By Peter Asmus, Principal Research Analyst, Navigant Research
Microgrids have a long history dating back to Thomas Edison’s first power plant, constructed in 1882. By 1886, Edison’s firm had installed 58 microgrids and some 500 off-grid lighting plants in the United States, Russia, Chile, and Australia, all centered on distributed fossil fuel steam turbines.
These early microgrids, which often served a mix of commercial and residential customers, were not a sustainable business opportunity. Over the course of the early 20th century, isolated microgrids offered by competing utilities gave way to a monopoly system featuring utility-owned centralized power plants. Today, some argue we are now heading back to a system more dependent upon microgrids that can aggregate and optimize diverse types of distributed generation (DG) and other resources, and can island themselves off from the larger grid during times of a power outage.
Over the past 5 years, the vast majority of microgrids coming online, whether grid-connected or off-grid, have been pilot projects or R&D experiments. Now the industry is moving into the next phase of project development, focusing on how to develop projects on fully commercial terms. The most recent report on microgrids published by Navigant Research, “Microgrid Enabling Technologies”, focuses on what makes microgrids tick. In other words, what are the top three key microgrid enabling technologies (MET) now mature enough to generate substantial vendor revenues?
The heart of the vast majority of microgrids is some form of DG. Different forms of fossil fuel combustion served as the basis for most pioneer energy systems. Legacy fossil generators often serve as the backbone of a microgrid, whether grid-tied or remote. The inherent base-load nature of such resources, and their attractive economics (especially when deployed as CHP units), make this DG option an ideal fit for microgrids.
The most disruptive of all DG technologies is solar PV, which is the prime technology behind the debate over the future viability of traditional utility business models. Residential solar PV installations have risen sharply in the last few years. Although small wind is likely to remain a niche technology for the foreseeable future, midsized and large-scale wind turbines are also being deployed with microgrids, especially in remote applications. Wind is most often deployed in hybridized systems, to work in concert with another energy source, such as solar PV, diesel generation, or battery backup power.
Conceptually, the inverter is the gateway between the DG asset and the grid, though the grid in question can be either the utility grid as a whole or an islanded microgrid. Modern-day inverters can be considered one part power electronics and one part networking and communications technology. They have the potential to empower homeowners and utilities alike to realize the full benefits of distributed and centralized renewable energy systems.
In sum, inverters play a significant role in microgrids due to their ability to integrate in distributed electricity resources and end-use power applications, as well as safely island grid-tied microgrids from the larger distribution grid. Without the recent advances in inverter technology, there wouldn’t be a grid-tied microgrid market today.
Advanced energy storage
Storage applications differ from other DER options (such as DG) in key respects: They do not have a typical operating profile or load shape that can be applied prospectively; and they are limited energy resources with a narrow band of dispatch and operation. However, they can also participate in multiple wholesale markets and provide several benefits simultaneously. These characteristics, plus the difficulty in monetizing multiple stakeholder benefits, often act as barriers to the widespread deployment of energy storage systems, whose multifunctional characteristics also complicate rules for ownership and operation among various stakeholders.
The services that energy storage delivers to microgrids are not dissimilar to those services that storage delivers to the traditional grid: resource optimization (solar PV, wind, fuel cells), resource integration (solar PV, wind), stability (frequency, voltage), and load management. Understanding the relative importance of each service to a microgrid customer is critical to building a compelling business case for different energy storage options, particularly in the face of cheaper alternatives, such as default technologies like lead-acid batteries or diesel generators.
Overall vendor revenue snapshot
Considering that without DG the vast majority of microgrids would not exist, DG assets are the foundation of any such network. They represent the single most lucrative MET segment, whether you look at fossil or renewable energy resources.
MET vendor revenue market share by technology: 2014 (Source: Navigant Research)
While fossil DG capacity exceeds that of renewable capacity deployed within microgrids in 2014, the much higher capital cost attached to solar PV, wind, hydroelectric, and biomass translates into much higher revenue per megawatt. Fossil fuel DG (including fuel cells) represents 58% of total DG capacity in 2014, and renewables capture 42% of the DG market. On a revenue basis, however, renewables capture 23% of total vendor revenue in 2014, compared to only 9% for fossil fuel DG (diesel and natural gas generators plus fuel cells). Not surprisingly, the largest category of forecast MET after renewables is energy storage, with 12% market share. Notably, the largest category of revenue in 2014 is technologies not included in the forecast, as the majority of microgrids being deployed today incorporate significant amounts of legacy DG (particularly diesel generators). As a result, large investments into distribution hardware (along with smart metering, distribution automation, switching) represent a large piece of the overall investment pie for these retrofit microgrid projects.
By 2023, interestingly enough, it is advanced energy storage technologies that lead all single MET categories in terms of vendor revenues, with annual revenue vendor revenues exceeding $3.5 billion. Yet the software required to optimize microgrids doubles its market share of the revenue pie, increasing from 5% to 10% in 2023, reflecting an increased interest in economic exchanges between microgrids and host distribution utilities, and a trend expected to last well into the coming decades.
Peter Asmus is a Principal Research Analyst contributing to Pike Research’s Smart Energy and Smart Utilities practices, with a focus on renewable energy sources such as wind power, solar energy and marine hydrokinetics as well as emerging energy distribution, integration and optimization smart grid models such as microgrids and virtual power plants. Asmus has over 25 years of experience in energy and environmental markets, as an analyst, writer, and consultant.