Microgrids: From Niche to $100 Billion Market
- February 5, 2018
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Energy experts at Navigant Research are convinced that micro-grids are moving from a niche novelty to mainstream, writes Fereidoon Sioshansi, publisher of newsletter EEnergy Informer. They forecast cumulative micro-grid investments of over $100 billion over the next decade, much of it in North America and Asia. Europe is lagging behind, but Finland may represent a growth market. Sioshansi takes a closer look at what microgrids are and how they are poised to shake up the electricity sector.
The first challenge with micro-grids is to decide on a definition. Not unlike smart grid, it means different things to different people. A recent analysis performed for the California Energy Commission (CEC), for example, identified 17 definitions attributed to a variety of organizations including International Council on Large Electric Systems, or CIGRE, using its French acronym. Other terms such as mini-grid, nano-grid and virtual power plants (VPPs) are also commonly used.
Virtually all mostly refer to the ability to optimize and aggregate distributed energy resources (DER) in one form or fashion.
Acknowledging the definitional issue, Peter Asmus, an expert on the topic at Navigant, suggests using one from the US Department of Energy (DOE), recently modified to include off-grid remote systems, which have historically dominated the global micro-grid market. It says, “A microgrid is a group of interconnected loads and distributed energy resources within clearly defined electrical boundaries that acts as a single controllable entity with respect to the grid. A microgrid can connect and disconnect from the grid to enable it to operate in both grid-connected or island mode. A remote microgrid is a variation of a microgrid that operates in islanded conditions.”
The key feature of a microgrid, according to Asmus, is the ability to island or disconnect from a larger grid when there is an outage or when it is economically advantageous to do so.
Definition aside, where are microgrids being deployed and why? According to the 13th edition of Microgrid Deployment Tracker published by Navigant Research in Dec 2017, over 20 GW of projects or portfolios of projects have been identified worldwide.
At present, no central agency or organization accurately and comprehensively tracks microgrids – hence one cannot be sure how many are operating, under development or proposed worldwide. Though incomplete, the Tracker is the most comprehensive tally of microgrids by region and segment available.
According to Navigant Research, Asia Pacific leads, followed by North America. The former tends to be mostly remote, off-grid systems, whereas the latter – particularly those in the US – tend to be connected to a utility grid.
The North American market, according to Asmus, is the most interesting region over the last 5 years due to recent extreme weather conditions leading to major power outages. This has resulted in increased interest – and funding – to maintain vital services during emergencies. In some cases, the micro-grids can in fact enhance the resilience of the macro-grid, to which they are usually connected.
Connecticut was the first state to pass a law promoting microgrids in 2011. Since then Maryland, Massachusetts, New Jersey, New York and others have enacted programs, as has California, which recently issued an RFP [request for proposal, a type of tender, editor] with $44 million funding to develop low-carbon microgrids. With recent storms knocking out power in Texas, Florida and Puerto Rico, other states are likely to follow.
Most such programs are focused on community and utility distribution microgrid projects, which face the most challenging regulatory barriers. Asmus, however, believes that the commercial and industrial (C&I) segment is poised for major growth. The primary reason is the declining cost of key enabling technologies, such as solar PVs, wind, energy storage systems (ESS) and the proliferation of new and creative business models that are increasingly able to monetize more of the value of such systems and capture them.
The most vexing conundrum facing microgrid development, according to Asmus, is financing – unsurprisingly. Among the promising C&I business models is Schneider Electric’s microgrids-as-a-service offering. By taking on the risk for performance and removing the upfront capital investment, the vendor can make the value proposition more attractive. Variations on this theme, including a combination of DERs (distributed energy resources) plus intelligent distributed ESS are beginning to gain traction among C&I customers.
Some proponents of Micro-grids argue that the best way to grow the market is not only to allow, but encourage utilities to invest in
s such systems just as they do with other infrastructure: by putting those costs into customer rates. Some utilities have been successful in this effort, among them the pioneering San Diego Gas & Electric Co. (SDG&E) project in Borrego Springs utility distribution microgrid. Others, however, have confronted regulatory skepticism and rejection, including Baltimore Gas & Electric Co. (BG&E), Commonwealth Edison Co. (ComEd) and others.
