Reliability and resilience are often used to describe the benefits of distributed energy resources and microgrids. With the growing popularity of microgrids, the investment community, utilities, and large engineering companies are stepping into what they see as burgeoning business opportunities. The investment models have been adopted from the cogeneration and independent power industries and energy service companies which used them to become increasingly successful in the 1990s and 2000s.
“Microgrids-as-a-service” is the popular name used to identify third-party investment arrangements where the investors own, and possibly operate, microgrid projects. In turn, the end-use client makes quarterly or monthly payments to the owner for the power generated by the project, says Clark Wiedetz, director of microgrids at Siemens.
First, a definition of microgrids: Most people are familiar with the US Department of Energy’s bureaucratic definition. Here is how David Chiesa, senior director for global business development at S&C Electric Co., defined a microgrid in simple terms—as “a technology project with a combination of generation and loads which can separate from the main grid and continue to operate.”
RELIABILITY AND RESILIENCY
Two new microgrid projects demonstrate the concept of microgrids-as-a-service. Teaming up with Duke Energy Renewables and Schneider Electric, the city of Montgomery County, MD, built a microgrid system at its public safety headquarters and correctional facility without expending its own funds.
Structured as a public/private partnership, Duke Energy provided the funding and owns the project. An enhanced power purchase agreement served as the contract for the partnership. Schneider provided a control center that brings together the hardware, software, advanced controls, and electrical distribution needed to operate the energy resources.
The system included solar photovoltaics and clean-burning combined heat and power from natural gas generators. It produces 3.3 million kWh of solar energy and 7.4 million kWh of generated power. The microgrid replaced an aging building electric infrastructure. The goal was to improve resilience of county operations with the majority of energy locally produced and the ability to island for up to seven days without grid support.
The public safety headquarters has a new 800-kW CHP unit, and a 2-MW solar array. Integrated with these systems is an existing gas generator. The correctional facility has a new 220-kW CHP system and integrated existing diesel generator. There is also potential for a solar system installation on a parking canopy.
Schneider Electric also installed a microgrid at its corporate campus at Boston One in Andover, MD, in partnership with REC Solar and Duke Energy, which owns the project. The microgrid includes 448 kW of solar photovoltaics and a natural gas backup generator. The system is managed by the Schneider Electric Energy Control Center. Also included is Schneider Electric’s EcoStruxure Microgrid Adviser, a cloud-connected demand-side energy management control system that uses weather forecast and site data to optimize the contribution of resources to the overall site’s energy performance.
Siemens is partnering with Chicago-based Commonwealth Edison (ComEd) to build the 7-MW Bronzeville Community Microgrid on Chicago’s South Side. It will connect with the microgrid on the nearby campus of the Illinois Institute of Technology (IIT). Wiedetz, director of Microgrids at Siemens, says it is the first of its kind for a commercial, behind-the-meter project.
Siemens will be integrating its Microgrid Management System with IIT’s controller within the Bronzeville microgrid to provide a number of capabilities that the utility requires, Wiedetz says.
ComEd received two grants from the Department of Energy to develop the project. It will own the Bronzeville microgrid, and Siemens is selling the control system directly to the utility, says Wiedetz.
Siemens is investing in various-sized microgrids with other clients, coupled with long-term service agreements, according to Wiedetz. He adds that this is not the only financial business structure that Siemens offers.
There is no standard way to buy, procure, or own microgrids at this time and industry would like to see these investment opportunities be standardized, says Wiedetz. “Microgrids as a Service” is one of a number of different strategies and they depend on project size, location, and regulatory environment as some of the variables, he says.
Third-party investors or developers have less interest in small projects because acquisition costs are high enough that they are not economically worthwhile to them. Small venture capital companies will be interested in $5 million projects. The larger VCs want to see $50 million to $100 million projects but could build a portfolio of the $5 million projects, explains Wiedetz.
Under another model, project developers will take ownership of the microgrid project, according to Nimish Bhatnagar, a manager in the Energy Solutions Group at Acumen Engineered Solutions International (AESI), an engineering and management consulting firm. The developer will sign a contract with the customer for a fixed term—say 10 or 20 years—and a fixed price, with or without an annual price escalator. At the end of the contract the developer could renegotiate the contract, transfer ownership to the customer, or demolish the plant, says Bhatnagar.
The project developer or EPC partner will find particularly attractive an independent O&M contract if the customer has limited facility resources for operating and maintaining the microgrid especially if they do not want to invest capital or human resources toward operating the plant, says Bhatnagar. He says investors are probably not interested in taking on ownership in the beginning, but later they might discuss the possibility with the microgrid host/customer or developer.
Most of the time, the operations and maintenance of the microgrid will be covered in the contract and will be the responsibility of the project developer. Another option might be for the customer to sign an independent O&M contract with a service provider, such as an electrical contractor.
