Navigant Research Blog

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.

 

Impacts of the Clean Power Plan, Revisited

— September 22, 2016

AnalyticsOral arguments in the litigation of the US Environmental Protection Agency’s (EPA’s) Clean Power Plan (CPP) are upon us. Let’s revisit what the CPP could mean for power generation in the United States.

Navigant’s Energy Market Outlook (NEMO) includes a regional CPP policy with the mass targets and compliance deadlines laid out by the EPA in the final rule. NEMO shows that impacts of the CPP are regional in nature, and in many regions are not as drastic in the early years of compliance as one might expect. In fact, most states do not see additional costs driven by the policy in the first few years of implementation. This is partly due to the fact that the EPA’s final rule includes a glidepath where targets are not as steep in the early years, partly due to expected changes that lower CO2 emissions before CPP compliance begins.

Coal Retirements

Navigant continues to forecast the retirement of significant coal capacity over the next few decades. Our current modeling shows approximately 73 MW going offline between 2017 and 2035. About 40% of these retirements have already been announced, and just over 20% are forecast based on plant age. These two categories can be ruled out as being “driven” by the CPP. The remaining 40% is shown to be uneconomic and is therefore shown to retire in our modeling.

Retiring Coal Capacity by Region, United States: 2017-2035

CPP Retirements

(Source: Navigant)

A decision to retire a plant before the end of its useful life is very complicated, and it is very rare that a single driver can be identified as causing such a decision. The more influential factors we have seen include competition with cheap natural gas and increases in costs caused by environmental regulations (including the CPP). NEMO shows that the largest shares of announced coal retirements are located in MISO and WECC, while the largest share of modeled coal retirements are located in SERC territory.

Renewable Growth

On the other side of the equation, NEMO also includes continued low natural gas prices due to shale abundance, as well as continued growth in large-scale renewables, distributed energy resources, and energy efficiency. Large-scale solar capacity additions continue to grow due to falling costs, with additions on par with wind in some regions. Early in the forecast, solar becomes the renewable of choice in California, driven by the state’s aggressive renewable and carbon goals, which go above what the CPP requires. Wind continues to be installed in areas with high potential, helping states like Texas meet their CPP targets.

Low-Cost Compliance in Early Years

NEMO includes over 29 GW of coal coming offline in the Eastern Interconnection before the CPP targets begin, making compliance in the first interim compliance period (2022-2024) relatively painless. Our modeling of the CPP uses a cap-and-trade mechanism to approximate a compliance framework. Across most of the country, carbon allowance prices are forecast to be zero for the first 2 years of compliance, meaning no additional costs are needed to meet the targets. As others have found, compliance costs are lower when regional trading is allowed. Our modeling confirms that states that go it alone tend to have higher compliance costs overall.

 

ISO-NE Meeting Attracts Natural Gas Protestors

— September 22, 2016

Oil and Gas ProductionMost regional transmission operator (RTO) stakeholder meetings are about the most dry, boring, and technical sessions you could imagine, usually consisting of a bunch of energy policy wonks debating market rules and cost allocation. But once in a while, something will happen to liven up the scene in an unexpected way. Such was the case at the September 15 Independent System Operator of New England (ISO-NE) Consumer Liaison Group (CLG) meeting in Providence, Rhode Island.

It started out as a typical CLG meeting. Heavy hotel lunch, meeting introduction from the chairperson, ISO-NE update, policy keynote speaker. Then the fun began with a panel on energy infrastructure projects in Rhode Island. First up was the CEO of Deepwater Wind, the developer of the first US offshore wind project to be completed, a 30 MW installation located off of Block Island. Offshore wind used to be controversial in the days of Cape Wind, but now it seems to have become more accepted, and there were no vocal naysayers at this meeting.

Natural Gas Power Plants

Next up was Invenergy, the developer of a new proposed natural gas-fired power plant in Rhode Island. The speaker outlined the basics of the project and made the case for the ISO-NE grid’s need for it. As he got into more of the details of the emissions and gas pipeline needs, a woman stood up on the side of the room and silently held up a sign in opposition to the proposed plant. That action alone was more excitement than is typically seen at one of these meetings, but it was just the appetizer.

Next, a speaker from Spectra Energy (soon to be part of Enbridge) took to the podium. Before he could get too far into his remarks about natural gas pipeline projects in New England, several audience members stood up and walked toward the stage. Two held signs opposing gas pipelines and one acted as the voice for the group, talking loudly to the speaker and the audience about the dangers of fracking.

The speaker from Spectra was obviously used to these types of demonstrations, as he calmly proclaimed that he welcomed the group at the meeting, as long as they didn’t disrupt the event and spoke when the allotted time for questions and answers arrived. The group persisted for a few minutes, but eventually went back to their seats. No need to call in the National Guard.

It was a fresh reminder to me that the discussions undertaken and decisions made in these often-esoteric venues have effects on real people in the public and on the land and environment. I honestly don’t think most of the people in the room would disagree with the concern over issues with natural gas extraction and delivery. There is just a difference in opinion over the best path forward for our shared energy future from a cost, reliability, and environmental standpoint. It was a very respectful example of our free society at work.

Now back to those less-than-respectful election campaigns!

 

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 manufacturers 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 resource (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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