March of the Microgrids

Microgrids have had a minor presence in the electric utility industry for years. Historically, implementation costs have kept microgrids from competing against the traditional electric grid, with its economy of scale. However, the growth of shale gas and the convergence of thermal, electric, and waste systems now are creating a compelling microgrid business case.

As microgrids become more prevalent, utilities stand to benefit in multiple ways—with rewards in operations, revenues, and customer service. The opportunity calls upon utilities to prepare for microgrids as partners on the system rather than competitive threats.

Defining the Microgrid

A microgrid is classically defined as a small electric utility than can be separated from the larger grid for stand-alone, computer-controlled, independent operation to locally take the place of the electric utility operations. Three main types of microgrids exist: single-parcel or single-owner campuses; multi-parcel or multi-owner campuses; and remote off-grid sites.

Various forms of single-parcel or single-owner institutional and military microgrids have been around for years, particularly in college, hospital and corporate campus settings. According to Pike Research, single-parcel campus microgrids will account for approximately 47 percent of the microgrid market over the next 10 years. These customers typically are primary metered customers, with self-owned utility infrastructure. Since the microgrid resides in a single parcel, a microgrid isn’t considered a public utility, and as a result it isn’t regulated by a public utility commission (PUC).

Unlike single-parcel microgrids, multi-parcel microgrids—such as industrial parks, developments and cities—require PUC regulation. Most states dictate that only a utility can install infrastructure that crosses property lines. Hence, only an existing utility, or a business entity willing to become a utility, can implement multi-parcel microgrids. This creates business opportunities for utilities, and those opportunities are expanding further as commercial developers are looking at combined microgrid energy systems.

Off-grid microgrids typically are found in military forward operating bases (i.e., in Afghanistan) and communities located away from the electrical grid, such as remote Alaska communities and isolated gas drilling camps.

The best microgrids of today blend distributed generation and dispatch and utility operations with a host of features that provide energy efficiency, demand response, situational awareness, and campus system optimization. Modern microgrid technologies also provide services like conservation voltage reduction (CVR) and volt-VAR optimization, along with other approaches to drive down generation cost, use less energy, enhance reliability and balance local energy supply and demand.

Portfolio Benefits

Microgrid systems that integrate electric, thermal and waste systems will drive microgrid implementations and create an energy system, not just an electrical system. This platform approach can provide greater customer, environmental, and economic value than the typical electric-only system.

Inexpensive natural gas makes onsite gas-fired generation—using either combined heat and power systems (CHP), micro-turbines, or fuel cells—less expensive than some utility-supplied power, particularly in areas with large spark spreads. Renewable energy sources, supplemented by energy storage and the ability to dispatch during peak electric rate times, also contribute to lower microgrid power costs. Additionally, advances in distributed generation technologies, such as PV and fuel cells, are driving down the costs of microgrid power.

CHP systems also provide thermal energy, setting up the potential for economical district heating systems. In greenfield developments, district heating provides a compelling economic incentive because capital costs associated with stand-alone heating, ventilation, and air conditioning (HVAC) units can be avoided. Typically, new building HVAC costs are approximately 5 percent to 8 percent of construction costs. Low on-site thermal cost combined with reduced or avoided HVAC equipment capital costs yield investment returns.

Additionally, advanced microgrid technologies can reduce energy consumption. Dynamic system control, such as CVR, demand response, and advanced meter feeds tied into situation awareness tools, can decrease energy requirements. Vehicle to grid (V2G) and energy storage integration can provide additional efficiencies. When coupled with traditional efficiency measures, such features can bring substantial energy savings. CVR alone can yield a 2 percent to 5 percent energy reduction without customer behavior changes.

In some applications, microgrids can reduce waste disposal costs. Many microgrid customers, such as hospital, industrial and military campuses, produce hazardous waste that can be converted to synthetic gas (syngas) via modular plasma systems. Syngas can be blended with natural gas to fuel CHPs. This reduces natural gas requirements and can generate renewable energy credits.

In addition to cheaper energy costs, natural gas inherently raises customers’ energy assurance. For years, commercial and industrial customers enhanced their electric reliability by using diesel back-up and uninterruptable power systems. Microgrids using natural gas to supply onsite generation, in combination with the existing electrical grid, comprise a consistently reliable energy supply. It’s exceptionally rare for the electrical grid and natural gas distribution systems to be down at the same time.

Finally, integrating renewable energy such as small wind, solar, and geothermal with energy storage can be accomplished with a gas-fired microgrid, providing a lower emissions footprint than the electric grid’s blended fuel portfolio—and potentially yielding renewable energy credits. When renewables are combined with energy efficiency and real-time system optimization, microgrids can begin to approach net zero emissions levels.

Microgrid Economics

Commercial microgrids can be funded via long-term financial agreements and project financing. Third-party developers can create a bundled power purchase agreement (PPA) and thermal purchase agreement (TPA), in which capital costs for the microgrid are converted to an ongoing operations and maintenance (O&M) cost basis. In an economically viable microgrid, PPAs and TPAs are structured so that the new overall electrical, thermal, and waste prices are lower than the existing purchased costs. The PPAs and TPAs not only yield lower energy prices, but fund capital expenses required to gain improved energy assurance and sustainability.

Tax grants, utility incentives, and renewable energy credits can provide economic benefit, in addition to the potential avoided HVAC capital costs from district heating.

Finally, many local counties view microgrids as cutting-edge energy efficiency technologies. Some campuses and commercial developments with proposed microgrids have received improved support, including accelerated permitting and sometimes mitigation of development criteria—for example, eliminating the requirement to build in-kind athletic fields in lieu of the large energy efficiency campus improvements.

