Navigant Research Blog

Microgrids: Pie-in-the-Sky Dreams versus On-the-Ground Realities

Peter Asmus — March 4, 2016

multimeterThe hype cycle on microgrids appears to have hit the crescendo level, causing at least one commentator to say “microgrids are the new kale.” This, of course, refers to the trendy vegetable alternative to lettuce and other leafy greens. Others, including many utilities, are still quite skeptical. They don’t see the rationale for third-party microgrids and argue that there are less costly alternatives to boosting resilience and energy security. Of course, many of the same utilities are busy trying to figure out what business model they should pursue so they can capture a portion of the microgrid value stream, whether from their regulated or unregulated business lines.

There is no doubt that significant barriers remain for microgrids to be considered a standard option for adding new capacity and other energy-related services across global markets. Nevertheless, there are certain application segments located within specific geographies where microgrids can make economic sense right now. Sometimes these deployments are dependent upon government incentives or other sources of supplemental funding. However, the number of microgrids being deployed today under a strict business case value proposition is growing.

Myself and others have often extolled the opportunities in the developing world. On paper, these markets look promising. High diesel prices and declining costs of solar PV (and now energy storage) make a microgrid that incorporates renewable energy a no-brainer.

As Justin Guay, climate officer at the Packard Foundation, told me the other day, some of the primary challenges to this market lie with subsidies embedded in the systems for fossil fuels such as diesel. He identifies this among several other issues that erect barriers to energy access in an article for the Huffington Post. “In many ways, enabling access to finance is job number one,” he writes. “Public policy can help address that by defining the rules of the road.” The International Energy Administration (IEA) has estimated that subsidies for fossil fuels globally totaled almost $500 billion in 2014.

Declining Oil Prices

Of course, declining oil prices have also hit this microgrid market. While in Alaska declining oil prices (ironically) threaten funding for climate-friendly renewable energy development for remote communities, in other parts of the world lower diesel fuel prices can pull the rug out from renewable energy economics. Diesel is the primary fuel for power generation in remote locations; prices hit 8-year lows in January of this year.

Yet there are bigger problems, corruption chief among them. Old boy diesel supply networks have created mafia-like arrangements lining the pockets of long-time locals that are threatened by new clean technologies. However, the tide may be turning in countries such as India, one of the most promising of all global markets for microgrids. Along with stripping away direct diesel subsidies, more subtle changes in financial rules may help this chaotic market reach its promise sooner rather than later.

India is an ideal microgrid market due to dense populations and the proliferation of cell phone technology. A series of recent rules creating a digital financial inclusion ecosystem is paving the way for creative business models to support small-scale energy supply entrepreneurs. Other changes in law allow for the shifting of subsidies once flowing to bad investments such as kerosene to instead be channeled into more productive activities, including sustainable energy microgrids. Getting big banks out of the way of mobile money creates a fiscal ecosystem that allows creative enterprises to finance energy access projects, stripping out inefficiency and lowering carbon emissions, all while providing vital healthcare and other services.

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