Navigant Research Blog

Off-Grid Offerings Aim to Keep Utilities Ahead of New Competition

— November 9, 2017

Over the past several years, the falling costs for solar PV, energy storage systems (ESSs), and other distributed energy resources have prompted some industry observers to predict the major threats to the utility business model would be driven by increasing numbers of customers generating their own power. This prediction has proven to be premature and not a serious concern for many utilities. The costs and complexity required for customers to truly become independent of their local electricity provider remain too high. However, some utilities with largely rural and remote service territories face unique challenges to provide reliable and affordable service to their customers. Select providers around the world have begun exploring opportunities to offer off-grid energy systems directly to customers in an effort to reduce costs while establishing a new segment of their business.

Examples Around the World

In the US, Vermont-based utility Green Mountain Power claims to be the first in the country to actively help its customers go off-grid with combined solar PV and energy storage offerings. With a high percentage of rural customers, long feeder lines, mountainous terrain, and frequent blizzards, the company faces higher costs to reliably serve each customer. A key aspect of Green Mountain Power’s offering is selling its customers the Tesla Powerwall residential storage system through a well-established partnership with the EV and stationary storage provider. To reduce the energy required by these customers, the utility provides energy efficiency retrofits and home automation controls. It also supplies backup generators to ensure electricity is always available.

On the opposite side of the world, one of New Zealand’s largest electric distribution companies is facing similar challenges and has established its own off-grid program. Powerco has begun constructing several all-in-one microgrid energy systems for customers in remote parts of the country. The company’s offerings include solar PV, energy storage, and backup generators configured to meet a customer’s year-round energy needs. Powerco has partnered with US-based ESS provider SimpliPhi Power to offer its modular 3.4 kWh lithium ion battery units. The utility has determined that these off-grid energy systems are more cost-effective than having to extend the reach of the centralized grid by just 2 km, with an added benefit of reducing fossil fuel consumption and providing greater reliability for customers.

Avoiding Threats 

As explained by my Navigant colleagues in a 2016 article, threats to the utility business model have evolved into something far more pernicious in the past 3 years. Solar PV, ESSs, and other individual technologies are increasingly combined into complex hybrid energy systems driven by evolving technology platforms to meet the energy needs of end customers. These developments have resulted in previously unheard of competition in the market from cable and telecom companies, solar PV providers, home security firms, and large tech companies.

Utilities Facing Increased Competition at the Edge of the Grid

(Source: Navigant Research)

Utilities such as Green Mountain Power and Powerco recognize these threats and are attempting to get ahead of the competition posed by new energy service providers. These companies recognize that they must be innovative with their offerings to keep pace with the demands of customers and the industry’s technology-driven evolution. By encouraging customers to adopt new technologies and go off-grid on their own terms, utilities can establish a profitable extension of their business while forging stronger relationships with customers.

 

Innovative Business Models Required to Drive Microgrids for Resilience

— October 17, 2017

The devastation caused by recent hurricanes in the Caribbean and southern United States has focused attention on the potential benefits of microgrids and local power generation. With widespread power outages and major damage to grid infrastructure, the opportunity to rebuild electrical systems with a more distributed and resilient architecture has never been clearer. Navigant Research’s new report Energy Storage for Microgrids highlights some the developments taking place in this emerging market along with the challenges that must be overcome to capitalize on the full potential of these technologies. The report explores innovations in business models that will be key to the growth of microgrids and distributed energy over the coming years, particularly in markets with significant financial constraints.

Protecting and Improving

Microgrids equipped with distributed energy storage, solar PV, and other forms of distributed generation can greatly enhance the resilience of the electrical system by preventing damage to a single portion of the grid from causing massive outages. This capability would be especially beneficial for islands such as Puerto Rico and the US Virgin Islands, which face frequent hurricanes capable of destroying transmission and distribution lines. In a centralized grid system, although power plants may still be operational after a storm, the energy they generate will be unable to reach customers. Microgrids with localized energy storage and generation are less susceptible to storm damage and can be brought back online more quickly, without damage in one area preventing service from being restored elsewhere. Furthermore, under normal conditions, microgrids provide numerous benefits to the grid by operating both independently and in a coordinated fashion to maximize the use of renewable energy without affecting grid stability.

Leveraging Financial Innovation to Drive Growth

Since microgrids are a relatively new technology platform, two major challenges that hold back new projects are the limited number of standardized solutions (despite some early plug-and-play offerings) and the limited financing options that reduce upfront investments and risks for customers. In the case of Puerto Rico and other islands with significant financial constraints, innovative business models will be critical for microgrids to spread.

Business model and financing innovations have been key drivers of growth in the solar PV industry over the past decade. Many of these same concepts are being applied to microgrid and distributed energy storage projects with the goal of negating the perceived risk of investing in new technologies. Some of the new models shifting risk and upfront investment away from customers include: power purchase agreements and leases with owner financing, software, energy as a service, and design, build, operate, and own models. New business models are being driven by the growing number of companies that leverage their backgrounds to provide microgrid solutions, including utility subsidiaries, energy service and technology providers, solar PV developers, and building energy management and controls providers.

