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Defining a business model for a utility-scale, multi-owner microgrid

Photo 126776641 © Lovelyday12 - Dreamstime

Abstract

In a distributed energy resource (DER) environment, microgrids represent an energy generation and distribution alternative to the aged macrogrid. According to Navigant research there are approximately 1800 microgrids globally, with 160 in the United States, mostly clustered around university campus and military installations. Microgrid capacity is expected to reach 4.3 GW by 2020 reported by GTM research. For context, a typical coal burning power plant generates over 600 MW. Therefore, nascent microgrid marketplace is far from mainstream yet may serve as one viable solution to our outdated and over taxed energy infrastructure. Superstorms, grid failure, cyber threats, excessive load demand add uncertainty to our energy system. Some public utilities have begun to evaluate and participate in their development as a significant stakeholder in varying types of ownership and economic structures.  Monitoring recent climactic and political events, ConEdison’s teams in Distributed Generation and Innovation Lab has taken active steps to study the regulatory, technological, and financial models of the microgrid. Led by the NYU Clean Energy program, ConEdison and NYU examined various multi-stakeholder microgrid business models across the United States in order to identify patterns and establish recommendations as well as create a primer for a future multi-owner, multi-stakeholder, utility-driven microgrid business model. These are their findings.

Background

Turning the capstone course (master thesis) into an intrepid exercise in discovery, students of the NYU School of Professional Studies, Diploma in Clean Energy, evaluated various multi-stakeholder microgrid business models across the U.S. Utilizing the narrative method for data collection and a stretch goal to study twelve microgrids, the students uncovered a young and highly fragmented microgrid landscape, driven by complicated and tenuous relationships, regulatory and technical complexities, and needed government sponsorship. Common patterns emerged among the evaluated microgrids that are operating, or are in development, while each overcoming their own unique political, regulatory, and financial challenges. If society deems the microgrid a critical part of the distributive energy infrastructure of tomorrow – to meet critical load, to serve the common good, to mitigate an uncertain climate future, and to put energy choice and independence into the hands of the customer - then regulatory attention is necessary to support all stakeholders who depend on and benefit from such a solution.

Spurred on by climate change and superstorms, New York Governor Cuomo set a state goal to create a more distributive energy system which would allow for alternate energy generation and interconnections to counteract grid disruption. In 2015 the governor launched Reforming the Energy Vision (REV) an initiative to re-evaluate the state’s energy strategy and evolve the energy system into a more reliable, resilient, and renewable platform. Illustrated by the intensity of hurricane’s Irene and Sandy which pushed the energy infrastructure to its limits, ConEdison has the difficult task of balancing the energy needs of the nation’s largest and most influential city on a more than 100-year old energy distribution system.

With the impending closure of Indian Point nuclear plant in 2020-21 (2,000 MW and 25% of all electricity for NYC and Westchester) and desire for complete cessation of coal-fired electricity generation across the state, New York faces a challenging energy future that requires a significant transformation in how it sources its energy. Sourcing cleaner and distributive energy generation is a priority for the public utilities with ConEdison taking a leading role in programs such as the highly successful BQDM (Brooklyn Queens Demand Management) energy efficiency program that avoided the need for the investment of a $1.2 billion substation among other distributive and non-wire alternative (NWA) initiatives. Microgrids are one of a menu of options that ConEdison, and other utilities, are evaluating as options to drive New York State toward a distributive, clean energy future positioning ConEdison as a model utility for the 21st century. 

Microgrid Project Definition and Approach

In simplistic terms, a microgrid is an energy system that includes generation and distribution connectivity to meet the energy demand of a specifically defined group of customers in a geographic area. The generation tends to include but not exclusively contain renewable energy. The system is supported by load management technologies as well as an interconnection point to the macrogrid, and can disconnect and operate independently, commonly referred to as “islanding”.

The scope of the project was to evaluate and recommend on a possible multi-owner microgrid business model and not focus on regulatory or technological requirements. Ironically, the ConEdison team did not emphasize any parameter around type of generation but given the nature of the academic program the students decided to focus on any renewable generation component in its evaluation.

To define the appropriate business model, the project began with a set of questions. How are the economics of current microgrids structured? How was the build financed? Who are the owners, stakeholders, and off-takers of the microgrid? What are the various sources of generation of each microgrid? What can we learn that ConEdison can then consider should it consider entering a microgrid business model of its own?

The students began with a literature review studying scientific journals, white-papers, and other governmental and NGO related reports. The NY Prize, a NYSERDA initiative, is a first-of-its-kind competition to stimulate microgrid development and served as a helpful conduit to network with field experts. Several microgrid projects across the state were in early stage development competing for future rounds of funding.

For its data collection the students employed a content and storytelling analysis by interviewing key stakeholders and participants in the development of the microgrid. All interviews were completed by phone except for one which was a private group tour through Hudson Yards delivered by the head of energy operations. The group set a goal of twelve (12) microgrids to target based on a series of qualifying factors and accessibility and eleven were ultimately reached. What the team lacked in regulatory and technical background made up in their business knowledge and acumen as well as their creative tenacity to locate the right people and receive candid input. The capstone took eighty-eight (88) days from start to delivery and an estimated three-hundred (300) hours combined to complete the project.

