately $52 per megawatt-hour (MW-h) of service. This is the sum of the average RMCP of $16/MW-h and the average LOC of $36/MW-h during that time period.

The average RMCP of $16/MW-h for the 12 months August 2010 through July 2011 is based on the monthly averages of the hourly "RMCP ($/MWh)" in the monthly PJM Regulation Zone Preliminary Billing Data files, found here: http://bit.ly/p84zBv.

The average LOC of $36/MW-h for the 12 months August 2010 through July 2011 is calculated by dividing the monthly totals of LOC payments by the monthly totals of the amount of capacity that received LOC payments:

• The monthly totals of the LOC payments were $123,074,636 over this period. This is calculated by summing the hourly values under the heading "Total PJM Lost Opportunity Cost Credit ($)" in the monthly PJM Regulation Zone Preliminary Billing Data files, found here: http://bit.ly/p84zBv.
• The amount of capacity that received LOC payments is called "Regulation MWs Made Whole." The number is a subset of overall PJM-assigned regulation capacity and does not include any self-scheduled capacity. "Regulation MWs Made Whole" total 3,392,847 MW over this period.

Note: Because PJM has published the "Regulation MWs Made Whole" for 2010 only (found at http://bit.ly/q36YdB), "Regulation MWs Made Whole" as a percentage of LOC-eligible capacity, i.e., PJM-assigned regulation capacity (referred to as "Regulation Make Whole Percentage") for 2010 is used to estimate the "Regulation MWs Made Whole" for subsequent periods.

For 2010, the "Regulation MWs Made Whole" were 3,346,469 MW. The 2010 LOC-eligible capacity, (i.e. PJM-assigned regulation capacity) was 6,437,897 MW, which is calculated by summing the hourly values under the heading "Total PJM-Assigned Reg (MWh)" in the monthly PJM Regulation Zone Preliminary Billing Data files. This yields a "Regulation Make Whole Percentage" of 52% for 2010.

It is important to note that the 2010 "Regulation Make Whole Percentage" should not be applied to the 2010 "Total Regulation" value of 7,591,046 MW (which yields a lower Regulation Make Whole Percentage), because "Total Regulation" is not an accurate reflection of LOC-eligible capacity. This is because "Total Regulation" includes self-scheduled capacity, which is not eligible to receive LOC payments. To calculate the "Regulation MWs Made Whole" for each month, the 2010 "Regulation Make Whole Percentage" of 52% is applied to each month’s LOC-eligible capacity, which is the "Total PJM-Assigned Reg (MWh)".

For August 2010 through July 2011, "Regulation MWs Made Whole" is calculated by multiplying the 2010 "Regulation Make Whole Percentage" to the August 2010 through July 2011 LOC-eligible capacity (total PJM-assigned regulation capacity). For August 2010 through July 2011, the 2010 "Regulation Make Whole Percentage" of 52% is multiplied by the August 2010 through July 2011 "Total PJM-Assigned Reg (MWh)" of 6,527,120 MW to yield "Regulation MWs Made Whole" of 3,392,847 MW.

For August 2010 through July 2011, the average LOC price of $36/MW-h is calculated by dividing the total LOC payments over this period of $123,074,636 by the "Regulation MWs Made Whole" over the same period of 3,392,847 MW.

For August 2010 through July 2011, all-in regulation price is the sum of RMCP ($16/MW-h) and LOC ($36/MW-h) and is $52/MW-h.

There are two frequency regulation markets on the New York power grid, and both are available for us to bid into. The first is the so-called "day-ahead" market, the other the "real-time" market. As the names suggest, the day-ahead market pays regulation service providers based on bids received the day before. The average hourly rates in this market are typically lower than rates in the real-time market.

For example, in July 2011 (our first month at 20 MW capacity), the average rate for frequency regulation in the day-ahead market was $15.29 per megawatt-hour of service*. By comparison, in the real-time regulation market the average rate for the month was considerably higher at $21.11 per megawatt-hour*.

We have and will continue to bid into the real-time regulation market to maximize the revenue potential of our Stephentown plant.

*Source: New York ISO website data

The 20 MW plant in Stephentown will be connected exclusively via one utility: NYSEG. The facility will come online in stages beginning in January 2011, and from its initial capacity to the full 20 MW it will be interconnected via a high-voltage NYSEG line. Early in the project's design phase we considered a partial-capacity connection through NYSEG and another via National Grid (which also has a substation at the site). That configuration was changed in 2010, so that the entire 20 MW would flow through NYSEG. A formal announcement regarding the 20 MW interconnection agreement with NYSEG was made on September 14, 2010.

