Navigant Research Blog

Innovative Business Models Required to Drive Microgrids for Resilience

— October 17, 2017

The devastation caused by recent hurricanes in the Caribbean and southern United States has focused attention on the potential benefits of microgrids and local power generation. With widespread power outages and major damage to grid infrastructure, the opportunity to rebuild electrical systems with a more distributed and resilient architecture has never been clearer. Navigant Research’s new report Energy Storage for Microgrids highlights some the developments taking place in this emerging market along with the challenges that must be overcome to capitalize on the full potential of these technologies. The report explores innovations in business models that will be key to the growth of microgrids and distributed energy over the coming years, particularly in markets with significant financial constraints.

Protecting and Improving

Microgrids equipped with distributed energy storage, solar PV, and other forms of distributed generation can greatly enhance the resilience of the electrical system by preventing damage to a single portion of the grid from causing massive outages. This capability would be especially beneficial for islands such as Puerto Rico and the US Virgin Islands, which face frequent hurricanes capable of destroying transmission and distribution lines. In a centralized grid system, although power plants may still be operational after a storm, the energy they generate will be unable to reach customers. Microgrids with localized energy storage and generation are less susceptible to storm damage and can be brought back online more quickly, without damage in one area preventing service from being restored elsewhere. Furthermore, under normal conditions, microgrids provide numerous benefits to the grid by operating both independently and in a coordinated fashion to maximize the use of renewable energy without affecting grid stability.

Leveraging Financial Innovation to Drive Growth

Since microgrids are a relatively new technology platform, two major challenges that hold back new projects are the limited number of standardized solutions (despite some early plug-and-play offerings) and the limited financing options that reduce upfront investments and risks for customers. In the case of Puerto Rico and other islands with significant financial constraints, innovative business models will be critical for microgrids to spread.

Business model and financing innovations have been key drivers of growth in the solar PV industry over the past decade. Many of these same concepts are being applied to microgrid and distributed energy storage projects with the goal of negating the perceived risk of investing in new technologies. Some of the new models shifting risk and upfront investment away from customers include: power purchase agreements and leases with owner financing, software, energy as a service, and design, build, operate, and own models. New business models are being driven by the growing number of companies that leverage their backgrounds to provide microgrid solutions, including utility subsidiaries, energy service and technology providers, solar PV developers, and building energy management and controls providers.

Creating Opportunities

While the distributed energy industry races to help communities recover from recent disasters, it is critical that new technologies capable of reducing the effect of future storms be implemented. However, overcoming the lack of familiarity with these new systems and relatively high upfront costs will be a major challenge. The most successful companies in this industry will be those that can unlock the potential of new business and financing models to reduce the risk and upfront costs to customers. This ability to leverage private investment in infrastructure will be particularly important as countries with limited resources look to recover from massive damage while preventing similar issues in the future. In a webinar later this month, Navigant Research will explore the role of microgrids for improving resilience in another high profile area: data centers.

 

Energy Storage to Optimize and Advance CHP Generators

— August 31, 2017

Energy storage is often associated only with the integration of renewable energy. However, recent market developments have highlighted the potential for storage to optimize both existing and new fossil fueled generators. While large-scale pumped hydro energy storage has been used on the grid for decades, those systems were rarely tied directly to any generation plants. A recent storage project built by General Electric in California is evidence that the falling costs for battery storage are opening opportunities to improve the efficiency and flexibility of existing generators.

There are attractive advantages for energy storage to optimize generators at a smaller scale. Gas-powered combined heat and power (CHP) systems are becoming increasingly popular due to the improved efficiency these systems offer customers that need a reliable supply of both heat and electricity. Because of the varying energy needs of these customers and the dynamics of CHP systems operation, there is frequently an overgeneration of either electricity or heat. This energy is often wasted, as establishing contracts that export excess energy is costly and challenging. Both thermal and electrical energy storage systems can greatly reduce wasted energy when tied to CHP systems and can provide attractive ROI for customers.

Industry Actions

Several recent acquisitions in the industry have emphasized this dynamic. In a recent blog, my colleague Adam Forni discusses these developments and the efforts of generator manufacturers to expand their offerings and participate in the emerging Energy Cloud. Notable recent investments in storage providers include Wärtsilä’s purchase of Greensmith and Aggreko’s acquisition of Younicos.

In both cases, incumbent generator providers moved to acquire storage companies focused on the software and controls required to optimize storage systems and integrate them into electricity markets. These tie-ups are mutually beneficial, as the storage providers gain access to new sales channels and potential new customers. The generator providers are likely focusing on developing the capabilities to integrate storage into their offerings and utilize new combined solutions to provide energy and capacity services in competitive electricity markets. The additional revenue generated by these grid services can greatly improve the overall economics of new storage and microgrid projects, including those that expand the capabilities of existing generators.

Into the Future  

The move toward microgrids and local power systems to improve the resilience of energy supply is an important driver for the integration of energy storage with conventional generators. Navigant Research’s recent Market Data: Combined Heat and Power in Microgrids report anticipates that 11.3 GW of new CHP capacity will be added in microgrids around the world over the next decade. The addition of these systems presents a major opportunity for both thermal and electrical energy storage to improve overall efficiency. Through the integration of energy storage and the sophisticated software platforms used to connect to energy markets, large amounts of new distributed energy capacity will become available on the grid.

 

Making the Case for Short-Term Solar Forecasting in Plug-and-Play Remote Microgrids

— August 25, 2017

The microgrid market is tilting toward solar PV generation as a preferred resource. This is especially the case within the context of remote microgrids due to the economic advantages these systems present from an ongoing operations and maintenance perspective. A concentrated effort to move closer to plug-and-play microgrids is also underway, with a variety of vendors touting this approach.

