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Microgrids and the Future of Energy


by Bill Shireman

Today’s energy markets are undergoing a transformation, moving from a top-down monopoly system dominated by large-scale fossil and nuclear power plants sending power one way to passive consumers to a dynamic, bi-directional network increasingly dependent upon distributed resources featuring an increasing diversity of technology, fuels and ownership.

One of the key enabling technology platforms that will be necessary if this new distributed energy future is something called a “microgrid.” When Thomas Edison helped birth today’s electric utility industry, his original vision was a series of microgrids, serving customers from on-site power generation. Over time, however, a “bigger is better” mentality drove the market to monopoly structures capturing economies of scale.

Today, huge declines in the cost of modular technologies such as rooftop solar photovoltaics (PV) is challenging the status quo, requiring new forms of innovation in hardware and software – and new business models to allow corporations seeking an edge in the pursuit of sustainability.

What is a microgrid?

Here is, in essence, the federal Department of Energy’s definition: “A microgrid is a group of interconnected customer loads and distributed energy resources (DER) within clearly defined electrical boundaries that acts as a single controllable entity that can connect and disconnect from the grid (known as “islanding”).

The key defining feature is the ability to island itself off from the larger power grid during times of a black-out, but this organizing structure also helps integrate distributed renewables into utility-scale resources.

Ironically enough, the term “microgrid” was originally applied to systems that optimized resources into a network NOT connected to any utility grid. It is this latter business model and opportunity that the United Nations has now identified as the key pathway to providing universal access to energy for the developing world.

What follows are 10 key trends with strong implications for any corporate entity seeking to understand how this new wave of deregulation and innovation will impact their triple bottom line.



The International Energy Agency (IEA) estimates that the annual cost of achieving universal energy access is approximately $48 billion. Under a base case scenario, IEA estimate the gap between expected costs and available (primarily public sector) funding at $34 billion annually. This majority of this latter figure represents household level lights and cell phone chargers. However, more than 10% of this total represents vendor revenues in the remote microgrid space, if private investment, policy reforms and technology advances can be orchestrated to meet market demand. The microgrid would enable a radically different economic development path for Africa and other developing regions such as India, South America and parts of the Middle East, and create new business opportunities for companies like Unilever, Nestle, and P&G to meet basic consumer needs at the “bottom of the pyramid” (the world’s poorest billion people. The analogy is the cell phone, as developing world nations skip land lines and leapfrog to the newest technology. A similar argument can be made for microgrids displacing any investments in centralized nuclear or coal plants.



While the U.N., World Bank and NGO institutions such as the Rockefeller Foundation and Clinton Climate Initiative are focused on village electrification via remote microgrids, a parallel effort is being undertaken by the private sector. Many extractive industries also operate off-grid in the developing world. Though historically targets of social and environmental activists, these corporations – among them Chevron and other oil/natural gas companies and gold and metal mines – are investigating incorporation of new technologies to reduce carbon footprints. Declining costs of solar PV, and the rising cost of diesel fuel – the latter the default on-site option for these remote operations – means that these corporations can finally make an attractive value proposition for going green. The challenge is incorporating new software networking technologies to enable an increasing diversity of devices to “talk to each other” and optimize performance. A key business model for this microgrid segment is known as A-B-C: A is for anchor, a large load that banks will finance (a mine or perhaps a cell phone tower); B is for business, the network extends out from the anchor load to surrounding smaller scale enterprises; C is for community, as the network then finally extends out to the general population.



A long list of large vendors is focused on both the hardware and software solution set for microgrids: General Electric, ABB, Siemens, Alstom Grid, Lockheed Martin, Eaton, Honeywell, Johnson Controls and Boeing, to name a few. These companies see microgrids are a natural evolution of the smart grid, and are currently seeking partnerships with smaller specialists in order to round out their offerings. ABB, for example, has purchased companies such as Powercorp of Australia, the world’s leading purveyor of diesel/wind remote microgrids, and Ventyx, an enterprise software company whose technology could operate fleets of microgrids from a single command center. There may never be a Microsoft or Intel of the microgrid world, but the fact that these powerful corporations are seeking to round out their microgrid offerings today speaks to the legs this market has in the coming decade. Key future challenges include open versus closed technology architectures. Ironically enough, it is the U.S. military that is pushing the hardest on this technology frontier, providing these large multi-nationals an opportunity to test out their offerings at three different scales.



While the entire electricity utility grid was designed to preclude microgrids, with standard engineering protocols disallowing the ability to “island,” growing numbers of utilities are now recognizing microgrids can also help them do their job better – especially as levels of customer-owned distributed generation increase over time. How? Microgrids help aggregate and optimize various forms of distributed energy resources (DER) so they become more visible and manageable for utilities. As the impacts of climate change, and resulting extreme weather, accelerate, microgrids also offer utilities a platform to increase energy security for vital emergency response facilities (police stations, hospitals, military operations, etc.). Among the handful of utilities that are moving forward with microgrid experiments are San Diego Gas & Electric, Sacramento Municipal Utility District, American Electric Power, Duke Energy and B.C. Hydro.



