It was 1995, and Joe Pinkerton was going from company to company trying to sell his startup’s magnetic bearing technology when he heard about an untapped market that instantly captured his interest.

Based on a venture capitalist’s suggestion, Mr. Pinkerton visited several flywheel companies. Flywheels are spinning discs that store energy, and the companies planned to use them to recapture braking energy for hybrid cars. Mr. Pinkerton thought his magnetic bearings could reduce friction in the flywheels, increasing their energy efficiency. But then he stumbled upon another application.

Flywheels could also be used to briefly generate power during an outage, bridging the critical gap before backup generators kick in. So fixated were the flywheel makers of the era on the untold billions that awaited them in the automotive industry, they discounted this less sexy market. Mr. Pinkerton didn’t. “They said it was boring, but right away, we realized we would like to go after that market. It was exciting because it was real.”

By 1996, Mr. Pinkerton had invented a flywheel specifically for backup power, and his startup, Magnetic Bearing Technologies, was renamed Active Power. The Austin, Texas-based company is now the largest public flywheel company in the world. It’s still a small company, with a $187-million market cap as of October 17 and $8.1 million in revenue in the first half of 2005. Indeed, flywheels are a small part of the overall backup power market—less than 10 percent, according to Farah Saeed, program manager for backup power solutions at Frost & Sullivan.

But after years of only minor adoption, this retro-tech is beginning to see signs of major growth. Credit high energy prices, a growing demand for reliable power, and blackouts and hurricanes that have raised awareness of the United States’ grid weaknesses—all converging with new advances in flywheel technology. Flywheels are becoming a viable solution for more customers.

Flywheels were a $182.5-million worldwide market in 2004, says Ms. Saeed. She expects the market to grow 3 to 4 percent every year until 2011. Maurice Gunderson, a managing director of Nth Power, a venture capital firm focused on new energy technologies, estimates the potential market at between $1 billion and $2 billion per year.

Picking Up Speed

CEOs have more evidence that the “boring” market is growing. Mr. Pinkerton says Active Power’s flywheel sales grew 80 percent in the last year. In September, Wilmington, Massachusetts-based Beacon Power—which reported $945,438 in revenue in the first half of this year—shipped its first flywheel demonstration system to the Pacific Gas & Electric utility in California for testing. While the contract amounts were not disclosed, Beacon CEO Bill Capp says the systems would cost about $1 million each if 10 or more were made.

In March, Pentadyne Power, a flywheel startup based in Chatsworth, California, closed an $18-million round of venture funding, bringing its total to $32 million. Along with Nth Power, investors included Rustic Canyon Partners, DTE Energy Ventures, Accera Venture Partners, Sempra Energy, and other private investors. The company also won new customers, including Ehwa Technologies Information, Emerson Electric, and Beaver Aerospace & Defense. “This has really been a breakthrough year for us,” says Pentadyne CEO Flint Craig.

The Anti-Battery

Flywheels are essentially big discs that spin like tops, storing energy as motion. The basic principal is inertia, which is the same principal used in all gyroscopes—tops, potter’s wheels, and satellites. If a flywheel is constantly juiced with a small amount of electricity, it will spin. When the electricity is cut, the spinning slows and energy is drawn off. At those times, flywheels automatically turn into generators, feeding electricity back through the system.

Most flywheel systems only provide about 15 seconds of power. But considering that 90 percent of all outages last for two seconds or less, that’s all you need, says Mr. Gunderson. In longer outages, it’s enough time to bridge to a generator. So flywheels are used for applications where it’s critical to avoid those few seconds of interruption, including hospitals, data centers, financial institutions, broadcasters, communication centers, airports, military installations, and semiconductor fabricators. Most flywheel customers are large power consumers that need at least 100 kilowatts of energy and have backup generators, says Ms. Saeed.

