Navigant Research Blog

What DER Business Models Will Gain the Most Traction in 2016?

— February 4, 2016

Power Cloud ComputingAccelerated adoption of distributed energy resources (DER)—whether talking about solar PV,  batteries, or demand response—appears to be a foregone conclusion. While the growth rates for different applications will vary in different parts of the world, there is little doubt that the future power system will be populated with increasing amounts of smaller, cleaner, and smarter sources of electricity services.

It is also fair to say that the primary challenge facing both utilities and regulators is to figure out which business model makes the most sense for each technology, application, and market. This is not a one-size-fits-all question.

While the DER spectrum is broad, let me focus on a networking platform that can aggregate and optimize: the microgrid. Platforms such as the nanogrid avoid many of the regulatory complexities facing its larger compatriot microgrid. The growing popularity of linking solar PV to energy storage for both commercial and residential single building sites is relatively straightforward. However, once a network expands across public right-of-way or includes multiple types of customers, prospects for commercial deployments dim.

The majority of microgrids that have been deployed to date in the United States—the world’s largest microgrid market—have relied upon a few major business models. For example, the most mature microgrid markets are systems deployed by owner financing and maintenance at universities, colleges, and hospitals. Likewise, stationary military bases—another semi-autonomous campus—typically rely upon standard government contracting vehicles such as energy performance savings contracts.

Purchase Agreement Innovation

Moving forward, I believe that the power purchase agreement (PPA) model will force innovation on the financing side of commercial microgrid deployments. A microgrid is far more complex than a rooftop solar PV panel. Nonetheless, as private developers become more confident in the ability of smart inverters and software controls to deliver economic dispatch of both internal and external generation and load, they will become more willing to take on the risk of a fixed price contract. Over the next 5 years, these private developer PPAs are expected to help establish the metrics by which microgrids will be judged thereafter. Companies such as Leidos are already plowing new ground on this front, factoring in the thermal energy benefits that are often key to making a microgrid viable.

Over the long term, utilities are most likely to bring this market truly into the mainstream. Whether they rate-base investments or choose to instead pursue this opportunity through their unregulated subsidiaries, their lower cost of capital can plug what currently exists as the biggest barrier to this market: a pool of funds to underwrite entire projects. Utilities serving rural communities that are not interconnected with a traditional utility distribution have been developing microgrids and putting them in the rate-base for decades. For example, approximately 100 such systems are operating in Alaska today.

However, rate-basing a microgrid in the lower 48 states is a different matter. That is why all eyes are still on the Illinois State Legislature as it considers legislation that would authorize Commonwealth Edison to rate-base six different microgrids serving a variety of customers, with the common goal of increasing the resilience of the entire utility’s distribution system.

Navigant Research will soon publish its Emerging Microgrid Business Models report, which reviews 10 approaches to developing microgrids today, ranging from a simple direct component sales approach to a comprehensive model being utilized by Siemens as well as PowerStream, the innovative municipal utility based in Ontario, Canada.

 

New York County to Show the Way on Community Choice Microgrids

— January 29, 2016

GeneratorI tried to help develop a microgrid in the small rural community of Point Reyes Station back in 2008. I was an independent writer and community organizer at the time, and Marin County was set to launch California’s first community choice aggregation (CCA) program, which empowered local governments to contract for power supplies while the incumbent investor-owned utility still maintained the poles and wires as well as billing.

Due to some last-minute hang-ups, the project—which would have incorporated existing solar, wind, and biogas power generation—was not funded. A study I conducted also concluded that the CCA market structure alone could not support a full microgrid implementation since it did not have the authority to manage the power grid itself, enabling safe islanding and requiring an interconnection agreement. As I reported in the San Francisco Chronicle, a small solar PV and battery nanogrid was installed at the site—a community center—but it was quite primitive and not rolled into the CCA, which now goes by the moniker of Marin Clean Energy.