Creating Opportunities

While the distributed energy industry races to help communities recover from recent disasters, it is critical that new technologies capable of reducing the effect of future storms be implemented. However, overcoming the lack of familiarity with these new systems and relatively high upfront costs will be a major challenge. The most successful companies in this industry will be those that can unlock the potential of new business and financing models to reduce the risk and upfront costs to customers. This ability to leverage private investment in infrastructure will be particularly important as countries with limited resources look to recover from massive damage while preventing similar issues in the future. In a webinar later this month, Navigant Research will explore the role of microgrids for improving resilience in another high profile area: data centers.

 

Energy Market Participation for DER Continues Taking Shape

— September 12, 2017

Distributed energy resources (DER) are often touted as having the potential to disrupt traditional energy markets by providing both reserve capacity and ancillary services. However, to date, there have been limited actual opportunities for this diverse set of technologies to provide these services. Regulatory efforts and collaborations between utilities and technology providers are actively working to change this dynamic in global markets. Likely one of the more innovative programs to bring DER into wholesale energy markets has been California’s Demand Response Auction Mechanism (DRAM).

DRAM is a pay-as-bid solicitation program through which utilities are seeking monthly demand response (DR) system capacity, local capacity, and flexibility capacity from DER. This innovative program aims to allow multiple DER technologies to compete on a relatively level playing field providing load reduction services on-demand for utilities. Contracts for load reduction through the DRAM have been awarded to companies providing DR from both commercial and industrial and residential customers, EV charging providers, and distributed energy storage/solar PV providers. Last month, the DRAM program closed its latest round of awards, with utilities requesting approval for 200 MW worth of contracts.

Tip of the Iceberg

DR is emerging as the primary entry point for DER to participate in competitive energy markets. Many DER, namely distributed energy storage systems, are highly flexible resources capable of providing a range of services, including DR/load reduction, ancillary services, and the ability to absorb excess energy during periods of low demand. Despite the variety of benefits DER can offer, the markets for providing and being compensated for these services are not yet in place in many areas. While existing DR markets only utilize one of the services that DER can provide, they are likely the most viable point of entry into competitive markets. The required integration with utility systems has been effective for decades, and grid operators are comfortable with these programs.

For most DER providers, a DR-type program is not the end goal for grid integration and energy market participation. However, it is a great opportunity to prove both the value and reliability of DER to help solve grid challenges. With California pioneering new programs, and other opportunities taking shape around the world, the evolution of DER participating in energy markets will evolve quickly.

 

Energy Storage to Optimize and Advance CHP Generators

— August 31, 2017

Energy storage is often associated only with the integration of renewable energy. However, recent market developments have highlighted the potential for storage to optimize both existing and new fossil fueled generators. While large-scale pumped hydro energy storage has been used on the grid for decades, those systems were rarely tied directly to any generation plants. A recent storage project built by General Electric in California is evidence that the falling costs for battery storage are opening opportunities to improve the efficiency and flexibility of existing generators.

There are attractive advantages for energy storage to optimize generators at a smaller scale. Gas-powered combined heat and power (CHP) systems are becoming increasingly popular due to the improved efficiency these systems offer customers that need a reliable supply of both heat and electricity. Because of the varying energy needs of these customers and the dynamics of CHP systems operation, there is frequently an overgeneration of either electricity or heat. This energy is often wasted, as establishing contracts that export excess energy is costly and challenging. Both thermal and electrical energy storage systems can greatly reduce wasted energy when tied to CHP systems and can provide attractive ROI for customers.

Industry Actions

Several recent acquisitions in the industry have emphasized this dynamic. In a recent blog, my colleague Adam Forni discusses these developments and the efforts of generator manufacturers to expand their offerings and participate in the emerging Energy Cloud. Notable recent investments in storage providers include Wärtsilä’s purchase of Greensmith and Aggreko’s acquisition of Younicos.

In both cases, incumbent generator providers moved to acquire storage companies focused on the software and controls required to optimize storage systems and integrate them into electricity markets. These tie-ups are mutually beneficial, as the storage providers gain access to new sales channels and potential new customers. The generator providers are likely focusing on developing the capabilities to integrate storage into their offerings and utilize new combined solutions to provide energy and capacity services in competitive electricity markets. The additional revenue generated by these grid services can greatly improve the overall economics of new storage and microgrid projects, including those that expand the capabilities of existing generators.

Into the Future  

The move toward microgrids and local power systems to improve the resilience of energy supply is an important driver for the integration of energy storage with conventional generators. Navigant Research’s recent Market Data: Combined Heat and Power in Microgrids report anticipates that 11.3 GW of new CHP capacity will be added in microgrids around the world over the next decade. The addition of these systems presents a major opportunity for both thermal and electrical energy storage to improve overall efficiency. Through the integration of energy storage and the sophisticated software platforms used to connect to energy markets, large amounts of new distributed energy capacity will become available on the grid.

 

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