Navigant Research Blog

Alaska Leads the World in Microgrid Deployments

— December 17, 2014

Many utilities view microgrids as a threat, due to intentional islanding and/or the effects of reduced customer load on long-term revenue projections.  However, a small but growing number of utilities view the microgrids they own and operate – known as utility distribution microgrids (UDMs) – as the next logical extension of their efforts to deploy smart grid technology.  As I’ve noted earlier, the developed world can learn interesting lessons in this field from the developing world.

Navigant Research’s new report, Utility Distribution Microgrids, shows that the total UDM market represents over $2.4 billion of economic activity today, with the bulk of this investment flowing into projects located in the Asia Pacific region.  As noted in an earlier report, Microgrids, North America is the overall market leader.  Yet, when it comes to utilities, both Asia Pacific and Europe are ahead in near-term deployments and related implementation revenues.  All told, under the base scenario, Navigant Research expects the UDM market to reach $5.8 billion in annual revenue by 2023, growing at a compound annual rate (CAGR) of 10.2%.

However, there’s one important exception to this market generalization: Alaska.

Across the Tundra

“Over the last decade, Alaska has quietly emerged as a global leader in the development and operation of microgrids,” declared Gwen Holdmann, director of the Alaska Center for Energy and Power at the University of Alaska Fairbanks, in a recent interview.  A particular focus has been hybrid conventional-renewable-storage systems, networks that have “logged more than 2 million hours of continuous operating experience for these types of systems,” according to Holdmann.  The state boasts a portfolio of somewhere between 200 and 250 permanently islanded microgrids ranging from 30 kW – about the size of a city block – to large remote hydro systems over 100 MW in size.  These microgrids, many in operation for over 50 years, provide electric power service exclusively to isolated rural populations.  Total capacity exceeds 800 MW, the largest installed base of microgrids in the world today (though China may overtake Alaska by the end of next year).

Holdmann clearly takes pride in what Alaska has accomplished with these scattered, isolated hybrid power systems, which tap fuels as diverse as wind, solar, hydro, biomass, and tidal currents, along with diesel.  While other pundits may point to New York, California, or Hawaii as the centers of North American microgrid development, Alaska has been developing cutting-edge microgrids for quite some time.  “The State of Alaska alone has invested over $250 million in developing and integrating renewable energy projects to serve these microgrids, – far more per capita than any other state in the country,” Holdmann said.

Integration Experts

The advent of advanced technology deployment to these rural systems has forced Alaska utilities and developers to become expert in microgrid development and operation.  By far the greatest challenge was, and remains, the high-penetration integration of intermittent renewables, such as solar, wind, and hydrokinetic, with traditional diesel or natural gas fueled electric power generation.  Nevertheless, Alaskans have repeatedly achieved higher renewable penetration levels than nearly any other place in the world, under incredibly harsh conditions, including daylight hours that shrink to a couple hours a day in the winter and winds that can exceed 100 miles an hour – enough to literally tear apart many conventional wind turbines not designed to stand up to such speeds.

Many Alaskan utilities have set up voluntary goals to reach 70% or 80% renewable penetration within the next 8 to 10 years.  Kodiak Electric Association, which serves Kodiak Island on the southern coast of Alaska, reports that it has achieved 99.7% renewable energy penetration so far in 2014, using a hybrid wind/hydro/diesel/battery/flywheel microgrid.

Mainland U.S. utilities could learn a lot from the innovators up north, where the smart grid is already delivering on the promise of a more cost-effective and sustainable power grid today.


Cautiously, Private Utilities Dip Toes into Microgrid Pool

— December 16, 2014

Lawrence Berkeley National Laboratory statistics show that 80% to 90% of all grid failures begin at the distribution level of electricity service.  While utilities can resolve these issues through a variety of technologies, their historic bias against the concept of intentional islanding – or cutting off certain systems from the wider grid – has precluded them from considering microgrids in the past.

