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.

 

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.

 

How Will the Developing World Help the Paris Climate Summit Reach Carbon Reduction Goals?

— November 30, 2015

With negotiators gathering in Paris Climate Summit this week, talks will likely be ruled by the need for mega projects of scale to help stem the rise in global temperatures linked to our deep addiction to fossil fuels. Though there is no doubt that developed economies such as Europe will need large offshore wind farms in the North Sea and equally massive solar farms in North Africa to reach existing targets, a much more interesting question is this: How can the developing world contribute, given the fiscal challenges facing the bottom of the pyramid populations?

Scaling Up

A quick answer: Through a major scaling up of both remote microgrids and nanogrids.

In a forthcoming report, Navigant Research forecasts the size for both of these off-grid networking platforms designed to increase renewable energy content for off-grid power. Ironically enough, it is here, in the deep jungles near the Equator or the frozen tundra of Siberia, where renewable energy resources such as solar and wind actually reduce energy costs.

It is estimated that over one-fifth of humankind lacks modern energy services. According to the United Nations, more than 95% of these potential customers live in Sub-Saharan Africa and Southeast Asia, with 78% residing in rural areas. While the cost of providing universal access to the electricity grid and decentralized electrification systems would be in the tens of billions of dollars annually, these costs also represent potential revenue to vendors of microgrid/nanogrid components such as distributed generation, energy storage, smart inverters, and smart meters.

The International Energy Agency (IEA) estimates that by 2020, developing countries will need to double their electrical power output. Demand for energy, especially electricity, is growing much more rapidly in these nascent economies than the rate of expansion of conventional electricity grids in the major industrialized world. All told, the developing nations are expected to represent 80% of total growth in energy production/consumption by the year 2035, according to IEA’s World Energy Outlook. Given the current economic conditions, one could safely assume that the majority of these new power supplies will be produced and distributed via remote microgrids, nanogrids, and other related forms of distributed energy resources rather than traditional hub-and-spoke centralized transmission grid infrastructure. This distributed approach is less risky and incremental, and syncs up with available trends in finance and business models related to power distribution in emerging economies.

Investment Needed

Just how much investment is needed to bring clean energy to the world’s poorest of the poor?

The African Development Bank, for example, aims to mobilize $55 billion in private funding under a New Deal on Energy for Africa program also designed to eliminate Africa’s energy deficit by 2025. Yet this number could underestimate the opportunity just for one continent, since it is based on providing minimal power for things like cell phones, LED lights, and laptops. Experience shows that once electricity is brought to a village, desire rapidly increases for more power.

In Africa alone, Navigant Research forecasts spending will reach more than $8 billion on remote nanogrids for village electrification by 2024. Ironically, it is these smaller systems that are expected to lead the market in Africa, rather than microgrids, due to their simplicity. They translate into not only big business, but a key tool to slow climate change in parts of the world that historically have not been considered major hotbeds for innovation. If we are to succeed in harnessing the power of new technology to slow climate change, I would argue it is in the developing world where that battle will be won—or lost.

 

Will One Company Conquer the Distributed Energy Space?

— November 25, 2015

I have often suggested that I don’t see any single company ever dominating the distributed energy space with networking platforms such as microgrids. My recent Leaderboard report, which ranks microgrid developers/integrators that offer their own distributed energy resource (DER) controls platform, underscores this point. All 15 companies that were ranked were, at the very least, contenders, with only three emerging as leaders according to the report’s criteria.

Some disagree. After this report was released, General Electric (GE) made a major announcement that raised some eyebrows, launching a new company called Current, an aggregation of existing business units currently valued at $1 billion. Jan Vrins, global energy practice leader here at Navigant, suggested in a recent blog that this move positions GE in a role of the network orchestrator, a business model that may prove to be the most profitable over the long term.

Current is designed to bundle previously disparate business lines offering LED lights, solar PV, energy storage, and electric vehicles into a single startup located within the walls of GE. Many in the industry are curious as to how this will play out, among them yours truly.

Whether talking about microgrids or virtual power plants (VPPs), the other significant development in the DER space is the approval of the merger between GE and Alstom Grid. Why? While GE’s broad suite of products relevant to the microgrid space is impressive, its control platform was not its strongest suit. By incorporating Alstom Grid’s controls, which are repurposed from its platforms used by numerous wholesale grid operators throughout the world, it now has a platform aimed at the VPP portion of the distributed energy value stream, migrating value from distribution level resources up to wholesale operations.

I see GE recent moves aligning more with VPPs—a network orchestrator business model—than microgrids. This is in spite of its major presence in New York, the hotbed for retooling utility business models to allow utilities a greater role with DER aggregation and optimization via community resilience microgrids. Since France, Germany, and Denmark in Europe are the current hotspots for VPPs, the GE-Alstom Grid merger is looking like a potential winner.

Yet there is plenty of competition. Navigant Research’s recently published report, our ninth edition of the Microgrid Deployment Tracker, for the first time tallies up identified microgrid capacity by vendor. Using that metric, ABB comes out on top. The bulk of these projects are remote microgrids in places such as Australia, islands off the coast of Spain, and in Alaska. The same update shows, nonetheless, if one tallies up total projects, it is Schneider Electric that rises to the top. Coincidentally, Schneider Electric ranked first in terms of the Leaderboard report, largely due to its partnership strategy on the controls questions, with firms as diverse as ETAP, Green Energy Corporation, and DONG Energy among its co-innovators.

One also has to admire the breadth of solutions being offered by Siemens. By offering a complete end-to-end solution for microgrids, including financing, and integrating this approach with the vision of smart city infrastructure, Siemens is echoing the idea that microgrids become a complete infrastructure package. The worlds of microgrids and VPPs come closer and closer together over time.

So, the bottom line? I don’t see any one company dominating the microgrid/VPP space anytime soon. GE’s recent moves will go a long way in strengthening its role in the DER space, but it has plenty of competition. Left unanswered at this point in time is whether the network orchestrator role will indeed unlock the revenue streams to allow large technology players to innovate in the increasingly crowded distributed energy market. It looks like GE wants to find out.

 

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