Navigant Research Blog

Data Centers Could Turn Microgrid Markets Upside Down

— March 2, 2012

After compiling numerous reports on the status of emerging markets for microgrids, I have concluded that not a single national government has developed an integrated or comprehensive policy creating a viable, vibrant market for customer-driven commercial sector microgrids.  In fact, according to the most recent Pike Research 2012 report on the global microgrid market, commercial/industrial applications (C/I) are lagging behind all other segments: campus environments, community/utility, military, and remote.  That could change within the next few years, if plans on the drawing boards for data centers in Singapore , India and other parts of the Asia Pacific region – and the United States – move forward.

Until recently, data centers largely relied on uninterruptible power supply (UPS) systems consisting of large banks of dirty diesel generators to maintain 99.999% reliability of power service.  As data centers begin to green their operations due to environmental pressures, air quality regulations and the increasing cost burdens of diesel fuel, though, the appeal of microgrids – along with the broader notion of aggregating distributed energy sources into virtual power plants – is looking more and more compelling.

The Asia Pacific region already is projected to lead the world in microgrid annual revenues, but this is due, in large, part to anticipated growth in the remote microgrid sector, especially in countries such as India, which recently deregulated its markets to accommodate remote microgrids of less than 1 megawatt (MW) in capacity.  Rumors are swirling about projects as large as 500 MW in one Asia Pacific country – and data center microgrids of similar scale in others – indicating that the C/I sector may be the sleeping giant. Due to low labor costs and lack of permit obstacles, the rapid construction of data center projects of this scale in Asia could blow Pike Research’s current market forecasts out of the water.

Today, the commercial and industrial segment represents the least developed market for microgrids worldwide.  Currently, it is illegal around the world for a residence or business to sell self-generated electricity to anyone apart from the local utility through net metering.  This makes the concept of creating and carrying out self-sustaining microgrids in multiple-owner C/I complexes extremely difficult in markets such as the United States.

On the other hand, microgrids may hold the most value for commercial and industrial users, since power outages kill productivity as well as revenues, especially at data centers.  The cost savings offered by microgrids to this sector is not limited to the free resources tapped by distributed renewables; they also include the reduction of downtime, as islanding capabilities allow microgrid-protected commercial data centers to maintain power when the larger grid fails.  Furthermore, the advantages of direct current (DC) microgrids for data centers are being extolled by a variety of companies, backed up by a recent study by EPRI showing a 15% efficiency gain at a data center in North Carolina.

Perhaps a sign of things to come is represented by the Niobrara Energy Park proposed near Loveland, Colorado.  Boasting a potential capacity of more than 200 MW of planned natural gas, solar and wind generation, Niobrara is still seeking an anchor data center tenant, but has cleared virtually all key regulatory hurdles.  This single microgrid – if successful – could dramatically transform this segment.  The logistics of managing and controlling a microgrid of this scale, though, are unprecedented.

Swiss industrial giant ABB is especially keen on the data center microgrid market, creating a new “best of breed” consortium that includes software innovator Ventyx, as well as less known firms such as Validus DC (for DC data center applications) and Power Assure (for data center smart grid energy management.)  Not only do these companies hold the potential to develop state-of-the-art microgrids, but they also have the capacity to do something much more radical: build out virtual power plants (VPPs) for far-flung data centers.

Imagine this: Data centers operating worldwide, but owned by a single enterprise, leveraging smart grid intelligence and their sizable loads to engage in demand response arbitrage, shutting down centers where prices are high during the day, and shifting loads to markets where prices are low at night.  These enterprise level VPPs could also become a microgrid, islanding in times of emergency or peak demand.

The team and tools that ABB has assembled – most recently the smart switches of Thomas & Betts, LLC — could transform electricity management for commercial operations at the distribution level.  Throw in some storage, and data centers not only help back-up variable renewables, but when not used for that purpose, sell ancillary services to grid operators.

This kind of fun is what the smart grid is supposed to be about!


The Untapped Potential of Qualified Energy Conservation Bonds

— March 2, 2012

There are dozens of ways to finance energy efficiency in a way that benefits all parties involved – building owners, energy service companies/energy efficiency service providers, and financiers.  One of the largest untapped programs in the U.S. is the Qualified Energy Conservation Bond (QECB) program, which provides public sector entities with a low- or no-cost debt instrument to pay for energy efficiency and renewable energy projects in state, municipal, and tribal facilities. 