That has changed over the last 3 years.  The extreme storms that pounded the East Coast beginning in 2011 have led the states of Connecticut, Maryland, Massachusetts, New York, and New Jersey to initiate resiliency programs that promote microgrids as a key element of their strategy.

Unfortunately, the concept of community resiliency or public purpose microgrids often violates utility franchise rules, since power would have to be sent over public rights of ways.  Connecting, for example, a gas station to a high school serving as an emergency shelter and a hospital could get the operator of this impromptu microgrid in trouble.

So, by way of necessity, utilities clearly have to play a role in these kinds of microgrids.  Furthermore, the hype about the utility death spiral is prompting many utilities to examine new regulatory structures and business models to accommodate the growth in third-party distributed energy resources (DER).

The Revolution Will Be Distributed

As a result, Navigant Research has issued a new report, Utility Distribution Microgrids (or UDMs).  While public power UDMs – both grid-tied and remote – are a larger market today and are expected to be in the future than systems deployed by investor-owned utilities (IOUs), the most interesting segment are these latter private systems, due to the regulatory issues they raise and because these large companies tend to move markets.

In conversations with utilities, the messages I’ve heard have changed dramatically.  When I initially researched this topic more than 2 years ago, the biggest concern about microgrids revolved around technology and intentional islanding, a concept that was anathema to utilities whose grid codes were designed to prevent customers from sealing themselves off from the larger distribution grids.  Worker safety, loss of customer load, and stranded investments in centralized generation also came up.

Today, many utilities cite these same issues, but growing numbers realize the DER revolution is picking up momentum and that microgrids that are owned or controlled by utilities could help them fulfill their mission to provide low-cost, reliable power.

Convincing the Regulators

The IOUs exploring microgrids include Arizona Public Service, Consolidated Edison, Duke Energy, NRG Energy, and San Diego Gas & Electric.  The primary challenge for an IOU today in implementing a UDM is justifying a microgrid under traditional rate-based regulation.  How can the utility convince state regulators that investing ratepayer funds into a project that directly benefits a small subset of customers will also benefit the wider customer base?  Even if a valid business case can be made, the typical 3-year rate case state regulatory proceeding business model may retard near-term innovation.

This IOU UDM segment offers the largest potential growth of any UDM segment, since it helps address the need for new technology solutions to address explosive growth in DER.  But it also faces the largest regulatory question marks.


The Global Biofuels Industry: A Future in Doubt

— December 11, 2014

In its recent report, The State of the Biofuels Market: Regulatory, Trade, and Development Perspectives, the United Nations (UN) notes that although the emerging biofuels industry has made great strides in the past decade – with ethanol and biodiesel becoming established commodities traded on all continents – significant barriers to commercialization persist across the developing world.  Global biofuels forecasts published in Navigant Research’s report, Market Data: Biofuels, support the view that future capacity deployment is heavily contingent on accessing a shrinking pool of capital investment targeting the industry.

As the UN report notes, conditions in the 2000s that drove annual investment in biofuels in the range of $10 billion per year – including uncertainties related to the price of petroleum products and peak oil speculation – have largely dissipated.  With shale oil & gas production on the rise in key biofuels markets like the United States and the price of crude sliding well under $100 per barrel, market realities have shifted.

Poor Timing

For the emerging advanced biofuels industry, the timing of this macroeconomic shift could not have come at a worse time.  While growth aspirations for the global biofuels industry shifted away from conventional pathways, such as corn starch, to ethanol, palm oil, and biodiesel during the financial crisis of 2008, greenfield biorefinery projects producing advanced biofuels have only just come online in the past year.

The development of these facilities involves capital costs in the hundreds of millions.  Since many of these projects were initiated and financed during a time when macroeconomic realities were quite favorable, a primary concern going forward is whether these first-of-kind facilities can spark additional investment to drive sustained capacity expansion.

This is unlikely given current realities.  To put this into perspective, according to our market data report mentioned above, global biofuels capacity – including conventional and advanced pathways – was just shy of 40 billion gallons per year at the end of 2013.  This represents 4.2% of the global liquid fuel market, or just under 1% of global final energy consumption.

