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.


FERC vs. EPSA Ruling: A Win for Demand Response and Energy Storage

— February 1, 2016

Control panelWhen independent system operators (ISOs) and regional transmission organizations (RTOs) were structured over a decade ago, rate structures were primarily based on participation by conventional energy generation methods. During that time, new technologies and services like energy storage were not contemplated. The Federal Energy Regulatory Commission (FERC) Order 745, approved in 2012, called for grid operators to pay the full market price (known as the locational marginal price) to economic demand resources in the real-time and day-ahead markets, so long that it is cost-effective.

In short, Order 745 allows third parties (i.e., customers) to circumvent utility prices and provide flexibility via demand-side management. The United States Supreme Court (SCOTUS) made headlines on January 25 by upholding the FERC’s authority to regulate demand response (DR) programs in wholesale markets. Known as FERC vs. Electric Power Supply Association (EPSA), the Court reaffirmed in a 6-2 decision that FERC acted within its authority under the Federal Power Act when it issued Order 745, setting standards for DR measures and pricing in wholesale markets. This ruling is a big win for energy conservation service providers like EnerNOC, which saw its stock shares jump 65% midday after the ruling.

Battery Storage

The decision is not only big for DR, but has huge implications for resources at the edge of the grid like energy storage. Battery storage is gaining popularity among commercial and residential sectors as a cost-effective solution to reduce peaks, manage demand charges, and integrate renewables; Navigant Research forecasts that 102.4 GW of new distributed battery storage will be deployed from 2016 to 2025. As the new ruling could catalyze a sharp growth in the distributed storage industry, utilities and their customers have a unique opportunity to leverage it in a variety of ways to provide value on both sides of the spectrum.

Battery storage offers enriched DR options in a number of ways, one being the speed at which storage can be deployed. With storage, utilities are able to instantaneously declare DR events, rather than hours or a day ahead. Additionally, with advanced battery management systems, atypical events that occur on the grid can be responded to autonomously. Distributed storage as a resource is dependable in terms of its performance, power capabilities, and location, which further enhances DR. Batteries have a finite amount of energy they can provide, allowing grid operators to schedule other energy resources with increased certainty. Conventional DR is prone to under or overestimating customer behavior, which can lead to decreased system efficiency.

Rise of Variable Generation

DR and energy storage have significant implications when compounded with increasing penetration of variable generation (VG). A study conducted by the National Renewable Energy Laboratory found that the grid can accommodate approximately 30% of annual electricity demand from VG with “flexibility options” (namely changes in operational practices) that increase the penetration of renewable energy resources. As renewable penetration exceeds the 30% threshold, integration becomes increasingly difficult because conventional generators cannot readily moderate output, causing assets like wind and solar to be curtailed, which could raise system costs. Even with increased curtailment of conventional generation, renewables offset less fossil fuel generation, effectively decreasing their overall value. This creates a huge market opportunity for DR and energy storage with their ability to shift load patterns, solidify capacity, and increase grid flexibility.

SCOTUS made a monumental ruling for the cleantech industry, and there will be increased DR participation to come as a result. The market has already seen several DR/storage systems like Schneider Electric and Johnson Controls (both leaders in DR), and even partnerships like that of EnerNOC and Tesla. The nexus of energy storage and DR provides efficient, economical solutions for utilities and their customers. As a result, how energy is produced and consumed will drastically change, requiring rate-makers to be more versatile with evolving regulations.


Value of Flexible Grid Resources Coming into Focus

— February 1, 2016

Server room.Earlier this month, California’s big three utilities announced awards for a new initiative to bring clarity to the value that flexible distributed energy resources (DER) can provide to the grid. The Demand Response Auction Mechanism (DRAM) program is one of the first attempts to incorporate a wide variety of DER into statewide grid operations. While this program is focused only on one service—helping reduce peak load on the grid—it is an important development in recognizing the full value that DER can provide.

The recently announced awards include load reduction through four primary technologies: behind-the-meter energy storage, residential DR, commercial & industrial (C&I) DR, and electric vehicle (EV) charging. Although the majority of this capacity was awarded to traditional C&I DR, the inclusion of more innovative technologies validate claims made by vendors that their solutions can provide value to multiple stakeholders throughout the grid system. Residential energy management providers such as EnergyHub, Ohmconnect, and Chai Energy won bids totaling over 11 MW to reduce load primarily using smart thermostats. Distributed energy storage vendors Stem and Green Charge Networks won a combined 880 kW of load reduction utilizing batteries they have located in C&I buildings. Finally, startup eMotorWerks will be shaving over 1.2 MW of load by aggregating the operations of more than 1,000 smart EV chargers.

DER Value and Growth

The diverse technologies included in this program demonstrate the ability of multiple technologies to provide valuable services to the grid. While the value these technologies provide for their host users differs significantly, they can be viewed as a single, flexible resource by grid operators. Navigant Research’s recent Distributed Energy Resources Global Forecast report provides a detailed breakdown of the rapidly growing DER market in countries around the world. As shown in the report and with the DRAM program, traditional DR is currently the most cost-effective form of load reduction for utilities. However, other technologies are expected to see much faster growth in the coming years. Distributed energy storage is expected to be the fastest growing DER resource in the United States, with a compound annual growth rate of 45% over the next decade.

Once again, California is leading the way in identifying and valuing the diverse services that new technologies can offer the power grid. All bids have been kept strictly confidential through the DRAM program, an important point to note as the various technologies have widely differing costs to install and operate. These bids will help inform future efforts to integrate DER both in California and around the world.


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.


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