Microgrids: how are business models evolving?

Microgrid business models are moving along a continuum, from third-party projects to utility-initiated projects.

Microgrids are being deployed increasingly in the changing energy landscape, not only in remote islands or at facilities such as campuses, but as a component of the modern grid to increase resiliency and to integrate a growing share of renewables into the generation mix.

In its latest biannual tracker, Navigant Research identified 1,681 microgrid projects totalling 16,553MW in 122 countries across the globe as of November 2016.

Indicative of the extent of growth, 126 new projects totalling 772MW across 39 countries were entered in this latest release.

The vast majority of these projects are in North America and Asia Pacific, with 7,124MW (43%) and 6,454MW (39%) of capacity respectively.

These two regions also accounted for 95% of the new capacity. Europe, a distant third with about 1,820MW (11%) of microgrids, added a mere 3.8MW of new capacity.

Notably also, while the different use cases for microgrid installations are multiplying, most are built to increase reliability and resiliency.

Microgrid business models

The primary drivers of this microgrid development are three-fold: the growth in the number and extent of extreme weather events; the falling cost of solar and battery storage technologies; and advances in microgrid control technology.

As a consequence, the microgrid is becoming a building block to the central grid, whether it is constructed as an element within the central grid or outside it with the potential for future integration.

According to a new study from the EPRI (Electric Power Research Institute) and the Smart Electric Power Alliance (SEPA), there are three basic business models underlying this growth – third party, utility and hybrid.

Until recently, a large portion of microgrids has been third-party installations serving a single customer.

Primarily due to state-level policies and technological advances, development of utility owned microgrids has started. Alongside these are now emerging the hybrid ‘unbundled’ model based on public-private partnerships, which could offer more flexibility and opportunities for collaboration.

Microgrid business models

“What we are seeing is a proliferation of microgrids designed for specific operational, regulatory and financial landscapes,” says Ryan Edge, SEPA programme manager and a co-author of the report.

“Our study of the different microgrid business models is aimed at supporting and expanding this diversity – and the increasing integration of distributed resources these systems can make possible.”

Microgrid challenges

Commenting on the barriers and challenges of microgrids, the report states that while the technology and equipment necessary for creating microgrids are available today, off-the-shelf commercial solutions are rare.

While individual technologies are not exclusive to any one installation, microgrids are customised to purpose and location, thus the details of their design and construction vary significantly.

In order to unlock the full potential of microgrids, a number of technical, economic and regulatory issues must be addressed.

For example, on the technical front, considerable challenges exist when toggling a microgrid between grid-connected and islanded modes.

Without a finely calibrated synchronisation process, grid reconnection could damage generators and loads within the microgrid and in surrounding systems.

Assigning value to microgrids – and monetising a project’s potential value streams – is complicated by the tangle of economic and industry factors involved. Clarity on price signals, rate structures and regulations is needed.

Current technical standards offer guidance for microgrid development, but a more detailed and nuanced set of standards is needed to help ensure interoperable designs, communication and testing practices.

In conclusion, the report states that microgrids can be justified across a wide variety of grid and customer use cases. And since no two markets or utilities are alike, they will continue to proliferate based on unique served loads, targeted drivers and deployed technologies.