Another $25 Billion Off

Advanced biofuels installed capacity – the focus of current commercialization efforts – accounts for just 1.2 billion gallons, or less than 2% of global biofuels production.  While that’s by no means insignificant, there’s still a long way to go in terms of reducing dependence on liquid fossil fuels, which account for 35% of global final energy consumption, according to data published by the Energy Information Administration (EIA).

In order for advanced biofuels to meet projected production capacity requirements by 2020 under expected biofuels supply mandates in key markets like the United States, European Union, China, and India (Brazil relies mostly on blending quotas), $25 billion to $35 billion in annual investment will be needed over the next 6 years, according to Navigant Research estimates.  This is a tall order for a suite of technology platforms that are not yet at price parity with petroleum-based fuels.


Distributed Solar PV Poised to Reach Its Potential in Africa

— December 9, 2014

According to the International Monetary Fund, 7 of the world’s 10 fastest-growing economies are located in Africa.  While Cairo, Egypt, was the only city in Africa to have a population exceeding 10 million in 2010, seven cities across Africa are expected to achieve this level by 2040.  Rapid urbanization means that more than 100 African cities are projected to exceed 1 million inhabitants by 2040.  Such levels of urbanization and economic growth have forced local utilities to acquire new, primarily large-scale power projects.  Utilities are primarily calling for large scale natural gas power plants and renewable energy projects (led by solar PV and wind),  as evidenced by the booming South African renewables market.

Over time, however, there will be growing opportunity for smaller-scale distributed renewable energy projects in the 1 kW to 1 MW range.  Growth in this power class is led by government agencies that are electrifying health clinics and schools, often with international donor support. This is likely going to continue to be the case for at least the next 5 years. According to Navigant Research’s report, Global Distributed Generation Deployment Forecast, annual capacity additions of distributed solar PV in Africa are expected to grow from 10.9 MW in 2014 to 56.5 MW in 2023.  Agriculture, hotels, extraction industries, water pumping, telecom applications, and growing consumer markets in Africa will result in distributed solar PV growth across the region.  Cumulative distributed solar installed capacity during this time will reach 332.2 MW, representing less than 5% of the total installed solar PV capacity in Africa in 2023.

Immense Opportunity

Urban residential will be the last segment to catch on in urban African communities, primarily due to the combination of a small middle class, a lack of awareness among potential customers, and a lack of financing options.  Several experienced engineering firms, particularly in Kenya, are targeting distributed solar customer segments.  And while there is significant buzz about microgrids in the region, in particular, these projects have not yet developed at the anticipated rate.  That will change if innovative companies, such as PowerHive, Access Energy, and PowerGen, are able to successfully scale up current microgrid efforts and attract further investment.  In Kenya, there are a number of creative mid-sized projects, including solar-wind hybrid systems, ranging from 10 kW to 300kW.  In general, the opportunity for distributed renewables is immense, and the field is wide open – provided companies (and investors) are patient enough to deal with potentially problematic African bureaucracies.

Patient Yet Determined

The engineering firms and developers offering these solutions are working with utilities and regulators to create a more conducive environment for this small-to-mid-scale market segment in urban and off-grid settings.  Compared to utility-scale installations by larger international companies that hire workers for a short period and do not have a continued presence, the distributed market segment will have the most impact from a job creation and sustainable development perspective.

These companies tend to be staffed with very determined people who have made progress in very uncertain and often frustrating circumstances.  They’re becoming more organized and lobbying for a more favorable regulatory environment – including more robust net metering policies, feed-in tariffs, and, in general, more freedom to operate.

Equally critical, however, is education among financiers (and customers) on how to finance small-to-mid-sized solar PV systems.  Similar to the diversity among U.S. state policy and public utility commissions, pathways for growth will differ for each country in Africa.  Those that are willing to stay the course and weather the frustrations of operating in uncertain political and regulatory environments stand to profit  and, in the process, contribute to the establishment of the local industry over the long term.


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