The evolving business case for microgrids is compelling. A high-value energy solution that has higher reliability and energy assurance with lower O&M expenses makes widespread microgrid implementation a future reality.

Utility Benefits

So why should a utility support widespread microgrid implementation? The three main reasons involve benefits from system improvements, increased income or income retention, and better customer satisfaction—and regulatory relationships.

Microgrids offer strong system benefits, particularly in dense urban or suburban redevelopment areas. Often, redevelopments occur in areas where substation expansion or new substation construction is required. It’s becoming increasingly difficult to secure land for either substation expansion or duct bank rights of way. Integrating microgrids into system planning can eliminate, or at least postpone, substation expansion. Likewise, microgrids can relieve distribution and transmission expansion issues, such as conduit construction, re-conductoring, and system outages.

Microgrids also can relieve issues associated with serving loads in remote locations that lack infrastructure, or that would require building substantial distribution infrastructure in order to serve them. Depending upon a utility’s extension cost policies, customers might bear significant costs under the obligation to serve. Worker camps associated with the shale gas industry and rural communities can cause significant obligation-to-serve issues, including the cost and time needed to develop infrastructure. Microgrids can help a utility address these issues and remain part of the service solution.

Microgrids have the capability of becoming grid independent, or islanding. Islanding can help a utility increase reliability and manage peak load events. During normal conditions, the microgrid is connected to the utility; local microgrid generation feeds the utility grid, and microgrid operations fall under normal utility system control and procedures. When the microgrid islands, the local controller assumes control of the local supply and demand. Islanding would occur under two conditions—unanticipated (such as adverse weather) and controlled (demand management scenarios). If the local utility has an outage, the microgrid islands, which results in continued service for the microgrid tenants. Likewise, during high system-constraint times, the microgrid can be removed from the utility grid to provide local load relief. Customer reliability and system flexibility increases, customer energy costs decrease, and utility system expansions issues are minimized.

In addition to electric distribution, the thermal distribution component is required to fully realize the microgrid economic benefit. This provides the opportunity for an electric utility to potentially expand into the thermal distribution arena. In fact, in a multi-parcel microgrid implementation, PUC regulation might require a thermal utility presence. The thermal infrastructure can be rate-based, and a utility can increase its revenue by expanding into an adjacent utility space. Microgrid thermal systems are relatively compact, which can make entry into the thermal distribution area somewhat easy.

If a utility serves military bases, it might have access to an area-wide general services agreement or utility energy services contract. Such contracts allow the incumbent utility to supply energy and efficiency services via sole-source arrangements. Military microgrids are single parcel, so infrastructure on the military base doesn’t fall under PUC regulation. However, these military microgrids offer the same strong partnership opportunities with a microgrid system integrator as multi-parcel microgrids—potentially increasing utility income by doing business with the federal government.

If a utility is a combination gas and electric utility, the microgrid opportunity provides income expansion to both sides.

If a utility plays in the unregulated independent power producer market, the opportunity exists to own and operate local distributed generation assets, or hold the bundled PPAs and TPAs for the microgrid.

Finally, microgrids are a good economic development story. Lower cost, higher reliability, increased sustainability, and energy assurance can draw prospective commercial customers into a utility’s franchise area. And a utility with these advantages gains positive positioning with local politicians, the PUC, and the media.

Microgrids also can help states satisfy their renewable portfolio standards (RPS) because renewable energy generation sources are easier to incorporate in local microgrids.

And as noted earlier, microgrids provide a higher level of reliability and energy assurance than the overall electrical grid. The general public is keenly attuned to utility performance, and many utilities have taken substantial public relations hits due to major storms. Microgrids offer a platform to demonstrate alternative methods to improve reliability other than traditional vegetation management, undergrounding, and distribution automation.

Staying Relevant

By slowly and steadily engaging in microgrid development, utilities reduce the risk of being caught in a microgrid tidal wave, and minimize the potential risk of becoming irrelevant. The telecommunications and electric utility systems provide interesting comparisons. Take Alexander Graham Bell vs. Thomas Edison and Nikola Tesla. If Bell saw today’s current communication system, he would have a hard time recognizing the technology. Communication technology has far passed the old copper wire communication system. Cell phones, wide area networks, fiber optics, and smart phones have made Bell’s technology obsolete. In the process, the successors to Ma Bell have been greatly reduced in scope and size.

Now consider the electric system. Tesla and Edison would recognize most of the equipment, transformers, copper conductors, etc. But with the advent of advanced metering, computer controls, wireless communications, fuel cells, and other cutting-edge technology, the energy field is rapidly changing. Soon, the energy system will become largely unrecognizable to Edison and Tesla.

A successful business organization must adapt to remain relevant. Incorporating the upcoming microgrid wave into a utility business model might be a viable method to minimize potential irrelevance, expand revenue, and increase customer satisfaction.

Potential adaptation strategies include partnering with microgrid system integrators and developers, rather than resisting them. A utility could allow system integrators to provide the microgrid platform, while owning the electrical components of the microgrid, since it will require traditional electric distribution infrastructure. As more microgrids are implemented across the United States, commercial developers of multi-parcel industrial parks increasingly will consider designing microgrids into their projects. Utilities are well positioned to enable the upcoming customer-driven request for multi-parcel microgrid developments. In such scenarios, utilities can put the infrastructure into the rate base, keep the microgrid customer on its system, expand the customer base, protect the utility franchise, and improve customer satisfaction.

A successful utility could both minimize the risk of irrelevance and tap the benefits of microgrid development.