Navigant Research Blog

Winter Season Builds Business Case for Storage, Virtual Power Plants in California

— January 9, 2017

AnalyticsA little over a year ago, the underground Aliso Canyon natural gas storage facility began leaking. While the primary concern was how methane emissions might jeopardize public safety, this event also created a crisis in energy supply in Southern California. As it turns out, it became the largest methane leak in US history. By some estimates, the leak had a climate change impact equivalent to burning 1 billion gallons of gasoline. The value of the leaked natural gas has been estimated at more than $21 billion.

However, the leak from the gas field, which supplied fuel for a fleet of fossil fuel plants serving as one of the backbones of the regional power supply, also created an ideal market opportunity. The only way to fill in the gaps opened by the leak was through distributed energy resources (DER) that could be mobilized in short order. Among the innovative solutions are virtual power plants (VPPs) enabled by energy storage.

Distributed Solutions

The sate moved swiftly. The California Public Utilities Commission (CPUC) made a bold decision, calling for a wide range of DER in late May. Fortunately, Southern California Edison (SCE) and industry providers were positioned to move fast, since contracts were already in place for over 260 MW of energy storage, 5 times the amount SCE had been required to purchase.

Last month, Stem was among the first vendors to deliver aggregated behind-the-meter, commercial-scale storage services. It was the first to pass eligibility tests for SCE’s local capacity requirements. The company has now dispatched the first of many distributed energy storage projects, all of which contribute to its forthcoming 85 MW fleet for SCE, arguably the largest mixed-asset VPP in the world.

The speed and scale for delivering products such as demand response (DR), energy storage, and VPPs are important, as the energy demands of the winter months place an extra burden on utilities for reliable energy supply across the country. Already, independent grid operators such as PJM are revising DR products in lieu of the shortage created by the so-called polar vortex 2 years ago. PJM’s new capacity performance product has created controversy, but its intent is to make DR a year-round resource. Integrating energy storage into such resources can help make that goal feasible. (Last December, the CPUC also strengthened its commitments to DER as a key solution set for year-round reliability.)

Ranking Vendors

Navigant Research released a Leaderboard report late last year ranking VPP software vendors. As an analyst, there is no better way to win friends (and create enemies) than to create a ranking of vendors. Another Navigant analyst wondered why Stem has not on the list. Needless to say, one could make an argument it belonged in the ranking; other vendors also protested their exclusion.

The truth of the matter is that the overlap is increasing between energy storage, DR, and VPP Leaderboards, so this latest ranking was limited to four energy storage firms in order to limit eligibility (with quotas also established for large technology vendors and pure-play software companies). Preference was given to those firms whose software managed onsite solar PV with batteries and loads at the distribution level and then aggregated these into VPPs. Stem is a VPP innovator, but its business model had focused more on demand charge abatement for commercial buildings without onsite distributed generation. Thanks to its above-mentioned engagement with SCE, Stem is now certainly on my radar when it comes to VPPs and energy storage, joining a growing list of innovators.


Why VPP Software Vendors Are Vital to the Success of the Emerging Energy Cloud

— November 30, 2016

Ethernet CablesThe concept of a virtual power plant (VPP) means different things to different people. It’s really just a creative way to imagine the variety of grid services that can be harvested from the plethora of distributed energy resources (DER) that are rapidly populating power grids worldwide.

A VPP is the epitome of the changes transforming relationships between utilities, customers, and a host of other market participants that are building real solutions to the pressing energy and environmental challenges facing the world today. Navigant has coined the term the Energy Cloud to describe the evolution of our collective energy future. VPPs are just one aspect of this shift toward smarter, cleaner, and smaller power sources being aggregated into real-time solutions that benefit individual asset owners while contributing to the sustainability of existing infrastructure.

The Value of Software

Now that hardware assets such as solar PV panels, batteries, and other DER are becoming commoditized due to increased market penetrations and creative business models, the key to unlocking greater value from both new and existing DER is software—the fundamental technology driver underlying the VPP market.

Software is a broad category. It includes systems that connect DER in order to optimize synergies between like and unlike resources, in addition to the interface mechanics of interacting with utilities and wholesale markets for ancillary services. IT and related software is where the money is being made in the VPP market; according to Navigant Research’s Virtual Power Plant Enabling Technologies report, software spending is expected to represent nearly 90% of total VPP implementation spending by 2025. The same report also provides an analysis of the energy storage systems being wrapped into VPPs.

A sudden surge in energy storage deployments being aggregated into VPPs is tilting the market in dramatically new directions. How utilities and wholesale transmission grid operators treat energy storage as an asset may be the most important technology-related development affecting near-term commercial VPP deployments.

Ranking Vendors

Navigant also recently published a Leaderboard Report ranking VPP software vendors. There is always an apples-to-apples comparison challenge with the Leaderboard format, but by stepping back and focusing on the overall trends in the market, insights bubble up to the surface.

Ranking software vendors active in the mixed asset VPP market is even more problematic than microgrid controls vendors given the lack of available transparent data on performance of software products. The lack of a universal definition for a VPP only adds another layer of issues in developing a ranking. These caveats aside, the rankings do reveal some market insights.

Some vendors claim vertically integrated utilities are the best near-term market for VPPs, since all ancillary services required to keep the grid physically in balance are purchased by one single entity. Others argue that deregulated markets open doors to new ways of monetizing value and harness the value of diversity and competition. I believe both opportunities will help build the VPPs of the future. It will be mix of pure-play software vendors, energy storage innovators, and large global technology companies that show the way.


Has Hitachi Zeroed In On the Most Viable Microgrid Business Model Today?

