New Microgrid Business Models - More Flexible Growth Potential

By offering microgrid as a service, its full potential will be unlocked and accelerated growth can expected.
Published: Fri 14 Feb 2014

Microgrids are playing an increasingly important part in distributed generation, grid reliability, and the green economy.

Reports from Navigant Research show that over 400 individual projects are currently in operation or under development worldwide. The global market is forecasted to pass US$40 billion in annual revenue by 2020.

Self-contained "microgrids" have certainly become a viable power option for consumers including datacenters, telecom stations and family homes.

However, while customer-owned microgrids are standard, the new business model, Microgrid-as-a-Service (MaaS), offers a flexible ownership structure and an opportunity to capitalize on the growing market. This is according to Lux Research which has published a report on this new business model.

The research shows that this model provides communities with an easy and cost-effective way to harness the full value of the microgrid. Communities won’t have to lay out large amounts of capital and they won’t need a huge staff count to operate it.

Lux Research utilized 15 different generation sources and cost/revenue inputs to build a bottom-up microgrid financial model giving the internal rate of return (IRR) and levelized cost of energy (LCOE) as metrics for given sector- and business-model-specific input assumptions.

While all models of microgrid development can be profitable, MaaS – where the installer owns and finances the microgrid on behalf of the subscribing customers or power purchasers – offers the best opportunity for flexible growth.

Because of the complex planning needed to deploy microgrids, innovative business models are being developed in response to the growing focus on local power quality and grid-wide performance, coupled with improved distribution generation and automation.

Lux Research analysts built and evaluated several models in order to assess opportunities for utilities, impact-investors and technology developers. This is what they found:

Customer-owned microgrids vs MaaS- Based on an industrial base case, with 10 MW of generation from solar and natural gas, as well as energy storage, the returns for the customer-owned microgrid and MaaS are exactly the same. However, with the customer-owned model, the customer has to carry all the financial risk. With the MaaS model, utilities and third-party financiers have the opportunity to strategically capture customers while diversifying from traditional power service opportunities.

Pay-as-you-go (PAYG) model shows promise in the developing world. Small-scale PAYG microgrid models can increase profitably while providing power to those who don’t have access to electricity. In India, Mera Gao Power runs profitable solar-driven microgrids, serving 25-30 paying customers per microgrid installation.

Electricity and gas prices impact microgrid economics. As the retail rate of electricity escalates, microgrids offer an easy investment as every 1 cent per kilowatt-hour increase in electricity rate translates into a 2% increase in internal rate of return. Similarly, gas price fluctuations can also drastically swing microgrid economics – a 50% price increase from US$4 to US$6/mm BTU can obliterate any economic benefits of a microgrid implementation.

Once the concept of “microgrid as a service” catches on and the cost of microgrids decreases, huge growth is expected-similar to that of solar. While customer-owned microgrids will be the dominant ownership model in the near future, the MaaS model will make flexible growth opportunities a reality.

Further Reading:

Lux Research-Microgrids: How Business Model Innovation Will Support New Development Opportunities.