In 2008, Congress passed the Energy Improvement and Extension Act, which authorized the use of qualified tax credit bonds to serve energy efficiency and renewable energy projects and set a bond volume limitation of $800 million, to be doled out to the 50 states.  The American Recovery & Reinvestment Act (2009) expanded the bond volume cap to $3.2 billion.  Using these funds, government agencies can issue bonds to private investors to finance energy efficiency and renewable projects.  The “interest” on those bonds is paid from the U.S. Treasury, either through federal tax credits to the financiers or through cash subsidies from the Treasury that bond issuers use to pay off interest owed.  The allowed bond volume is allocated to individual states, large municipalities, and tribal governments based on population. 

The project provides a net benefit to government agencies as well as to financiers.  Government agencies benefit because the QECB program increases the amount of agency debt that can be financed through federal tax credit bonds, which are used for a range of other government investments such as public schools and forestry projects, which are among the lowest-capital tools available to fund improvements.  It also saves government agencies on energy costs.  Financiers benefit from the low-risk returns provided by the bonds. 

However, the path to adoption of QECBs has been slower than one might expect.  Just over $500 million of projects have been funded over the last four years – less than one-fifth of the total program allowance.  Only about 21 states have even initiated QECB-funded projects.  Of the five largest states, only California and Illinois have made significant inroads toward deploying QECB-financed projects.  A few states, such as Kentucky and Kansas, however, have nearly exhausted their limits. 

The QECB program can be applied in other ways to fund not only public buildings but also privately-owned buildings.  For example, the city of Boulder, CO financed its ClimateSmart Property Assessed Clean Energy (PACE) financing program through QECBs.  In addition, some government agencies have paid for the administration costs of QECB programs through other sources, such as the Department of Energy’s Energy Efficiency and Conservation Block Grants (EECBG), another provision of the stimulus package, thereby facilitating the deployment of QECBs in constrained state budgets.

Although uptake of QECBs has been slow to date, expect continued growth of QECB-financed projects in the next few years.  The program will not sunset under current federal law, and there is no shortage of energy efficiency investment opportunities in state and local government buildings.


SCADA Monitoring Enters the Cloud… Sort Of

— March 2, 2012

Among the documents buzzing around Pike Research offices is a press release from DN2K, “DN2K Receives Significant Funding for Advanced Remote Monitoring, M2M and Management Systems”

At its root, DN2K’s product is cloud-based SCADA alert and response.  I give DN2K credit for market savvy because they nowhere use the C-word.   They don’t even abbreviate software-as-a-service.  A surface reading of their press release might suggest that they are hunkering down for battle against established data historian products.  Such is not the case however – they announced a product that applies business rules against data to communicate alerts and responses.  Via a cloud.

The elephant in the parlor here is “cloud”.  Doing anything cloud-based in smart grids raises the hackles of quite a few cyber security practitioners who really ought to know better.  Unless an entire grid is within the confines of the headquarters’ razor-wire, there will be remote management of grid elements.  Clouds are remote and so is most of a grid, by its very nature.  It’s past time to live with that.  If we don’t believe it’s possible to secure such a basic connection as corporate HQ-to-cloud, then what are the odds that connection to every distribution cyber asset will be secure?  And at least clouds are hosted in physically secure environments, unlike substations or pole tops – just to name two places that are seeing new smart grid components.

Clouds get a bad rap, partly because so few people accurately understand cloud computing.  Let us begin by stating unequivocally, “There is no single ‘Cloud.’”  Repeat that out loud several times.  There are thousands or millions of clouds – some well-implemented, some poorly so.  A cloud is any network-based IT environment that follows certain rules – well summarized by the National Institute of Standards and Technology (NIST).   Those rules do not include accessibility by all of humanity.  Private clouds can strictly limit access – sometimes operating only within the bounds of a corporate firewall – yet provide sought-after benefits such as reduced capital expenditure and hands-free storage elasticity.  There are also hybrid clouds and community clouds, both well described by the NIST document.