For their part, the regulators, many of whom do not understand, let alone appreciate the full value of micro-grids, are reluctant to allow utility rate-basing of microgrids until and unless they can be assured of the cost effectiveness of the schemes – and assurance that the benefits are widely shared among all customers, not just a select few.
The key question for regulators, according to Asmus, is to be sure that the dollars invested in microgrids provide system-wide benefits that justify the expense. How long before that critical milestone is reached is anybody’s guess.
In the meantime, Asmus believes that the private sector will lead the market, but he is optimistic that utility, and more importantly regulatory acceptance of micro-grids, will occur within the next 3 years.
This is among the reasons that Navigant Research is forecasting cumulative micro-grid investments of over $100 billion over the next decade. It is convinced that micro-grids are moving from a niche novelty to mainstream. Many others concur. Whether we call these micro-grids or by another name may not matter as much as the emerging consensus that much more is likely to happen on the customer end of the business. Regulators can encourage and facilitate the transition process by providing better clarity and regulatory support.
Is Finland Europe’s Best Hope for Microgrids?
While Europe is considered a global leader in moving toward a low carbon energy future, the tightly regulated EU markets have several features that severely limit the development of microgrids, writes Peter Asmus, energy expert at Navigant Research on Navigant’s blog on 7 December 2017:
- “The focus in Europe has been on large-scale renewable energy development such as offshore wind, which requires massive investment in transmission infrastructure.
- Deployment of distributed energy resources such as rooftop solar PV has primarily been based on feed-in tariffs, a business model precluding the key defining feature of a microgrid—the ability to seal off resources from the larger grid via islanding.
- EU markets are tightly interwoven and methods to address the variability of renewables such as wind and solar lean toward cross-border trading, not localized microgrids.”
As the Navigant Research’s Microgrid Deployment Tracker demonstrates, Europe represents only some 9% of the global microgrid market. The vast majority of microgrids deployed in Europe are on islands in the Mediterranean, the Canary Islands off the coast of Spain, or projects such as Bornholm or the Faroe Islands of Denmark, notes Asmus.
According to Asmus, “a unique confluence of factors make Finland the best opportunity for microgrids in Europe. Finland is not only the global leader on smart meter deployments, with 99% of its 3.5 million customers having access to this technology, but it also has a deregulated wholesale and retail market that features 83 distribution system operators (DSOs), with the largest distribution networks composed of 200,000 customers.”
“Unlike its neighbors Sweden and Norway, Finland lacks massive hydroelectric resources. What hydro it has tends to be run-of-the-river systems, and some of the smaller scale systems are microgrid-friendly. Most importantly, Finland is a country that does not fully share the stellar reliability associated with the EU grid. During blackouts in 2011 and 2012, as many as 570,000 customers lost power for an extended period of time. This outage raised the issue of the vulnerability of the Finland grid to winter storms due to overhead lines running through the country’s deeply forested regions that can sag from snow.”
Asmus notes that “in a quick response to these power outages, new regulations have been put in place that limit power outages to 6 hours annually for urban residents and 36 hours for rural customers by 2028. In a policy that would likely scare utilities in the US, DSOs are required to compensate customers for power outages. If a power outage lasts longer than 12 hours, the DSO must pay the customer 10% of its annual distribution fee, and compensation goes up gradually to a maximum of 200% with interruptions longer than 288 hours.”
The first option of most DSOs to respond to these new regulations is to place distribution lines underground. However, writes Asmus, “that can be expensive, especially given the low density of some DSO customer bases. According to research performed by Lappeeranta University of Technology (LUT), the lowest cost option for 10%‒40% of the medium voltage branch lines would be low voltage direct current microgrids. One such LVDC microgrid project, developed by LUT in collaboration with DSO Suur-Savon Sähkö, was developed in 2012, incorporating solar PV and batteries. Though only one other microgrid currently is operating, Finland represents an ideal market for utility distribution microgrids.”
For more information see also www.peterasmus.com
Fereidoon Sioshansi is president of Menlo Energy Economics, a consultancy based in San Francisco, CA and editor/publisher of EEnergy Informer, a monthly newsletter with international circulation. This article was first published in the February 2018 edition of EEnergy Informer and is republished here with permission.
His latest book project is Innovation and Disruption at the Grid’s Edge, published in June 2017. It contains articles by two dozen experts on “how distributed energy resources are disrupting the traditional utility business model”.