Our competition consists primarily of fossil fuel-based electricity generators. As compared to fossil-fueled regulating generators, we believe that our Smart Energy Matrix flywheel regulation systems offer superior performance and cost advantages. In addition, our systems consume no fuel and produce no direct emissions, making them a far cleaner, environmentally friendlier alternative.

In some locations, hydro-based generators can compete effectively against flywheel-based methods. In addition, some lithium ion (Li-ion) battery companies have recently initiated pilot installations for what may become competitive products. Although the variable costs of hydro generators are relatively low, we consider the competitive threat to be quite limited. This is due to the fact that capital costs are extremely high, lead times for construction are very long, and opportunities to build new hydro generation facilities are limited by a variety of environmental concerns, as well as location-based geography.

Although specialized batteries do constitute technical competition, we believe the extremely fast cycling requirements of frequency regulation will limit the practical depth of discharge of Li-ion batteries, thus requiring installation of more batteries than would otherwise be needed to obtain the initial required power discharge and charge capacity rating. Further, we believe the interactive effects of high cycling and fast discharge will lead to accelerated degradation of the energy storage capability of these batteries, requiring periodic additions or replacement of batteries to maintain initial capacity, or else a continuous de-rating in commercial capacity. These effects will increase Li-ion batteries' initial costs, maintenance costs, or both.

Finally, we note that the historical rate of improvement of Li-ion batteries is slower when compared to our inertial-based flywheel energy storage. While Li-ion batteries will continue to improve, we believe flywheel energy storage will too, but at a much faster rate. Compared to our 3rd generation design, our 4th generation flywheel increased its energy storage capacity by more than 300 percent, while power output simultaneously increased by about 700 percent. Advances in carbon composites, nano materials and rotor dynamics show clear potential for significant future cost performance improvements in our high energy flywheels.

The intellectual property rights of our flywheel-based products are primarily in patents that we hold or that are pending, but also include technologies and patents that we are licensed to use. We hold one or more U.S. patents on our flywheel vacuum system, heat pipe cooling system, output paralleling algorithm, metal hub, low-loss motor, co-mingled rims, earthquake-tolerant bearings, bearing cooling device, and bearing damper. We also hold one or more foreign patents on our vacuum system, co-mingled rims, and metal hub. Our patents expire on various dates between 2020 and 2026.

We also have about 30 pending U.S. and foreign patent applications, and several other applications being prepared for filing. We hold a perpetual, exclusive, royalty-free, worldwide license from SatCon Technology Corporation to use its flywheel technologies and patents for stationary terrestrial flywheel applications. (Our plans for exploring the development of systems for use in space or naval applications do not rely on the patents licensed from SatCon.) This license includes 15 issued U.S. patents and 12 foreign patents and applications that expire on various dates between 2012 and 2021. We further expect to develop additional intellectual properties and trade secrets as we continue developing our Smart Energy systems.

Frequency regulation is needed on a global basis, so our markets are global. Our initial market entry is in North America, where the total regulation market is divided into the "open-bid" and "vertical market" segments. As a merchant provider of frequency regulation, the open-bid segment is more accessible to new technologies, so our market strategy is to enter the open bid market segment first, followed by the vertical market segment. Open bid markets include PJM Interconnection, New York ISO, Midwest ISO, ISO New England, California ISO, Ontario ISO (Canada), and ERCOT (Texas). As our technology gains credibility among the traditionally risk averse vertical utilities, we believe they will seek to buy our technology and/or enter into long-term contracts for regulation services.

We are actively exploring opportunities in a number of large overseas markets. Overseas market development will likely include a mix of revenue models, including our merchant provider business model, the sale of turnkey equipment or systems, and co-ownership of frequency regulation plants.

Yes, definitely. Beacon's technology does not burn fossil fuel, while most of today's competing technology does. With the exception of hydro competitors, who are geographically limited, any type of carbon tax or cap-and-trade system will act to directly increase the cost of carbon-intensive competitors. While Beacon does have some exposure to fossil costs due to the need to buy a small amount of make-up electricity, our degree of exposure is much less compared to generators that burn carbon based fuel.