On the other hand, customers may want to own the microgrid being built on their property or they may ask for another entity like GE to own it, says Matthew Nicholls, Managing Director for GE Distributed Energy Solutions. The goal is to do this in partnership with the utility where reliability is important, says Nicholls. As increasing numbers of distributed resources, including microgrids, connect to the grid, utilities benefit from their visibility. There is emerging support to capitalize on the ability of microgrids to provide ancillary services which further benefits the project economics, says Nicholls.
Chiesa, with S&C Electric, describes how his company joins a developer and investor with funding to invest in and own microgrids.
A developer such as Helios, Lodestar Energy, Urban Green Technologies, or Origis will look for ideas from people who control a piece of land, with access to natural gas, and a customer willing to buy power. The developer will then look for a company which can build the microgrid and that company might be S&C Electric.
Chiesa says the developer would then typically contract with S&C Electric to develop a project cost estimate. The developer finds the financing, takes on the debt/equity for the project, and pays a fee to S&C which designs, engineers, and builds the microgrid. The developer arranges a power purchase agreement with the customer to sell power. Lastly, the developer needs an interconnection agreement with the local utility. The project is then built. Once complete, the investor pays off the developer, obtains ownership of the microgrid, and receives payments from the customer for the sale of the power produced by the microgrid.
A variation on this model might involve a lease of an asset. The consulting firm/developer may talk to a major manufacturer which burns a lot of electricity and tells that company, “I will provide 25% of your usage if, in exchange, you pay me a leasing fee.” Another possibility, says Chiesa, is the manufacturer might choose to finance the project itself as Walmart, Google, and Amazon have chosen to do. But that type of project would not fit into a microgrid-as-a-service model.
HOW THE ECONOMICS WORK
The economics of projects are linked to their local electricity rates, scale, customer priorities for generation and reliability, and available value streams including subsidies which, along with regulatory support, are enablers, says Nicholls, with GE Grid Services.
Nicholls says GE has found that economics vary globally and across the country with the projects it has evaluated and built. Subsidies and stable contracts remain important elements everywhere.
With industrial hosts on single sites, savings can be substantial with either microgrids or distributed energy. Decreasing emissions, reducing costs, and improving reliability are the major priorities with hosts.
Reliability is critical and one of the drivers. A solid operations and maintenance schedule may be required by an investor. GE has a long history of providing operations and maintenance services to large generation projects and have partners to assist customers who own their microgrids.
“The only other point I would make,” says Nicholls, is that the economics and quality of solutions are moving quickly, leading to increased capabilities and lower costs for storage and digital tools. “An example of an improvement is the emerging capability to utilize electric vehicles as grid assets, using dynamic charging or even vehicle-to-grid,” he adds.
The dynamics of costs coming down so fast and many technologies advancing equally fast makes this work exciting and will create value for more customers as both economics and performance continue to improve, Nicholls concludes.
Bhatnagar, with AESI, says there are primarily three ways a microgrid owner will see savings: first, decreased electricity use and cost reduction through reduced or eliminated demand charges; second, improved reliability and resiliency if the owner has been having issues with unreliable utility power, or weather events cutting utility power; and three, meeting sustainability goals if they are universities or hospitals with established goals to reduce GHG emissions. He added that most large universities publish reports on their environmental impacts.
Regional differences do influence financing, says Bhatnagar. Utilities have different programs supporting distributed resources, including microgrids. For example, utilities may have opportunities for net metering which encourage customers with microgrids to sell power back to the grid.
Project developers and solution providers are also discussing the idea of virtual power purchase agreements (VPPAs), says Bhatnagar. This type of PPA would allow a facility to help build a renewable energy project at a location remote to their facility to take advantage of renewable energy credits, as well as to potentially earn additional revenue to fund a microgrid project at their facility.
Potential microgrid owners can look to federal incentives including investment tax credits (ITCs), bonus depreciation, and the Modified Accelerated Cost Recovery System (MACRS), where depreciation is taken in the first year. Nonprofit public facilities or institutions will probably not be able to directly use these incentives, and project developers and investors who can use them may choose to pass the savings of these incentives on to the customer as part of the financing contract.
Chiesa, with S&C Electric, says a microgrid’s generation efficiency must be taken into account when planning its components. Solar generation will produce 30–35% of the total need, no matter the size of the plant. Wind generation has an efficiency of about 45%, according to Chiesa. Thus, the microgrid will produce a maximum of 80% of the power needed to operate. To bridge the gap with another 20%, another source is needed, such as energy storage, natural gas, or a utility connection, which is the most affordable of the options.
If natural gas is the only source of generation, it pays for the peak load once. Buying power from the utility, the customer only pays for the power he or she consumes. If the goal is to develop a 100% renewable platform and solar is the base generation, the project will have to pay for peak capacity at least twice, assuming the microgrid also has storage. Given that, Chiesa says this is what makes the business cases hard to “pencil out” for today’s microgrids.