Back to the Present

Flash forward to 2016. Westchester County in New York is moving forward with a unique CCA program that breaks new ground on several fronts, including an attempt to create a community-based energy program incorporating several features beyond the typical CCA menu of wholesale power purchases and local distributed generation (DG):

  • The CCA is moving forward without state legislation specifically authorizing such local government power purchasing. Legislation authorizing just Westchester County to move forward with a CCA was vetoed, but then the New York Public Service Commission authorized the CCA as a pilot program.
  • Because of this unique approach, Sustainable Westchester, Inc., which counts Joule Assets among its behind-the-scene prime movers, has had to work to pass local legislation in each municipality to enlist local government participants.
  • The CCA will not only look to new DG models such as community solar, but also a novel community-based behavioral demand response (DR) program leveraging tight social networks that already exist in the region.
  • Westchester County also boasted more microgrid proposals (14) responding to the New York Prize competition than any other county in the state, involving companies as diverse as Booz Allen Hamilton, Siemens, Power Analytics, Green Energy Corporation, Hitachi, NRG Energy, and others.

If we zero in on microgrids, there may be some hope for a tighter linkage between a CCA and microgrids, thanks to Westchester County. For one, New York is a “home rule” state, which means local governments—some of which date back to the 17th century—have more clout and legal authority than in other states. (Though California is also a home rule state, the concept is much more entrenched culturally in New York.) For two, New York’s Reforming the Energy Vision process is opening up new business models that align with both DR and microgrids. For three, Westchester County is situated in a major congestion zone, since it sits between the giant loads of the Big Apple and wholesale power supplies located in upstate New York. The integration of both more aggregated DG and DR make inherent sense from a systems planning perspective.

First Steps

“Our vision is for Sustainable Westchester to become a municipal service aggregator entity for a wide range of DER [distributed energy resources] services, including microgrids,” said Glenn Weinberg, director of smart community choice programs for Joule Assets. “We see the need for a centralized entity to manage these microgrids on a regional basis, as many may require services whose procurement could benefit from economies of scale.” The first important step for the CCA is a Request For Proposals for power suppliers, which the program has just released.

 

Why Africa, and Why Now?

— December 31, 2015

As I noted in a previous blog on the Paris Climate Summit, it is estimated that over one-fifth of humankind lacks modern energy services. According to the United Nations (UN), 78% of people residing in rural areas are often served by primitive energy systems that spew carbon into the atmosphere.

I would argue that Africa is uniquely positioned to determine the success of the COP21 goals. The proximity of Africa to Europe, which has historically funded a variety of programs for former colonies, is one major reason for the continent’s pivotal role in limiting climate change. Others factors include nomadic populations not concentrated in dense pockets (as is the case in India) that support more centralized infrastructure solutions. For example, even microgrids are a challenging value proposition here for the majority of indigenous peoples in Sub-Saharan Africa. As a result, nanogrids seem to be favored by funders for bottom of the pyramid (BOP) deployments since they are seen as less risky and can reach potential consumers quicker.

A variety of both binding and aspirational goals is expected to affect the remote power supply market opportunity, with activity likely to increase over time for both microgrids and nanogrids. The following sampling of programs and projects are expected to help drive this overall market forward:

  • The UN’s Sustainable Energy for All initiative (SE4ALL), launched in 2011, set goals for ensuring universal access to modern energy services; doubling the share of renewable energy; and doubling the global rate of improvement in energy efficiency in buildings, industry, agriculture, and transport by 2030. More than 70 governments worldwide have been engaged in this effort with over $50 billion pledged to realize these goals.
  • Energy Africa consists of 14 African countries that have pledged to bring solar energy to the 620 million people living in the African continent that currently lack access to electricity.
  • The African Development Bank aims to mobilize $55 billion in private funding under its New Deal for Energy in Africa program designed to eliminate Africa’s energy deficit by 2025.
  • Powering Africa, launched by the U.S. Agency of International Development, has pledged $7 billion to help bring power to Sub-Saharan Africa.

