How to Determine Your Microgrid Business Model

In our first installment of the microgrid blog series, we explored the benefits and types of microgrid projects being built in the U.S. today. In this week’s article, we analyze some of the underlying economic principles that determine possible business models for your microgrid project and offer examples of operating projects around the U.S.*

Defining your microgrid project’s business model is the process
through which you identify the economic benefits and underlying financial
structure of your project. This should justify the investment you are making as
well as define any ancillary benefits, such as resiliency, that might be more
difficult to monetize or quantify. This process is especially important if you
are not a utility who might be able to rate-base costs and you need to show
financial metrics for your investment with a higher level of certainty.

From Resiliency to
Revenues

Resiliency has been a key motivating factor for microgrid projects to date — and microgrids have delivered on this promise. A notable example is the microgrid at Princeton University, a gas-fueled combined heat and power (CHP) plant supplemented by a solar farm, which provided the university critical resiliency during Hurricane Sandy. Interestingly, “the initial motivation for the project was to reduce lifecycle costs”. Let’s dig deeper into this aspect.

Often, resiliency is a benefit that cannot easily be monetized
by the owner of the project. Additionally, even if you can accurately determine
the cost your business incurs due to outage events, the more unpredictable
these events are in their occurrence and duration, the more difficult it is to justify
a business case based solely on avoided outage costs. On the other hand, if you
can project dependable revenue streams or cost savings that are directly
monetizable and relatively more certain — for example, reduced demand charges
— your business case gets stronger. 

A great example of a microgrid built on multiple benefits is
offered by the Strattford Hill solar + storage project in
Vermont, where the
utility Green Mountain Power (GMP), owner of the system, is able to:

  1. Provide
    backup power to a public emergency shelter.
  2. Better
    integrate solar PV in an area of high solar penetration, by reducing line
    congestion via batteries.
  3. Provide
    meaningful cost savings.

The project’s main cost savings come from a reduction of
capacity and transmission charges. This cost-saving strategy allows GMP to reduce
its demand during peak demand and peak transmission hours when those charges
are calculated.

This particular business model will still require the ability to
predict those peaks correctly. The key is that the projected cost savings and
revenues are sufficient to justify the project from an economic point of view.
Additionally, this project is able to provide resiliency to a public emergency
shelter as well, providing an important community benefit. Building a business
model for the public emergency shelter on a stand-alone basis would be much
harder, as in this example such resiliency is more difficult to quantify and is
not monetizable by GMP.  

The GMP example includes another revenue stream that is
currently utilized — frequency regulation — and others that could also be
available: demand response and energy arbitrage. The optimal business model
determines those that are more valuable and more easily achieved, while
optimizing trade-offs.

Based on the assumptions made to project these cost savings and
revenues, the payback for the GMP project is expected to be reached in nine
years without taking into account grant funds that the project has received.

Neighborhood Microgrids: The Next
Generation

A growing number of microgrids are now being built to power local neighborhoods, sometimes with a large community or institutional beneficiary attached to the project.

Photo Credit: Alabama News Center/Laurey Glenn

A microgrid is powering the “smart neighborhood” at Reynolds Landing, Alabama. In this community, 62 homes, all featuring energy-efficient technologies, will be an “R&D platform for transactive controls and market experiments” for Alabama Power. The data will be analyzed to study how residential homes and the utility can interact to help each other achieve mutual benefits.

Billed as the first microgrid project in the Southeast to support an entire residential community, the Reynolds Landing microgrid includes 3 acres of solar fields, battery backup and a natural gas-powered generator. Alabama Power will investigate ways to maximize energy efficiency and cost savings for its customers, while keeping their desired level of comfort in their homes. The utility will also use “neighborhood flexibility” to reduce peak demand. Local generation and resiliency will be other important benefits. If the economic benefits for the customer and the utility justify their respective investments, this could lead to the business model of the future in the way local communities are powered.

While these more complex business models are being evaluated, we can look at other examples where sustainable communities are already well-established: The Mueller community in Austin has one of the highest concentration of both rooftop solar panels and electric vehicles in the country and features multiple sustainable elements, including a gas turbine microgrid that provides resiliency to the nearby Dell Children’s Medical Center.

Third-Party Financing for Microgrid
Projects

According to Wood Mackenzie, more than half of all
2018 U.S. microgrid projects were third-party owned.
Under this business model, a customer can buy the typical services offered by a
microgrid, like resiliency, under a long-term contract with a third-party
entity which owns and operates the project.

The
availability of this financing option is enabling a broader spectrum of private
and public entities to access the benefits of microgrids without incurring the
capital expenditure.

The public-private partnership between Montgomery County, Md, Duke
Energy Renewables and Schneider Electric, illustrates the advantage of the
third-party model: The county enjoys more predictable energy costs coupled with
resiliency under a 25-year PPA with Duke, who is the owner of the
microgrids at the Public Safety Headquarters in Gaithersburg and correctional
facility in Boyds.

As solar +
storage microgrids are becoming a more viable solution to reduce demand
charges, third-party financing could help more organizations benefit and
increase their penetration. We have to mention here that despite their growth,
the Wood Mackenzie report does not see solar + storage microgrids overtaking
fossil-based microgrids over the next 5 years.

Microgrid business models have come a long way. The original resiliency benefit is now complemented and reinforced by potential revenue streams and cost-savings benefits, most importantly reduction of demand charges. As these business models are fine-tuned and more projects are built, costs should come down and the virtual cycle of broader adoption should follow in the not too distant future – enabling each of us to benefit from more resilient, reliable, cleaner and less expensive electricity.

*Today we will focus solely on some existing examples in selected U.S. states, without addressing the legal and regulatory aspects that might preclude them being replicated in other U.S. states (e.g. legality of third-party PPAs), or might affect their economic profile in the long-term (regulatory changes due to FERC order 841).

By Giuseppe Brizi

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