Navigant Research Blog

Building the Business Case for Commercial Microgrids

Peter Asmus — January 15, 2014

The majority of microgrids that have come online to date – whether grid-connected or off-grid – have been pilot projects or research and development (R&D) experiments.  Now the industry is moving into the next phase of project development, focusing on how to develop projects on fully commercial terms.  It appears that the main technology components have made significant headway, and the keys to future growth now rest with greater creativity in both the public policy and business model arenas.  One pathway that could address the latter is through power purchase agreements (PPAs).

The increasing frequency of severe weather is prompting utilities in the United States and around the world to reconsider their historic opposition to customer-owned microgrids that can disconnect from the larger grid and island, allowing critical mission functions to stay up and running.  Yet, utilities continue to worry about how a proliferation of customer-owned microgrids might complicate their job and whether regulators would instead allow utilities to build, own, or control these microgrids in some sort of coordinated, enterprisewide fashion.

Quantifying Reliability

The modularity of microgrids means this: calculating a return on investment (ROI) is virtually impossible.  Vendors claim paybacks ranging from 2 to 5 years, depending upon the amount of new hardware being deployed and the availability of ancillary service revenue streams.  Realizing greater utilization of existing generators through the networking and sharing of resources enabled by a microgrid leads one to the logical conclusion that microgrids will ultimately lower the cost per kilowatt-hour.  Third-party financing can make an even better value proposition.  Selling demand response (DR) services back to utilities provides yet another boost to the bottom line.

The primary metric that remains a mystery is the value of reliability. Quantifying the benefits of reliability is both art and science.  At this point in time, there are no widely recognized financial metrics to monetize the value of energy security and reliability, the key distinguishing feature of a microgrid network.  Analysis conducted by the National Renewable Energy Laboratory (NREL) in 2012 looked at a military base – Fort Belvoir – and found the value of electrical energy security (VEES) at that site ranged from $2.2 million to $3.9 million annually.  The range reflected the mission of the respective loads within the base and recent performance metrics of each utility.  Since each microgrid is a customized solution, it is also difficult to generalize about any VEES cost advantages such networks can offer compared to a host distribution utility (whose cost of service also varies per geography and utility market structure).

Open is Better

Putting aside for the moment the lack of consensus on monetizing the energy security of a microgrid, what about financing? Can PPAs do for microgrids what it did for solar PV? Companies such as Green Energy Corporation and Leidos are betting on it.

In order for the PPA business model to work, the network controls must be based on a streamlined and open architecture. Given that microgrids are much more complex than a simple solar PV system, companies willing to enter into long-term PPAs must be smart about risk and choose suppliers wisely, favoring simple, elegant controls that do not require ongoing customized engineering every time a new resource is integrated into the microgrid.

Navigant Research is betting on the PPA to help move microgrids into the mainstream in North America, as a new market forecast demonstrates (see chart below.)

Annual Total Microgrid Vendor Revenue by Region, Base Scenario, World Markets: 2013-2020

 

(Source: Navigant Research)

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