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)


2014 Will Be a Memorable Year for Cleantech

— January 13, 2014

Is January 13 too early to call 2014 a year to remember?

We have recently published our fifth annual white paper, Smart Utilities: 10 Trends to Watch in 2014 and Beyond.  The free white paper, more than past editions, details the massive transformations facing utilities and their business models.  Things are just so different now!

Navigant Research offers another peek into the future with our webinar, The Year Ahead in Cleantech, on Tuesday, January 14 at 2 p.m. Eastern Standard Time.  I have dramatically titled the Smart Utilities section of the webinar, Everything You Know is Wrong.  Perhaps that’s overly dramatic, but so much is changing, it’s not far off.  Key trends that will be discussed include:

  • Distributed generation begins to rock utilities’ world: Utility business model are likely to change, perhaps dramatically, as they suffer the one-two punch of reduced energy revenue and increased payouts to distributed generators
  • Solar power generation’s impact on distribution grids will be enormous: Some governments have aggressively supported residential solar generation while others have not -  What happens in either case?
  • New grid-balancing technologies that deal with distributed inputs can make granular, automated decisions that enable utilities to run grids more efficiently while remaining within mandated voltage ranges
  • Energy efficiency may happen in our lifetimes: We have detected signs of life in the home energy market during 2013, with some encouraging pilot programs that may foretell new life for HEM, the forever stepchild of cleantech
  • Utilities are changing their view of the smart grid: We observed some interesting behavior changes during 2013, among both utilities and the vendors that sell to them
  • Smart grid applications continue their rise: Navigant Research has recently completed an examination of Smart Grid IT, and this seminar will discuss some of the leading applications

These topics and more are examined in the white paper.  Many of these issues are by no means resolved, nor is there any clear path to resolution.  But the time to start thinking about these issues, and how they will affect your business, is now.

For more, join us for The Year Ahead in Cleantech, which will also feature discussions on Smart Transportation and Smart Energy.  Click here to register.


In 2014, Utilities Must Adapt or Retreat

— January 8, 2014

In 2013, the majority of utilities could still afford to keep their head in the sand, ignoring the crisis presented by distributed renewable generation to their bottom line now and in the future.  In 2014, this will not be the case.  Electricity sales of centralized utilities will continue to decline because of continued investment in energy efficiency and onsite distributed renewable energy generation from both residential and commercial and industrial customers.  This erosion of electricity sales will cause utilities to recover their costs by adding fees and/or increasing rates, which will increase the cost of utility-delivered power.  As a result, the economics of distributed generation will potentially be even more attractive to end users, further accelerating the deployment of renewables.  This is the utility death spiral.

As covered in Navigant Research’s report, Distributed Solar Energy Generation, distributed solar PV deployments in particular will continue to accelerate, including in nontraditional markets such as the southeastern United States.  The low cost of electricity in the Southeast has hampered wider adoption compared to the West Coast and Northeast, where high-cost retail electricity rates have made renewables more attractive.  In conjunction with falling renewable technology costs and incentives reduction on the horizon, many customers are making their moves, presenting a great opportunity for forward-thinking utilities in both the residential and commercial markets.

Adaptive Action

Meanwhile, financing has made solar PV available for little to no money down.  Advanced module-level power electronics – as covered in Navigant Research’s report, Microinverters and DC Optimizers – are bringing more rooftops into the fold and increasing the overall energy harvest.

Those utilities that have grasped this threat are taking action to adapt to the changing market environment in the following ways:

  • Taking their case to the public utility commission and requesting fees on those customers with onsite renewables
  • Limiting net energy metering (the ability to send power back to the grid and be compensated at retail rates)
  • Getting into the distributed generation business themselves

Some utilities are doing these things in conjunction.  Utilities have many of the most important components that are required to make the latter option feasible, including a captive customer base, generally high trust among their customers, access to low-cost capital, and solid expertise in operations and maintenance and customer service.  Taking this plunge is no easy decision for companies that are traditionally slow-moving.  But there are few other options.  Utilities may have noticed the writing on the wall during the past few years, but 2014 is the year they will have to do something about it – or it will be too late.


In San Diego, A Tale of Two Microgrids

— December 10, 2013

Besides being the perfect setting for a microgrid conference, San Diego is arguably the best overall market for microgrids in the world.  Two microgrids that are already up and running in the region represent two starkly different views of the future of energy.

San Diego Gas & Electric’s (SDG&E’s) Borrego Springs microgrid, which attracted over $10 million in state and federal funding, is one of the few microgrids to be deployed, owned, and operated by an investor-owned utility.  While originally an R&D project, the 4 MW microgrid has proven to be a valuable asset for the utility, as it has successfully islanded off customers from the larger grid during major storms and power outages and has helped manage the integration of new assets into the larger distribution network.

During an intense thunderstorm in September, for example, the microgrid was able to seal off and continue to provide power to over 1,000 customers in a power outage that lasted more than 20 hours.  Earlier this year, the same microgrid – which incorporates solar photovoltaic (PV) systems, diesel generators, and advanced batteries – provided similar energy security during a flash flood in late August and a major windstorm in April.

In the Desert

The Borrego Springs microgrid, which included Lockheed Martin, Oracle, and Green Energy Corporation as vendors, is being moved into full-time commercial operations.  It also incorporates demand response (DR) and home area networks, allowing SDG&E to experiment with how residential customers will respond to price signals.  SDG&E wants to see how it could deploy such microgrids throughout its system in order to provide a lower-cost solution to providing power in the high desert that forms the eastern part of its service territory.  Given California’s recent mandate on installing 1.3 GW of distributed energy storage, SDG&E is trying to figure out how to wrap microgrids around a total of 165 MW of energy storage that will be deployed by 2020.

Location of Borrego Springs Microgrid

(Source: San Diego Gas & Electric)

The other major microgrid currently in operation in San Diego is at the University of California-San Diego (UCSD) and represents 42 MW in total customer load.  Although it’s located within SDG&E’s service territory, it does not take or sell back any of its services to its host distribution utility.  In fact, Byron Washom, director of strategic energy initiatives at UCSD, told the 3rd Military & Commercial Microgrids conference audience in San Diego that he didn’t want to bother with the accounting burdens of selling ancillary services back to SDG&E.  The only time in recent history that the UCSD microgrid provided power to SDG&E was during a wildfire in 2007, when it reduced demand by 4 MW and exported 3 MW – just enough power to keep the entire SDG&E system up and running.

While SDG&E faced several regulatory burdens in building its microgrid because it was a utility, Byron extolled the virtues of working on a campus, the current leading microgrid market segment, helping North America to lead the world in deployments.  Consider the following:

  • The microgrid can generate 92% of its own generation needs, reducing its power bill by 50% and saving $850,000 per month, with its residual needs handled by a direct access contract dating back to before the Enron debacle shut down such deregulated power deals in California.
  • Since the microgrid is university property, there is no need for any building permits.  The microgrid can also do innovative testing behind-the-meter without having to worry about United Laboratory safety guidelines.
  • The campus has not only saturated all of its rooftops with solar PV but also boasts, according to Washom, the largest electric vehicle (EV) charging network globally, achievements helped along by the advantages of being a self-regulating entity.

UCSD invests only in technology options that cost the same or less than utility service.  Washom has become adept at using OPM – other’s people money – to reduce the cost of technology and, in the process, created a world-class learning experience for students enamored by a business-savvy approach to sustainability.

These two microgrids offer directly competing views of our energy future.  Which vision do you think will win (and also provide the largest societal value)?


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