Though the environmental performance of different forms of electric utility structures varies immensely, it may come as a surprise that it is government-owned utilities that are leading in terms of current installed capacity with microgrid technologies when compared to their investor-owned counterparts. This is especially the case for utilities that serve indigenous peoples in regions of the world such as Canada, Alaska, South Africa and Australia. In these cases, off-grid systems are the only option, and these systems have to be remarkably robust to provide 24/7 power. While historically dominated by fossil fuels, these systems first turned to wind power, and are now increasingly incorporating solar PV into their distributed generation portfolios. Investor-owned utilities, which typically lead on energy technology innovation, have been plagued by safety and customer departing load concerns surrounding microgrids. Since they typically face a 3-year rate case regulatory model governed by state regulations, they cannot move as fast as their smaller, government-owned counterparts. They are still seeking a profit-making business model that can be justified during highly complex regulatory proceedings that may need to be revised with performance-based incentives rather than top-down regulatory edicts.



Microgrids can also serve as vehicles to reduce the need for polluting fossil fuel plants. The concept of demand response – real-time adjustment in electric loads to help spread out scarce electricity supplies during times of peak demand – is now a burgeoning market on the East Coast of the U.S. Rather than running expensive and polluting power plants just a few days (or even hours) per year, it is far more cost effective (and sustainable) to instead shrink consumption at the precise moments when power costs are at their highest. Increasingly, regulators are providing incentives for demand response. The largest market today is the U.S. due to the sheer amount of energy waste in the system, but Europe and even countries such as India are viewing this new approach to energy service delivery as a promising way to deal with wide swings in renewable energy supply. Instead of having to burn fossil fuels when the sun doesn’t shine or the wind doesn’t blow, consumption can be throttled back to fill gaps with new smart grid technologies.



Along with new technologies enabling timely demand shifting based on market pricing, a distributed energy future also rests on the premise that overall demand for energy shrinks across the board, round-the-clock. This is where the public sector plays a vital role. Government energy efficiency standards for buildings to reduce overall consumption from the grid to “zero” are one approach to prod the private sector to move in the right direction (often referred to as “net zero energy” buildings.) Sometimes special incentives for various energy savings technologies – such as LED lights – can help make these buildings more cost effective in the short-term, enabling longer-term sustainability. Appliance standards, pioneered in California in the 1970s for refrigerators, are now being widely deployed globally and help shrink energy consumption across devices such as computers and other household and commercial devices. A combination of better lights, passive solar energy for natural lighting and heating, on-site power generation and demand response are typically necessary to meet any net zero energy goal. Companies such as Philips are revising their off-grid LED lighting offerings, trying to figure out how large multi-nationals leverage their financing capabilities with local entrepreneurs typically focused on small-scale “pay as you go” business models, whereby customers with limited fiscal resources pay for energy incrementally over an extended period of time.



Along with microgrids, another new trend to accommodate this increasing diversity of DER deployed at points of energy consumption and/or production is the idea of “virtual power plants” or VPPS. While still composed of real assets, this term refers to the ability to stitch different kinds of resources , that also include plug-in hybrid vehicles and other forms of energy storage, into platforms that can buy and sell energy services with utilities or upstream to grid system operators. The primary difference between a microgrid and a VPP is that the former is a static set of resources that can disconnect from the larger grid if necessary to ensure reliability. The latter can expand and contract depending upon the needs of the market, but requires a certain level of embedded intelligence within the larger grid, and whose scope can reach out to an entire utility service territory, or the boundaries of an entire state or country. Thanks to the proliferation of DER, interest has grown in smart grid models that build from the bottom up, rather than from the top-down, and those that incorporate customers into solutions in a much more dynamic, bi-directional fashion. The VPP is the epitome of this kind of new thinking in energy markets, but is equally focused on utility and grid performance and the economics of customer energy costs.



In the U.S., the growth of rooftop solar PV is engendering a backlash among utilities, who worry about cost shifting from those with on-site power to those who still purchase all of their power from the incumbent system. As long as penetration levels of solar PV, small wind and other on-site customer owned generation was small, utilities did not have to worry about the cost or operational impacts of these resources. But as these sources start providing 10, 20 or, in some cases, 100% of customer demand, the existing system no longer works. While net metering is the dominant model used in the U.S. for power supplies operating behind the utility metering infrastructure, the preferred path in Europe has been the feed-in tariff, which provides extremely lucrative incentives for customers to install solar PV, which then sells into the wholesale (instead of retail) market, and is therefore visible to utility operations. Parts of Germany already receive all of their power from solar and wind in Germany, which has led to an effort to scale back incentives, and then instead create a new spot market for these customer-owned assets, where prices instead float depending upon real-time market conditions. Microgrids and VPPs offer a way out of this dilemma, since they can help resolve visibility issues by aggregating small dispersed resources into larger systems. They can also provide customers new value streams based on actual market conditions, such as islanding during times of emergency, providing benefits to both utility grid and customer, simultaneously.



The answer is no. The vast majority of microgrids will include both fossil fueled resources and renewable energy generation, along with energy storage, smart meters, smart switches and other devices. An ideal resource for a grid-connected microgrid is Combined Heat & Power (CHP) plants, which typically burn natural gas. Given today’s record low prices of natural gas, some microgrids, such as at the University of California-San Diego, can save approximately $4 million annually due to on-site combustion of natural gas. The beauty of the microgrid is that it can incorporate such a wide variety of resources into a single system. The goal is usually to reduce reliance upon diesel generation, currently one of the dirtiest and most expensive fuels. The microgrid is a platform that actually allows natural gas to complement, rather than compete with renewable energy. Recent efforts by the fossil fuel industry to dismantle existing renewable energy content laws in U.S. states speaks to a current dynamic that can run counter to long-term sustainability. Microgrids and other forms of aggregation and optimization of diverse DER offers an alternative path forward, one in which resources can be viewed from a systems theory perspective, and not trivialized or analyzed from a narrow silo perspective shaped by the whims of immediate political expediency.

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