Wind and solar are intermittent generation resources. As more of these valuable resources are deployed, the amount of regulation capacity deployed by grid operators must also increase to help keep the grid in balance.
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Beacon Power Corporation was incorporated on May 8, 1997, as a spinoff from SatCon Technology Corporation. Since its inception, Beacon has been engaged in the development of flywheel devices for storing and delivering electricity. Today the Company is focused on applying its patented energy storage technology to design and deliver multi-megawatt systems that will provide frequency regulation services to the grid.

The Company's fiscal year corresponds to the calendar, with our year ending on December 31.

Beacon Power is located in Tyngsboro, Massachusetts. Our corporate headquarters facility houses our research and development, manufacturing, administrative, sales and marketing, and service functions.

As of November 2011 we have 44 employees.

Beacon's Smart Energy Matrix (SEM) flywheel systems can operate in different MW-level configurations without any loss of capacity or efficiency. These possible configurations can be as small as 1 MW and up to a full-scale 20 MW plant. In fact, thanks to the inherent modularity of its design, SEM frequency regulation plants could potentially be built to even greater capacities (for example, 50 MW). Beacon has established its initial full-scale plant design at 20 MW because for higher capacities, the grid interconnection process is different and would take longer.

As has been reported, we have been operating a 1 MW Smart Energy Matrix at our headquarters in Tyngsboro and performing frequency regulation services on the ISO New England grid since November 2008. A second 1 MW resource was added in July 2009 and also operated independently (it was connected to a separate power line). In December 2009, we added a third MW to the second 1 MW system, in the process creating our first integrated 2 MW resource. It is integrated in the sense that it responds to one ISO control signal and shares a transformer and control software. Thus, as of December 2009 we are operating a total of 3 MW of flywheel capacity on the ISO-NE grid, all of which is responding to one ISO control signal. Further, these resources respond to that control signal within four seconds (not eight).

No. Rotational speed is only one of several factors, and not even the most important. The others are surface speed (or "tip speed"), measured at the outside of the spinning flywheel rotor, and the mass of the rotor.

Beacon's Gen 3 flywheel, which was used in DOE-funded frequency regulation demonstrations in California and New York, had a 600-lb. rotor that spun at 22,500 rpm with a tip speed sufficient to provide a stored energy capacity of 6 kilowatt-hours (kWh).

The current Gen 4 flywheel, the Smart Energy 25, is designed to provide a stored-energy capacity that is more than 4x greater (25 kWh) than Gen 3. To do so, Beacon engineers increased the mass of the rotor four-fold to approximately 2,500 lbs. With this greatly increased mass, its rotational velocity of 16,000 rpm is more than sufficient to reach a tip speed that can deliver the requisite 25 kWh stored energy capacity.

At the heart of our flywheel is a rotating carbon-fiber composite rim. The rim is levitated on a combination of permanent and magnetic bearings and operates in a near-frictionless vacuum-sealed environment. The flywheel is powered to its operational speed using a permanent magnet motor and electricity from an external power source (for the frequency regulation application, the grid). As the rim spins faster, it stores energy kinetically in the rotating mass. The flywheel is able to spin with great efficiency because friction and drag are reduced by the use of magnetic bearings and the vacuum environment. Because parasitic losses are low, very little power is required to maintain the flywheel's operating speed.

Beacon's flywheel systems store far more energy compared to other commercially available flywheels. Our 4th generation flywheel stores a full 25 kilowatt-hours (kWh) of extractable energy - up to ten times as much energy compared to other flywheel systems. This is made possible with the use of high-strength carbon composites that tolerate more stress than metal flywheels; proprietary technology that optimizes rotor dynamics (i.e., "balance"); the large size and mass of our flywheels (mass times speed is directly proportional to energy stored); and the use of permanent and magnetic lift bearings that allow the carbon composite mass to spin with almost no energy loss. Most other flywheel systems are designed to deliver high power for a very short period, from 10 to 30 seconds, and their use is primarily limited to uninterruptible power supply (UPS) systems. Because Beacon's flywheels by comparison can store much more energy, each one of our flywheels is capable of delivering 100 kW of power for 15 minutes. By placing multiple flywheels in parallel, we can deliver frequency regulation at a utility (i.e. megawatt-level) scale.