Private clouds can bring all manner of security discipline that has often been shortchanged by in-house deployments.  One example: user identification and authentication.  Clouds focus attention on knowing who is accessing your cloud.  Once inside a cloud, any user with a standard browser can access any application in the cloud.  Meaning, if users have not been correctly authenticated on entry, your only remaining protection is whatever security exists inside the application itself – which is often not very much.  Who knows?.. A company deploying a cloud might finally be able to justify multi-factor authentication.

It remains to be seen whether a product such as DN2K’s will take flight.  To be sure, there are still unresolved issues, such as North American Electric Reliability Corporation (NERC) compliance in a cloud.  No one knows how NERC auditors will react to a cloud-based solution.  Even clearing that hurdle, the competition could be fierce and clouds may remain emotional topics no matter what NERC says, but the business case for low-CAPEX solutions can be extremely compelling to the levels of management that control funding.  Eventually someone will find a middle ground between compliance and efficiency.

I will leave it to others to assess whether or not the $1.5 million announced by DN2K constitutes a “significant” investment.  Yet even here, cloud computing changes the discussion.  Gone are the days when investors’ first chore was to bankroll a data center.  Conversely, last year OSIsoft announced a “minority” investment of $135 million.  Either way, it’s encouraging that investors continue to see Industrial Control Systems as worthy investments of their clients’ funds, and that cloud computing continues to figure in innovation.  Without that, the smart grid industry may continue to focus too much on infrastructure expense and not enough on innovations in reliability and customer service.


Hawaii Becoming a Test Bed for Clean Technology

— March 1, 2012

Earlier this month, the government of Hawaii and Korean partners (the Republic of Korea Ministry of Knowledge Economy and the Korea Smart Grid Institute) signed a letter of intent to pursue mutual interests in smart grid development in the Hawaiian Islands.  While the project scope and specific practices for the Hawaii project are not clearly defined in the announcement, it’s safe to assume that projects included in the Jeju Island smart energy program, including smart meters, renewable energy development, and electric vehicles, would be implemented in Hawaii.

Hawaii comprises more than 120 scattered islands and is far from the nearest mainland (1,860 miles).  Electricity is expensive, and Hawaii is the most fossil fuel-dependent state in the nation.  Thus, the need for switching to renewable sources of energy is as much an economical imperative as it is an environmental one for the islanders.

With regards to policy, Hawaii is deeply committed to developing a clean-energy economy.  The island state has made great progress in aligning regulatory policies with clean energy goals; encouraging development of next generation, clean energy technologies; and deploying renewable generation and grid infrastructure.  As a result, the state has been building energy efficiency, increasing photovoltaic capacity, and creating green jobs.  The following figures show how much Hawaii has been deploying clean-energy technologies relative to the other 49 states.

Further, the state has bold goals: to achieve 70% of its energy from renewable sources by 2030.  Hawaii aims to serve as a clean energy model for the U.S. and for the world. As the graph below indicates, 66 renewable energy projects are currently in progress and more are in development in bio-energy, geothermal, hydro, solar, and wind, etc.

I’ve written several blogs about the Jeju projects.  As of now, over 170 Korean companies are engaging in specific projects, including advanced metering infrastructure (AMI), electric vehicles, solar and renewable generation, and energy storage test beds.  In the case of AMI, 6,000 household are participating in a smart meter test. The Ministry of Knowledge and the Smart Grid Institute are leading the project with investments totaling more than $240 million between 2009 and 2013.

In fact, South Korea is an exceptional country. With a sole utility service provider – KEPCO – and its current advanced electricity grid capabilities, South Korean camps are targeting oversea markets, rather than domestic markets, from the first phase.  Focusing on overseas smart grids markets will help Korean players find more lucrative opportunities.  Thus the partnerships with Hawaii should help Korean providers gauge their current capabilities by applying Jeju’s outcomes in a similar environment in the United States.  Jeju and Hawaii both have clean, year-round, and renewable energy resources, including abundant sun and wind.  Tourism is the major industry in both places, and Hawaii and Jeju both hope to maintain their unique ecosystems with clean energy sources.

Japanese partners already initiated a joint U.S.-Japanese smart grid demonstration project in November, 2011 on Maui. Those two projects with Asian players could make progress to achieve Hawaii’s goals.


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