What are the practical considerations for end-users who are interested in microgrids?

This is the fourth in a series of mini-articles on microgrids.  In previous articles, we provided technical definitions for microgrids, discussed basis microgrid value propositions, and identified the physical elements of a typical microgrid.   Today, we talk about some practical things to consider if you are an energy-user contemplating a microgrid.  

There are dozens of articles on the internet about microgrids, but only some of them detail how microgrids benefit customers or the responsibilities that go with a microgrid.  

I am reminded of an analogy I heard a number of years ago:  “… you do not buy a drill because you want a drill, you buy a drill because you want holes.” Microgrids are certainly "cool" but their purpose is to solve some kind of problem facing the customer.  As noted in a previous post, the outcomes desired from a microgrid installation are lower cost, higher reliability or to provide remote utility service.  Rarely, if ever, will the desired outcome be things like “more operational complexity,”  “more administrative tasks”, or “more regulation."  All of these are likely to come with owning, operating, or even contracting for a microgrid. It is an absolute necessity to define the desired outcome and understand the risks before committing to a microgrid. 

Here are some of the practical considerations:  

Will a microgrid save you money?  Generally the first step in considering a microgrid is to perform a preliminary feasibility analysis to determine if additional steps (contract with a developer, engage in engineering and permitting activities, etc.) are worthwhile. The preliminary analysis could be relatively simple if reliability is the primary driver and the negative consequences of an electricity outage (economic, business continuity, safety or health) are large; there simply isn't a choice. Under these circumstances, cost is secondary – it is the value of electricity that is the driver and that analysis is really driven by an evaluation of marginal risk mitigation relative to marginal cost of increasing the level of reliability.  For customers driven purely by the desire to save money or stabilize energy costs over a long period of time, this preliminary feasibility analysis must consider the relative economics and risk profiles on non-microgrid alternatives.  While the cost of microgrid components are coming down, it is still difficult for a microgrid to compete with the utility strictly on price (assuming equivalent reliability) – even in Hawaii.  In either case, a preliminary economic assessment is well worth the investment, because it can guide your later efforts towards implementation, or help you avoid unnecessary expenditures chasing a solution that is not feasible.   

Are there other ways to accomplish your objective?   If economics is the driver for the microgrid, there may be other steps that could be taken to lower energy cost without resorting to a full microgrid.  Have you taken full advantage of opportunities to increase energy efficiency in your facility?  Would a sub-metering system and energy monitoring portal allow you to proactively manage your energy use and cost and enable simple behavioral changes that save money?  Are there utility programs available (e.g. demand response, time-based rates, on-site renewable energy programs, community-based renewable programs, etc.) that will lower your energy spend with better payback on your investment?  If reliability is the driver, could you deploy a battery-based uninterruptible power supply (UPS) that allows you to perform an orderly shut down of your process until power from the grid is available again - instead of keeping your facility at full capabilities during a prolonged utility outage?  Could you relocate your servers to cloud-based systems?  The answers to these and similar questions will be different for each customer and will be driven by the business need.  Remember – you need “holes” not drills!.   

Should you “cut the wire” from utility?  As noted in a previous post on microgrids, “islanding” in the context of a microgrid refers to the ability of the microgrid to operate without being connected to the utility.  From a design perspective, this can be a temporary or permanent state.  In the temporary islanded state, the goal of the microgrid is to provide continuous service to critical loads for the duration of the utility outage, but return to an interconnected mode of operation when the emergency is over.  On the other hand, if the desire is to permanently “cut the wire” from the utility, the microgrid must be designed to meet the customer’s loads at the desired level of reliability with no utility support.  Achieving an equivalent level of reliability to that provided by the local utility will generally mean greater redundancy in generating sources, longer duration energy storage devices, and higher costs.

Do you have the operational expertise and desire to run a microgrid? Operating a microgrid entails obligations and responsibilities that come with being your own utility.  These obligations and responsibilities include, but are not limited to: staffing with competent and trained individuals to ensure continuous operations and regular communication with the utility when in an interconnected mode, maintaining a spare parts inventory, routine maintenance of microgrid components, administration of warranties and service contracts, insurance considerations, and implementable contingency plans for unexpected outages of any element of the microgrid system (i.e. how long will it take for service to be restored if the microgrid goes down?).  New “microgrids-as-a-service” business models are emerging where third parties develop, operate and even finance the microgrid on behalf of the customer.  This can remove some, but not all, of the risk and administrative burdens associated with operating a microgrid.  However, even if a third party is providing these services, you now have a third party with a hand in your critical operations. Therefore, proper due diligence (experience, capabilities, financial strength, etc) and negotiation of appropriate allocations of risk in the contracts are a must when considering a third-party microgrid-as-a-service provider.  

Is financing available for your microgrid?   Financing models for microgrids will emerge, but at the present time, it is generally difficult to obtain debt financing for a single stand-alone microgrid. This market is so new that lenders do not yet fully understand the asset class, there is little standardization in design, and deals are typically too small (“not enough zeros on the end of the number”) to attract larger financial players.  This translates into higher required returns for the provider of financing, and therefore higher cost for the customer.  Financial products will emerge as they have for commercial and residential solar PV markets (e.g. solar lease programs), but like those markets, the underwriting requirements will require customer credit worthiness and security requirements (including “turn off your power” clauses for non-payment).  Some microgrid-as-a-service providers will finance a microgrid against a long-term (e.g. > 5 years) power purchase agreement, but this model entails similar underwriting requirements, and it may be challenging from a regulatory perspective in some jurisdictions.

In closing, the considerations above are not meant to discourage microgrid development.  But based on the author's own experience in developing an early microgrid to serve a master-planned real estate development, some form of the considerations above will manifest themselves in almost every microgrid situation.  The key is to make sure you remain focused on your core business, clearly identify your energy related objectives, and understand your tolerance for risk.  

The forgoing discussion also assumes that a regulatory paradigm is in place that allows customers to take advantage of microgrids.  This is not necessarily the case in every jurisdiction.  In our next post on microgrids we will address some of the policy considerations related to microgrids. 

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