Levels of power supply and demand on the power grid change from second to second. The need to balance electricity supply and demand on the grid requires a special service called frequency regulation to maintain stable power frequency. Deviations from nominal frequency can have a negative impact on the operability of devices that obtain power from the grid. In North America, grid frequency is maintained at 60 cycles per second (Hertz, or Hz). In Europe and other parts of the world, the same requirement exists for balancing power supply and demand, but at a frequency of 50 Hz. In North America, the effectiveness of maintaining grid frequency is measured against performance standards established by the North American Energy Reliability Council (NERC). Financial penalties can be imposed on grid operators when performance standards fall below levels deemed acceptable. Similar standard-setting entities for frequency regulation exist in most other parts of the world.
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When the grid operator (ISO) sends a signal that asks the system to absorb power, Beacon's Smart Energy Matrix uses power from the grid to drive the motor/generator, which in turn spins up the flywheels. When the ISO sends a signal that directs electrical power to be injected back into the grid, the momentum of the spinning flywheel is used to drive a generator located on the shaft of the flywheel. A bi-directional inverter is also part of the system that converts the kinetic energy into electrical energy for release to the grid. In this way, the flywheels effectively "recycle" electricity back and forth between the grid to provide the essential grid-stabilizing regulation service.
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There are many other potentially attractive applications for our flywheel energy storage technology, including:

• Cloud Mitigation for Solar PV

  Beacon's flywheel technology has the ability to buffer fluctuations in solar output caused by intermittent cloud cover and other factors. More on Cloud Mitigation for Solar

• Ramp Mitigation for Wind

  During wind ramping events, a flywheel regulation plant will provide a fractional contribution of added energy, in order to mitigate the event for as long as it has energy.
  More on Ramp Mitigation

• Wind/Diesel/Flywheel Hybrid

  As the cost of diesel fuel continues to rise over time, flywheel-based energy storage can play a valuable role in helping remote micro-grid communities reduce diesel fuel consumption, air pollution and cost.
  More on Wind/Diesel/Flywheel Hybrid

• Stabilization of Distributed Generation (DG) Systems

  In the event of a blackout, a DG system that combines Beacon's flywheels with fast electronics could separate or "island" itself from the grid and continue to serve its load.
  More on Stabilization of Distributed Generation Systems

• Peak Power Support

  Flywheels can be an excellent source of peak power support for a wide variety of applications, including (for example) mining drag lines, oil derricks/extraction, ships, and pulse laser weapons.
  More on Peak Power Support

• Frequency Response Reserve (FRR)

  A flywheel frequency regulation plant has the necessary instant response capability to provide FRR as an added overlay application without compromising its mission as a regulation provider.
  More on Frequency Response Reserve

• Voltage Support for Rail Systems

  Flywheel systems can support rail systems in several ways, including providing rail voltage support by augmenting power from the local substation, and working in conjunction with regenerative braking.
  More on Voltage Support for Rail Systems

• Uninterruptible Power Supply (UPS)

  Our flywheel energy storage systems can be applied as UPS systems designed to protect sensitive data centers and other customer environments from short-term power disruptions.
  More on UPS systems

• Angular Instability Control

  A multi-megawatt installation of flywheel energy storage, combined with fast-acting electronics, integration of existing Phasor Measurement Unit (PMU) monitoring, and specialized real-time control software, has the potential to dampen wide area system oscillations of the type that have contributed to wide-scale blackouts.
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• Reactive Power Support (VAR support)

  Beacon flywheel systems contain full four-quadrant electronics that are capable of varying the ratio of real to reactive power on a near instantaneous basis.
  More on Reactive Power Support

The Bloom Energy Server (from Bloom Energy) is based on solid oxide fuel cell technology. Solid oxide fuel cells are an efficient form of fossil-based electricity generation, and although they claim higher efficiency numbers, their use does not offset the need for wind and solar power to achieve climate goals. Such systems have historically faced cost and reliability challenges, which may still need to be resolved.

Flywheel energy storage systems do not generate power like fuel cells do since they do not utilize fossil fuel. Instead, flywheels work like mechanical batteries to absorb and inject energy to and from the grid, effectively recycling excess electricity to provide fast-response frequency regulation services without producing any direct emissions. Flywheel technology offers a clean, sustainable, long-lasting method of providing an essential grid-stabilizing service.

Fuel cells are somewhat limited in their ability to change output quickly, so these devices are not expected to be as effective at providing regulation compared to fast-response flywheel energy storage systems.

If distributed fuel cells succeed in being widely adopted as on-site generators at the retail level, one benefit would be that they would reduce the need for less efficient centralized power generation resources. Since grid operators rely on centralized generators to provide both base load power and frequency regulation services, any significant reduction in the use of centralized generators would likely decrease the availability of conventional regulating generators. This would have the effect of increasing the need for regulation-only solutions like Beacon's fast-response flywheel-based storage.