The recent Paris Climate Summit is building on this momentum and accelerating funding. The African Renewable Energy Initiative increased a previous target of 10 GW of renewables by 2020 to 300 GW by 2030. Among the funders of this new venture are The World Bank ($16 billion) and the Green Climate Fund ($100 billion).

This long list of programs implies adequate support for energy access in Africa via cleaner power sources that produce less carbon. Of course, one could turn this assumption on its head. The plethora of programs speaks to the need for subsidies to make such ventures economic. According to a recent report from Navigant Research, the Middle East & Africa region is expected to be the global market leader in remote power. Project implementation revenue is forecast to exceed $4.7 billion in 2015 and increase to more than $11.0 billion by 2024, edging out the Asia Pacific region both at the start and the conclusion of the forecast horizon.

Annual Remote Market Capacity and Revenue by Region, World Markets: 2015-2024

Peter Blog Dec 30

 

(Source: Navigant Research)

So why Africa? Because it is the most difficult market for energy access. Why now? Because the Paris Climate Summit put a spotlight on Europe’s leadership role in combating carbon, both at home as well as on its neighboring continent.

 

Moving Beyond the State of California at CAISO

— December 23, 2015

The California Independent System Operator (CAISO) is one of nine independent wholesale grid operators in North America. Today, roughly two-thirds of the U.S. electrical grid is managed by independent system operator (ISO) entities, which manage and coordinate all generation resources, including the large and rapidly growing amount of variable renewable resources.

California’s recent passage of legislation increasing the target for meeting 50% of total state demand for electricity from renewables by 2030 underscores why the CAISO is moving in new directions that will likely require a name change as it expands its access to out-of-state resources.

ISO Control Areas for North America

Peter CASIO Blog 1

(Source: California Independent System Operator)

Various studies—including one from the Regulatory Assistance Project—confirm that these impartial grid operators lower overall costs of power supplies, as well as enhance the environmental performance of the power sector. With current trends toward coal plant retirements and the subsequent increase in reliance upon variable renewables such as solar and wind power, it turns out, however, that bigger is indeed better.

Since I am a strong advocate for decentralized distributed energy systems such as microgrids, this may seem like an odd argument to make. To put this statement in context, consider the following truism I learned while researching my book on wind power: the larger the control area for a balancing authority such as a utility or an ISO, the less an issue the variability of wind. Why? Chances are that the wind will not all die at once if you can manage this resource over a large swath of wind resource areas. This general axiom also applies to solar energy, though the dynamics are different.

Today, CAISO serves an estimated 35% of the electric load in the West, but this number is expected to grow steadily over the next several years due to the creation of two new organized markets designed to help the state meet its aggressive energy goals, programs highlighted at the recent Paris Climate Summit.

The two recent major market expansions by CAISO are:

  • Energy Imbalance Markets. CAISO is now reaching out to utilities outside of its traditional control footprint to purchase ancillary services. The Energy Imbalance Market (EIM) improves the efficiency of dispatching resources by using devices and sophisticated software systems that analyze the needs of the grid every 5 minutes and automatically find the lowest-cost generation to meet demand. Without an EIM, utilities have to meet demand with resources in their own service areas, which can translate into having to start higher-priced generation or dip into even more expensive energy held in reserve.

CAISO Energy Imbalance Market Participants (Partial List)

Peter CASIO Blog 2

(Source: California Independent System Operator)

  • Regional Energy Markets. An even more dramatic step by CAISO is creation of a fully integrated Regional Energy Market. The control area of CAISO may encompass many new partners. The first step is to integrate with the system resources of PacifiCorp, which has control area of over 11 GW of resources in Oregon, Washington, Idaho, Nevada, and Wyoming. The diversity of resources available in these states, ranging from hydro to wind and fossil fuels, will help diversify the energy economy managed by CAISO. Benefits of this integration include resource procurement savings, lower peak capacity needs, and more efficient unit commitment and dispatch.

Given these looming changes, CAISO will need a new name. This is just speculation, but I would bet it will rebrand itself as the Western Regional Independent System Operator (WRISO) at some point in the future.

 

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