Flywheels generally come in containers the size of water heaters or refrigerators, and can provide between 100 to 250 kilowatts of power. They can also be yoked together to provide more electricity. “The strength of a flywheel is high power for a short duration, so when you think about big backup power installations, where you need a megawatt for 15 seconds to bridge to backup power, that’s really ideal,” says Mr. Pinkerton.

Flywheels replace batteries, says Ms. Saeed. “There is some frustration with batteries because although they’re cost-effective and a reliable, mature technology, they require so much maintenance,” she says. “Any battery-less technologies would be favored, especially by larger facilities with intense power capacity.”

But Beacon is targeting a different market than its competitors. While the most obvious power issue is when power goes out entirely, fluctuations in voltage or frequency—measured in cycles per second, or hertz—also wreak havoc on the power grid. Instead of preventing blackouts, Mr. Capp says Beacon wants to regulate electrical frequencies for utilities, and plans to charge for the service, rather than sell the systems themselves. In that application, size is less of an issue, and Beacon’s system combining 10 100-kilowatt flywheels fills a shipping container. But each system can provide a megawatt of power for 15 minutes, and will generate about $350,000 of revenue per year, says Mr. Capp. Last year, U.S. utilities paid $190 million for energy used for frequency regulation, he says.

Aside from Pentadyne, many private players are also involved. Ms. Saeed says the biggest are Piller Power Systems, an Osterode, Germany-based company wholly owned by British engineering group Langley Holdings, and Hitec Power Protection, based in Almelo, the Netherlands. Others include GE Digital Energy, Urenco Power, Caterpillar, AFS Trinity Power, Flywheel Energy Systems, Optimal Energy Systems, Eaton Powerware, and Precise Power.

The U.S. is the top market for flywheels, but the market in Western Europe is growing quickly, and Nth Power expects the market in Japan will also grow soon, says Mr. Gunderson. He expects the bulk of the market to remain in more developed economies because it’s mostly the high-tech industry that is willing to pay for the upgrade, he says.

But Mr. Pinkerton says he thinks developing areas such as Northern Africa, China, and India will also be prime markets. “In Northern Africa, business is just booming and there’s a horrible electrical infrastructure where you’re using backup generators two to three times a day,” he says. “Batteries literally explode because they’re outdoors and they just can’t take it, but that’s perfect for a flywheel.” In October, Active Power expanded sales to India in a deal with backup power manufacturing company Numeric Power Systems.

Globally, the uninterruptible power supply market (UPS) has huge potential. Ms. Saeed says the global UPS market was worth $4.72 billion in 2003, while the Freedonia Group says backup power now makes up a $6.5-billion market in the U.S. alone. The flywheel market “will remain small relative to the conventional UPS market, but I do project it to be successful going forward,” says Ms. Saeed.

Why Now?

Flywheels have been around for decades—thousands of years, if you count the potter’s wheel—and many people have never heard of them. So why the sudden interest from investors? First of all, higher energy prices and tighter environmental standards have sparked interest in cleantech. Flywheels are considered clean because, unlike batteries, they contain no chemicals that could damage the environment when they’re thrown out.

In addition, more people are becoming aware of the grid weaknesses. In the U.S., the grid is aging and under-maintained. Many transformers are approaching or surpassing their design life, and in every year since 1975, investment in the electricity transmission grid has dropped about $117 million, according to the U.S. Department of Energy. The result is a brittle grid constantly on the edge of failure. Research firm Primen, now part of EPRI Solutions, estimates the cost of power outages and fluctuations at between $119 billion and $188 billion yearly.

As the grid’s inherent weaknesses come to light, the demand for steady, uninterrupted power grows. While small outages were acceptable a few years ago, now electronic transactions, cell phones, email, and ATMs all depend on even flows of power. “Other than the inconvenience involved, light bulbs, motors, and things are pretty much insensitive to those kinds of disturbances,” says Mr. Gunderson. “But anything that has a computer in it—everything from a microwave oven to a bank—can be damaged by those disturbances. Blinks in the lights that you hardly notice when there’s a power disturbance are not even annoying to a person, but they can cause an MRI machine to crash and not restart for 24 hours.”

