Accelerated 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.
Tags: Demand Response, Distributed Energy Resources, Energy Technologies, Microgrids, PPA
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