— September 22, 2016

Energy CloudI had the pleasure of participating in an afternoon workshop at the VERGE conference in Santa Clara, California this week. The workshop covered a lot of ground, including offering two different perspectives on microgrids from two leading players: Spirae, a controls and software innovator, and Hitachi, the only company in the world that has declared it has a 100-year-plan for  “social innovation businesses,” a broad category of solutions that includes microgrids in North America and Asia.

While the workshop covered a lot of ground, perhaps the most noteworthy portion of the program was a presentation by Urs Gisiger, director of project finance for Hitachi Energy Solutions. Gisiger directly addressed questions that seem to be a hot topic of conversation at nearly every event focusing on the hype and promise surrounding microgrids and a distributed energy future: How do we finance such projects at a time of great market uncertainty? In other words, what is the best microgrid business model?

Gisiger set the stage by referring to some recent research performed by Navigant Research, looking at which business models have been deployed in systems in North America in 2015 and 2016. Note from the chart below that if we exclude both remote microgrids and military microgrids—systems with unique investment needs—the overall favorite in terms of business model structure is the power purchase agreement (PPA), representing 45% of total capacity.

Grid-Tied Non-Military Microgrids by Business Model Capacity, North America: 2015-2016

Microgrids Blog

 (Source: Navigant Research)

Of course, a PPA can be financed in several different ways, and this is where Hitachi has really done its homework. In the process, it is shedding light on the part of the microgrid finance supply chain that up until this point in time has largely been in the shadows.

Project Financing

For example, Gisiger revealed 20 banks that will do project finance for energy infrastructure today, including microgrids. In addition, he provided a much longer list of 60 banks, the majority of which are selective in their power project financing, that conceivably also loan money for microgrid projects in North America. “In addition, debt funds and insurance companies are also entering the microgrid market,” he said. He also noted that unregulated arms of utilities are also entering the microgrid financing space in North America, a small group creeping up toward 10 at present.

Despite this good news, Gisiger also offered a sobering portrait of financing options, with the majority—including individual project finance and corporate loans—not leading to satisfactory results for either project developer or project owner (or both) today due to high transaction costs. A revolving line of credit for a fleet of projects looks much more promising, since it allows for greater scale.

As an intermediate step to move forward as financiers become more comfortable with the risk profile of microgrids, Gisiger singled out a lease facility arrangement based on full recourse financing on a corporate balance sheet; a line of credit is taken out so no upfront equity is required. The bundling of projects into a portfolio is key to achieve critical mass. This approach results in better overall project economics since portfolio sale proceeds stay with the developer, while significantly trimming overall bank, legal, and advisor fees.

Needless to say, microgrids will never be a one-size-fits-all solution. While utility deployments of microgrids are increasing, it is still third-party microgrids that are plowing new ground, especially in terms of financial innovation, with Hitachi among the leaders.


Plug-and-Play Microgrids, Here and Now

— September 22, 2016

Power Line Test EquipmentOne of the primary challenges facing the microgrid market today is the perception that each project is unique and therefore requires significant customized engineering. In fact, dozens of microgrids never seem to make it past the feasibility analysis phase due in part to this predicament.

While it is true that very few microgrids are exactly alike and therefore the idea of cookie-cutter configurations seems next to impossible, there are vendors now offering products and services that are moving the market much closer to a plug-and-play paradigm.

Case in point: Tecogen. The company manufactures the InVerde, a small natural gas engine often deployed as a modular 100 kW combined heat and power (CHP) unit that comes embedded with the Consortium for Electric Reliability Technology Solutions (CERTS) islanding software. String a few of these CHP units together (as the Sacramento Municipal Utility District has done) and presto—you now have a simple microgrid. The inverter that comes with the InVerde technology enables islanding and can support multiple generators on the same microgrid, each one acting autonomously to maintain power quality by responding to load changes, managing voltage sag, and regulating current.

Energy Ecosystem

Navigant Research does not consider a single InVerde unit a microgrid, since it is powering up a single building and is only 100 kW in size. We would instead categorize such systems as nanogrids. However, even multiple InVerde units are not considered microgrids by some entities, among them the New York State Smart Grid Consortium. Regardless of what one calls such systems, nanogrid, microgrid, or whatever else, they do represent part of a new Energy Cloud 2.0 distributed energy resources (DER) ecosystem.

The argument that Tecogen is not a microgrid market maker is being challenged by a new product offering, the InVerde e+, which allows for the integration of both energy storage and solar PV (or small wind) into a single controllable entity by virtue of direct current (DC) bus. With this recent upgrade, Tecogen’s claim to enabling truly plug-and-play microgrids seems quite valid—and even more compelling.

In the United States, CHP (and the ability to create thermal energy) is key to the economic value proposition for microgrids. In fact, the ideal resource mix for a microgrid in the United States today is CHP, solar PV, and a lithium ion battery. If sized strategically, this microgrid configuration can be cheaper than utility costs in California and much of the East Coast today.

Tecogen’s InVerde units boast an impressive list of features, among them emissions equivalent to that of a fuel cell, 33% electrical efficiency (and 81% total energy efficiency), and the lowest installation costs of any comparable technology in its class. The biggest surprise? The cost of microgrid controls—embedded in each CHP unit—is zero.

Marketplace Gains

Even before the recent new offering, Tecogen had made impressive gains in the marketplace. It ranked fourth in terms of total installed microgrid projects globally in the latest version of Navigant Research’s Microgrid Deployment Tracker. In last year’s Leaderboard report ranking microgrid developers/integrators that offered their own controls platform, the company ranked fifth.

Tecogen is not the only vendor moving the market toward plug-and-play and interoperability. Spirae and Blue Pillar have made important strides in this direction from an independent controls perspective. In addition, Duke Energy’s Coalition of the Willing is also moving forward to develop a common interoperability framework for microgrids, focused on so-called Open Field Message Bus (Open FMB) communication standards.


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