All these drivers are putting pressure on the market. Nth Power considers power reliability one of its main areas of focus because it is growing so rapidly, says Mr. Gunderson. The company estimates the total market opportunity at between $3 billion and $5 billion.

Meanwhile, advances in flywheel technology have boosted its attractiveness. Better vacuum technology and magnetic bearings have reduced friction in flywheels, lowering the amount of energy they need to keep spinning and allowing them to provide more energy in less space. Pentadyne and Beacon also use lighter, stronger, composite materials so their flywheels spin faster without deteriorating. The amount of energy produced is an equation of mass and speed, and when you double the speed, you quadruple the energy produced for the same mass. The two companies also use high-speed motors, which allow their flywheels to get electricity in and out more effectively, says Mr. Gunderson, who is also on the Pentadyne board.

As an investor, Mr. Gunderson says he is not using flywheels just to hedge his bets, but is committed to the technology. “There are few things you can be totally confident in, but of this, I’m 100 percent certain,” he says. “I absolutely cannot think of a scenario in our 10- to 15-year timeframe in which flywheels will not play a big part.”

A Slow Start

Still, there is reason for skepticism. After all, flywheels have been around for decades, and the market is tiny. The first flywheel hype began in the 1980s and 1990s, when they were viewed as an automotive technology, says Mark Cox, chief investment officer for New Energy Fund, a renewable energy hedge fund. The idea was to have a ready source of extra energy for vehicles, to boost them up hills without using extra fuel, he says. But flywheels, like gyroscopes, don’t tilt. So the flywheels would work to keep cars moving in the same direction, making it difficult to get them to turn, he says.

Following in Mr. Pinkerton’s footsteps, the industry gradually realized that flywheels worked better for stationary applications. But the target market was still unclear. When Beacon and Active went public in 2000, Beacon focused on the telecom market, and Active Power sold to Internet data groups, which wanted new technology.

Like the rest of the high-tech industry, all the flywheel companies took a beating when the bubble burst. Beacon regrouped with a new CEO and new business plan. Active Power struggled at first to sell to tech-shy customers like banks and hospitals. “They said, ‘New? New’s not good,’” says Mr. Pinkerton. “The backup power market is really reference-driven so we had to start over from scratch, and it was hard. It’s taken some time to build up the market.”

The results became evident last year, which was the turning point in the flywheel market, with sales increasing 40 percent, says Ms. Saeed. But in another potential sign of skepticism, Mr. Pinkerton says flywheels are limited to “biting around the edges” of the backup power market. Active Power is launching a non-flywheel technology, CoolAirDC, scheduled to debut in November.

Niche or Not?

Even as Mr. Pinkerton branches out from flywheels, Ms. Saeed is convinced that flywheel makers have now overcome most of the technological challenges: “I think it’s more a matter of marketing and price.” But Mr. Cox says flywheel manufacturers still have some developing to do.

He says flywheels are still too expensive per kilowatt hour—$30,000 for Pentadyne’s system and $49,000 for Active Power’s.

Mr. Cox says his hedge fund once included Beacon stock, but he dumped it when prices were low. Now, he’s considering reinvesting in flywheels. “There’s no question that these products have at least niche applicability, and that’s exciting,” he says.

Ms. Saeed also expects flywheels to remain a niche product, for customers that really need constant power, that have space for the technology, and that have a maintenance budget. “It’s obviously not for a small office with four people,” she says. “It will still remain small relative to the conventional UPS market, but I do see this to be a successful market going forward.” She expects large companies will gradually adopt flywheels as they replace existing backup systems, or try new solutions for new facilities.

Companies are still trying to find the best customers for flywheels, and as the technology changes, they could be used in other applications. Ironically, those could one day include transportation all over again. Beacon says its system could eventually be used to charge the regenerative braking systems in trains, for instance, and could also end up on ships. As the market expands, there is room for newcomers spinning new ideas about how to profit from flywheel technology.