Navigant Research Blog

Building the Business Case for Commercial Microgrids

— 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)


U.S. Military Not Retreating on Clean Energy

— May 9, 2012

While many government officials nervously await the outcome of the November elections and speculate as to its implications for the cleantech sector, one federal department is likely to be relatively unaffected regardless of the outcome: Defense.

According to panelists at the recent “Mission Critical: Clean Energy and the U.S. Military“ event in Denver, the military’s growing commitment to reducing its use of fossil fuel, for both national security and economic reasons, will not waver regardless of who’s in charge in the White House or the Congress.

Senator Mark Udall of Colorado rattled off a series of statistics that underline the reasons for the military’s emphasis on becoming as green as the army’s uniforms:

  • The military is 25 percent of government’s energy burden
  • The Pentagon is biggest consumer of fossil fuels in the world, burning 300,000 barrels of oil per day at a cost of more than $30 million in fuel per day
  • A $1 increase in the price of oil increases DoD’s energy cost by $100 million per year
  • 1 out of every 50 convoys in a combat zone results in a casualty, and the Army has accrued more than 3300 fatalities in convoys since 2001
  • Convoy and security costs $100 per gallon for combat zones

Udall emphasized that the military is implementing many fuel-reducing technologies because of the high human price paid in getting fuel to the front lines. “Saving energy saves lives,” he said, adding that adopting clean energy technologies is “one of the most patriotic things we can do.”

Despite any changes that might occur in the leadership in the executive or legislative branches, the military will continue to be an early adopter of clean technologies that enable it to become more energy independent. These includes making military bases self-sufficient (and less vulnerable to attack) by creating microgrids, and purchasing a large number of hybrid and electric vehicles for its non-combat fleet.

While investors may be endangering the cleantech industry by exiting or staying out of the market, the military remains committed to deploying solar and wind. The military will generate 25 percent of its energy from renewables by 2025, according to Mark Mahoney, director of the Army Regional Environmental and Energy Office.  Mahoney said one benefit to renewable adoption is that a platoon can reduce the load it carries by 700 pounds simply by replacing portable generators with solar chargers.

Fort Carson, Colorado, recently achieved the challenging trifecta of becoming a “net zero” facility for energy, water and waste. Fort Carson became the second such army facility, joining Fort Bliss in El Paso, Texas.  The military’s unrelenting commitment to clean energy is consistent with its overarching mantra of preparedness.  According to Mahoney, we can’t “afford to wait until the next international energy crisis … or national tragedy forces us to act.”


U.S. Now an Oil Exporter

— December 2, 2011

I did a double take when I saw this headline on the homepage of The Wall Street Journal: “U.S. Nears Milestone: Net Fuel Exporter.”

“U.S. exports of gasoline, diesel and other oil-based fuels are soaring,” the newspaper reported, putting the nation on track to be a net exporter of petroleum products in 2011 for the first time in 62 years.”

Really? Here are a few highlights from the WSJ’s story:

  • A combination of booming demand from emerging markets and faltering domestic activity means the U.S. is exporting more fuel than it imports, upending the historical norm.
  • As an overall exporter of fuels made from crude, the U.S. now has greater influence in the global energy market.
  • The U.S. will not lose its “net exporter” tag anytime soon.

While many of us weren’t paying much attention, people at energy companies saw a challenge and found new ways to meet it, leveraging new technologies for more efficient drilling amid a shifting global energy market.

This means the energy picture may not be so gloomy after all. Clearly, this does not mean we should ignore other fuel sources, including renewables. And it hardly helps solve the looming challenge of global climate change. But it does offer hope that solving long-term energy challenges, such as national energy security, may not be as difficult as once envisioned. That’s a good thing.


Blackout in Seoul

— October 4, 2011

A couple of weeks ago, I came back to my office from a seminar in Seoul. When I stood in front of the elevator door, the light in the hall went out, along with the elevator sign lamp. The elevator indicators quickly recovered in few seconds. I thought that the lobby lights would also shortly be turned on, but the outage continued for over 30 minutes in my building.

I thought that there must have been big trouble, an accident, or even an act of terror, because I’ve never experienced such an outage lasting over several minutes in my 30 years of working in the South Korean capital.  Unlike in some major North American cities, electricity outages are not common events for Seoulites.

That day, Seoul and other major cities in Korea experienced unprecedented and massive blackouts.  The blackouts started around 3 p.m. and lasted for 30 minutes each as they rolled across areas of Seoul, Busan, and several other big cities.  The news media reported widespread turmoil.  Firefighters were swamped with hundreds of emergency calls from people trapped in elevators.  Non-working traffic signals caused huge traffic jams.  Hundreds of factories without backup uninterruptible power supply (UPS) systems were hit by power failures.  The media also pointed out that some military bases also experienced outages, meaning that national defense was compromised during the incident.

The government attributed the blackouts to unseasonably high temperatures, about 5 degrees higher than the average 26ºC (79ºF) for September, which increased electricity demand for air conditioners.  At the same time, some major power plants were in maintenance shutdowns at the time.

The aftermath continues. President Lee Myung Bak blamed the Korea Power Exchange (KPX) for failing to estimate exactly what the daily peak-hour demand would be.  Citizens and commercial and industrial consumers are reportedly preparing lawsuits to recoup their losses.

The breakdowns were surprising because KEPCO,the sole utility in Korea, has boasted of its stable and advanced capabilities in power supply.  In fact, Korea claims one of the shortest average blackout periods per-household-per-year in the world (16 minutes), along with Japan (11 min) — meaning that Korea is one of the most advanced countries in regard to grid stability. KEPCO often highlights the comparison on this measure with the United Kingdom (78 minutes), and the United States (138 minutes).

Several factors likely contributed to the blackouts. In part it was a man-made failure, brought on by faulty estimations of daily power consumption during a time of unexpectedly high temperatures.  Some industry officials insist that current power-demand forecasting mechanisms should be re-calibrated. Others assert that new power-plant construction must be planned to meet growing electricity demand. In fact, according to the Ministry of Knowledge and Economy, Koreans tend to consume more electricity per capita than inhabitants of many developed nations (South Korea: 8.833 kWh; Japan: 7,818; Germany: 7,148; Great Britain: 5,607 kWh).  One contributor to heavy consumption patterns in Korea is the low price of electricity ($0.072/kWh) as compared to the United States ($0.099), Japan ($0.173), France: ($0.122), etc.  These demand and supply factors were undoubtedly interwoven in the recent outage.

One result is that people are now paying more attention to the newest solution: the smart grid.  The stock prices of Korean domestic smart grid-related companies surged following the outage.

The smart grid presents opportunities for utilities and their customers to benefit from the efficient management of energy and advanced equipment and devices.  Moreover, it offers significant opportunities to wisely manage a nation’s energy sources by potentially reducing the need for additional generation sources, better integrating renewable and non-renewable generation sources into the grid’s operations, reducing outages and cascading problems, and enabling consumers and businesses to better manage their energy consumption.

As shown in the table below, Korean players are following a systematic roadmap for the realization of advanced substation and distribution automation as a part of a full-scale smart grid deployment.  Given the estimated level of technology self-assessment, South Korea is one of the front-runners in smart grid deployments.

Much of the direct impact of this outage will be to educate general consumers about the capability of the smart grid.  I believe that this outage could be a meaningful tipping point for the Korean electricity industry.  


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