The microgrid landscape is best described in figure 1 based on a NYSERDA report on the microgrid marketplace. As shown, the energy generation is divided into two categories of utility and non-utility owned and four sub-categories within the type of ownership. Under utility the layers get more complex in terms of control of the system and whether all components are provided or out sourced to third-parties. For non-utilities the question of rights of way and how the ownership is structured mattered most. The objective was to then study one or more microgrids that fall within each category that describes the landscape.

Control of the microgrid references who manages the overall ‘brains’ of the system. In some cases, the utility would develop and own the controller that manages turning on and off, sourcing of generation, interconnection to the macrogrid, demand response, and more. In other cases, a private stakeholder would manage the controls.  

Figure 1: Microgrid Ownership and Service Typology (NYSERDA)

Success drivers

From interviews and testimony, the group identified seven success drivers contributing to a microgrid’s likelihood for viability. Examples of each are provided to further illustrate the outcome. The group determined that Hudson Yards required no further elaboration since it was fully self-financed by a real estate development company. 

Government support was a common theme. A government-friendly atmosphere in support of distributed energy alternatives helped stimulate policy, funding, and regulations which overcame barriers to success. Active input from public officials and other policy makers to help underwrite and publicly support clean energy and resilient DER programs reflected a higher likelihood of viability.

Examples: 

  • Bronzeville received over $5 million in US Department of Energy grants
  • University Heights received public support from high level public officials and community leaders

Utility cooperation and assistance in the development of a microgrid was equally notable. Utilities directly contributed or helped facilitate in the planning and development of the microgrid, particularly critical were the rights of way and the interconnection to achieve islanding mode.

Examples:

    • Community Energy Park microgrid (generation, controller & wires) was built by the utility
    • Hudson Yards received substantial technical and connections assistance from ConEdison

Critical Facilities that served the public interest were well received. In hard hit communities due to severe weather storms or other grid failures a microgrid serves to support the greater public. Microgrids that met such parameters to serve vulnerable populations received favorable community acceptance and utility and government participation.

Examples:                                                                                   

    • Parkville and Community Energy Park are two microgrids that explicitly serve as refuge locations for the general public in the case of blackout
    • Parkville’s microgrid powers a supermarket and gas station to provide the community with food sources and mobility in the event of a macrogrid power failure

No cost resiliency is a freebie hard to quantify but also hard to pass up by off-takers. The added assurance of immediate continuity should the grid fail, without or very limited disruption was a bonus that benefited all users of the microgrid, commercial and residential.

Examples:

    • Community Energy Park, University Heights, Parkville and Bronzeville all receive the benefits of greater resiliency for no charge above what they would pay to the utility

Supplanted existing costs by diverting funds to alternative efficiency programs. Relatively expensive allocations already budgeted could now be applied to more cost effective microgrids and other energy efficiency projects. A win-win for all parties.

Examples:

    • University Heights allowed National Grid to avoid spending for a large feeder to support that load
    • Marcus Garvey partially allowed ConEdison to avert $1 billion in new substation costs through the Brooklyn-Queens Demand Management Program

An opportunity for green branding added a level of interest and intangible value. Projects were deemed more favorable when renewable generation was added to the microgrid’s energy generation mix. Low emitting fuel cell and solar plus storage were the most popular energy models.

Examples:

    • University Heights publicly advertised the clean energy benefits of their microgrid as part of their public support campaign
    • Parkville and Community Energy Park both included clean energy as key component of their value proposition

Leverage an existing microgrid presents a scalable opportunity. Especially in cityscapes and industrial zones, the permitting, regulations, and general acceptance is already in place when a second microgrid is introduced. The belief is certain efficiencies are achieved by adding another microgrid especially in critical areas of grid connection points and back up generation.

Examples:

    • Bronzeville leverages a proven, existing microgrid at Illinois Institute of Technology (ITT)

Market Obstacles

Development costs of a multi-user microgrid tend to be higher than a single use, nano-grid. There are more parties involved, typically take longer to develop, higher soft costs and often follow a multi-stage process from feasibility to project planning to RFP and implementation. Much of this can be bypassed or expedited by a single user.  Development of friendlier regulatory frameworks can help reduce future development costs.

Regulatory uncertainty creates barriers as current regulations do not address ownership and structure rights of a multi user microgrid plus vary when crossing city or state boundaries. Common questions include: Can and should a microgrid be treated as a utility? Who has franchise rights? Which entity has the obligation to serve the customer? What happens to net metering in the coming years? Without a regulatory framework a microgrid investment could quickly dissolve over the inability to answer such fundamental questions.