One can make the case that displacing high cost diesel fuel with fuel-free solar is a valid value proposition on paper. However, a variety of ancillary technologies can also be integrated into a remote microgrid setup to transfer this concept into economic savings in the field. Such integration could displace as much diesel as possible while also limiting wear and tear on fossil fuel generators and batteries. Yet, the hype surrounding the dynamic duo of solar plus storage is obscuring the fact that different tools can help build a market for microgrids, including short-term solar forecasting.

A Game Changer in Australia

The Commonwealth Scientific and Industrial Research Organization (CSIRO) of Australia has helped develop a plug-and-play microgrid offering that marries low cost short-term solar forecasting with load optimization and diesel scheduling innovations. The game changer is the ability to integrate low cost short-term solar forecasting into remote microgrids featuring ever increasing solar PV penetration over time, with early tests showing a 97% reduction in high ramp rate events and fuel savings of almost 8%.

Solar forecasting falls into two categories: long term and short term. Long-term forecasts look out over a period of time (such as a week) to optimize resource scheduling. This forecast is more relevant to grid-connected solar PV resources. Since these forecasts look out over a longer-term time horizon, error rates tend to be lower because the forecasts are far less granular than short-term solar forecasts.

Remote microgrids cannot sell any services back to a grid operator; thus, the prime focus for remote microgrids featuring high penetrations of solar PV is short-term solar forecasts. Fluctuations at this scale can lead to blackouts or inefficient use of scarce and expensive diesel fuel.

According to the analysis Navigant Research performed for CSIRO, it appears the key to commercial success of short-term solar forecasting is minimizing capital cost and error rates. One could argue that short-term solar forecasting should be the first response to managing the variability of solar energy, since it is far less costly than major hardware investments like advanced batteries.

Short-Term Forecasting Adds Value

The short-term solar forecasting technology embedded in the plug-and-play microgrid solution from CSIRO is well-suited to Australia. It also offers other forms of value. For one, it can be used in the planning process to shape the initial design. First Solar claims it can get within 1% accuracy of annual energy estimates from available solar resources, but the company has difficulty sizing batteries properly since short-term solar power production is too variable. The technology being developed by CSIRO can address this gap, developing better estimates of required capital costs during the design phase for better battery sizing.

Finally, short-term solar forecasting technology can also be an important tool utilized outside of a remote microgrid application such as in the case of virtual power plants (VPPs). Australia is emerging as a hotspot for VPPs, too. In fact, CSIRO is sponsoring a free event focused on VPPs on December 1. Australia just may be the center of digital grid innovations.

 

C&I Customers Are the New Rage in Today’s Evolving Microgrid Landscape

— May 8, 2017

The world of microgrids offers a spectrum of vendor opportunity. Each market niche has its own set of opportunities and barriers and vendor leaders and laggards, as well as preferred business models.

While governments and policy wonks tend to focus on the surge of interest in both the utility and community resilience microgrid sectors, the commercial and industrial (C&I) microgrid segment is now coming to life.

Just how big is the total C&I microgrid market? As discussed in the recently published C&I Microgrids report, Navigant Research expects the global capacity of these microgrids to reach 448.3 MW in 2017. This figure is expected to grow dramatically to 5,389.1 MW annually by 2026 at a compound annual growth rate of 31.8%.

Slow in Uptake, Quick to Catch Up

Thinking in terms of the typical evolution of a market, it makes inherent sense for the C&I sector to be slower in its uptake of microgrids than other microgrid market segments. With a razor sharp focus on the bottom line and an aversion to risk, the private sector initially lags behind other market segments that are privy to explicit government support. Yet, when the stars align on proven technologies and viable financing business models, businesses move swiftly.

Here are three reasons Navigant Research forecasts that C&I is emerging as the fastest growing of all microgrid markets over the next decade:

  • Steep drops in the cost of distributed solar PV and energy storage. While this trend benefits all microgrid developments, it is particularly pertinent to the C&I segment. C&I customers place a premium on reliability but also do not want to pay a premium for energy services. The lower the cost of key microgrid enabling technologies, the more attractive the microgrid value proposition becomes.
  • Major advances in software controls translate into the ability of microgrids to maximize the value of legacy assets (such as backup diesel generators) and new technologies (like solar and batteries). One of the primary sticking points in the past was confidence in the ability of smart inverters and software overlays to manage diverse distributed energy resources to substitute for the tried and true pure fossil fuel solutions of the past. Multiple commercial projects validate that this is now possible.
  • Business model innovation that addresses the fierce internal competition for fiscal resources within a corporate structure. Vendors offering no money down power purchase agreements, sometimes coupled with software as a service controls platforms, limit upfront capital expense. A microgrid looks a lot better from a corporate balance sheet perspective, as it is viewed as an ongoing operations and maintenance (O&M) expense.

Evolving Opportunity

As Navigant Research noted in its Market Data: Microgrid O&M Revenue Opportunities report, the microgrid O&M revenue opportunity is much larger than originally thought. As the fleet of all global microgrids grows, vendors are waking up to the opportunity. Likewise, both vendors and potential microgrids hosted in the C&I space are beginning to recognize the inefficiency of old school backup diesels, uninterruptible power supply systems, and redundant utility feeds. This is especially so for data centers, which have long focused on uptime linked to mission-critical loads, but abhor new technologies and anything that might be perceived as a risk.

Perhaps the best way to understand how C&I microgrids will lead future growth are these statistics: in 2017, C&I microgrids—both grid-tied and remote—are expected to capture just under 20% of the total implementation spend. By 2026, that market spending share is anticipated to surge beyond 35%.

 

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