Impact on utilities (active or passive) causes great uncertainty as the rate base risks being diminished. Will utilities push back or cease participation in third-party microgrids without any economic stake in the microgrids’ success? Questions concerning rights of way, interconnection, and a favorable economic structure when a lucrative segment of the rate base is lost has yet to be fully addressed. Who should pay for assets that remain indefinitely on standby and could be used elsewhere to generate income and meet customer need?

How to value non-monetized assets that all off-takers benefit from but do not pay for. Does resiliency deserve a premium, even if never used? How can a reduction in emissions using clean energy be quantified and savings passed on to deserving customers? Cyber threats are not just a concern for the macrogrid but essential for the security and stability of microgrid and who pays for these threat protections?

Lack of standardization creates greater risk and added complexity. If standards were in place for all parties to follow, then this could lower development costs and accelerate implementations. Technological standards would reduce guess work in the interconnections and controllers of a microgrid. The designs could come with basic and common ingredients on which all microgrids operate and complicated and even intractable local rights of way to cross-state regulations could all be readily addressable.

Immature storage technology artificially constrains the flexibility and efficiency of all energy production in a decarbonized, decentralized energy infrastructure. With anticipated future advancements and cost reductions a microgrid could further lead the energy revolution.

Primer for a Multi-owner Microgrid 
   
1. Nature/Purpose of Microgrid 
 Can it support islanding? 
 Examples: 
  Hospitals for Urgent Care
  Community Centers for Shelter
  Food and Fuel Retail Providers
   
2. Level of cooperation from participants 
 Utility, microgrid owner, microgrid user
 Examples: 
  Facilitate rights of way
  Negotiate reasonable stand-by tariffs
  Ensure safety with islanding and post outage sequencing
  Community outreach and communication
   
3. Investment participation 
 Is this add-on or new build?
 Rate base included (Y/N) 
 What if any benefits from distribution tariffs
 Quantify any load management and resiliency benefit
   
4. Standardization  
 Are there any consistencies to leverage?
 Examples 
  Types of generation
  Technological interconnections
  Tariffs
  Regulatory advantages/treatments

Conclusion

The United States is shifting from centralized and fossil fuel-oriented energy generation to a decentralized and decarbonized energy future. Our energy vision of tomorrow very much reflects traditional American values: one of choice, independence, and on demand. A conduit to attain these aspirations will come from various distributed energy resources including microgrid. Customer benefits with reliable power, particularly in emergency situations, and may come cheaper and cleaner. The utilities benefit from reduced load in key areas, draws from a resilient option, and fulfills its obligation to serve. Society benefits from a more stable grid and lessens greenhouse gas emissions.

About the authors: All contributors are recent graduates of the NYU School of Professional Studies Diploma in Clean Energy 2019 resetting careers to pursue interests in the energy field. Jason Price (jasonandrewprice@gmail.com) is a NYSERDA scholarship winner and former hospitality technology executive with a background in sales, marketing, M&A and strategy. Chris Fleischman (chris.fleischman@gmail.com has a background in finance, economics, M&A, and program management. Suzanne Kucera (suzanne@kucera.com) has a background in investment banking, media and technology. Chad Dyer (chad.dyar@gmail.com) is an independent investor and researcher. To anyone reading this article, all four candidates are open to new careers paths and accepting interviews.

Jason Price's picture

Thank Jason for the Post!

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Discussions

Matt Chester's picture
Matt Chester on Aug 27, 2019 11:59 am GMT

Thanks for sharing, Jason. 

The United States is shifting from centralized and fossil fuel-oriented energy generation to a decentralized and decarbonized energy future. Our energy vision of tomorrow very much reflects traditional American values: one of choice, independence, and on demand.

It's interesting to see you frame this as an American trend. It undoubtedly is happening across the United States, but I'm wondering if you find that the U.S. progress in this regard is notably ahead of other countries that are adopting microgrid models as well? What's unique about the American landscape vs. others when it comes to fostering this decentralization?

Jason Price's picture
Jason Price on Aug 29, 2019 1:52 am GMT

Thanks for the question Matt. I mention about 2000 microgrids and only 160 are in the US (and growing) so microgrids are far more representative outside the US. In our research we did interview a microgrid operator in the Phillipines and studied a 2018 Navigant research report that examined microgrids in the UK. In most cases the microgrids resided on remote locations (islands) distant from energy generation sources and were government supported solutions. I am not qualified to judge on who is ahead however it is quite possible that since most countries have set climate policies they may have satisfied or even standardized certain regulations and other hurdles that we have yet to resolve since some of these may require input from Washington, DC. It is likely that we still reflect a highly fragmented environment to develop microgrids where elsewhere this may no longer exist. I would welcome other experts in microgrids to chime in here on their experiences. Thanks!

Matt Chester's picture
Matt Chester on Aug 29, 2019 12:54 pm GMT

Thanks for your thoughtful reply, Jason. It definitely seems like rural/remote/island communities have the most potential to gain from microgrid setups, while the benefits/challenges that come with them are different when compared with building microgrids within the larger established grid in the United States. I'm sure there's a fair amount of lessons learned that can be applied across these two areas, though it won't always be a one-for-one transfer

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