“When I evaluate a microgrid project,” explains Chiesa, he has to consider the business case even though he is not the developer. “I have to understand the customer’s total load, both nominal and peak, the load profile, and the seasonal cycle. Based on that, I decide if a financier would provide funding for the project. If I don’t think they will, we don’t continue to pursue the project.”
RISKS AND REWARDS
What are the potential financial risk factors, Chiesa asks? Is the power purchase agreement viable? Have the developer and the contractor worked together before? A good working relationship is essential because the entire venture relies on the contractor—S&C—to do a good job building the project. Another factor is perceived risk. The investor will likely base its interest rate on the risk it perceives.
Technology risk lasts the lifetime of a project and is accounted for in the power purchase contract. GE’s Nicholls says it has visibility to new technology and can analyze technology risk, for example with energy storage, through its research facilities.
Rewards that the customer or host of a microgrid can look forward to are reliability, energy savings, and reduced emissions. If the project is evaluated and built well, the risks are limited, says Nicholls. Customers are adopting electric vehicles and microgrid projects can bolster the local power system to support EV charging infrastructure and energy management.
Some distribution systems have constrained nodes, and microgrid or distributed energy projects can help to enable local economic development in partnership with utilities by reducing the constraint on the distribution system.
Financial risks for the investor include the credit risk of the host and potential risk of equipment failures, says Wiedetz, with Siemens. Working with Siemens helps these investors mitigate one of those key risks. There is also regulatory risk which can cause delays while waiting for contract acceptance. These risks need to be addressed in the contract and either the end-user or investor will take them on. Lastly, changes in utility tariffs may also be a risk. As an example, tariff changes can impact demand charges and thus impact future revenues.
Bhatnagar, with AESI, agrees that the risks involved in financing and building a microgrid for all stakeholders include changes in utility rate structures and changes in technology—solar and storage, for example. “We don’t know what will happen in five years in terms of regulations, markets, or generation technology,” he says.
For investors and project developers, there is the added risk of ensuring that they have sufficient cushion in their cost assumptions—for example, EPC costs—to account for any surprises during design and construction phases of the project.
OPERATIONS AND MAINTENANCE
As mentioned earlier, a customer may recognize that he or she has limited facility resources for operating and maintaining the microgrid and does not want to invest capital or human resources toward operating the plant, says Bhatnagar. This is particularly attractive for the project developer or EPC partner who might want to sign an independent O&M contract.
Most of the time, the operations and maintenance of the microgrid will be covered in the contract and will be the responsibility of the project developer, Bhatnagar says. Another option might be for the customer to sign an independent O&M contract with a service provider, such as an electrical contractor.
Chiesa, with S&C, explains that once the microgrid is built, operations and maintenance responsibility will depend on who owns the equipment. The investor owner would likely contract out O&M responsibilities to another organization. If the project is leased, the customer owner may handle the O&M services themselves. Operating the microgrid is a bit different than the traditional grid and comes with its own complexities based on the microgrid.
If the microgrid is operating at all times, for example as a district energy plant, 365 days a year, seven days a week, operations support likely can be handled in-house. If the project owner is using the microgrid for grid optimization or grid services, operations would likely be contracted to an outside specialty company.
Whether a customer is looking for a traditional microgrid or a microgrid as
a service, picking an experienced partner is still the most important step in the development process, Chiesa concludes.
Energy and economic development go hand in hand and a microgrid’s partnership with another customer, especially if a customer is a city, can be the economic foundation for development.
Dr. Gregory Reed is heading up an ambitious initiative to design and build a “grid of microgrids” around the city of Pittsburgh to do just that. An engineer at the University of Pittsburgh, Reed is director of the Center for Energy and Energy Grid Institute at the university.
Reed’s institute is collaborating with the Mayor’s office for the City of Pittsburgh, Duquesne Light Company, and Peoples Gas to define neighborhood clusters that are vulnerable to flooding, ranging from downtown Pittsburgh to small areas further out. They are working on feasibility studies right now, Reed says. Resiliency, security, and sustainability are the major drivers that the microgrids should bring to the clusters, he says.
Reed says each microgrid being planned will be unique with tailored designs and storage integration. Discussions about private financing are in the early stages. Reed says Direct Energy and NRG, in private conversations with the city, have expressed interest in private investment, but he has seen nothing substantial at this point in time.
One of the neighborhoods Reed and his collaborators are looking at is the Hill District, a once thriving district that began an economic downturn in the 1960s and continues today.
Reed says they are studying how a microgrid could play a role in stabilizing the area and reducing electricity costs. He admits financing will be difficult.
The Energy Grid Institute, located in the Hill District, is building a new power lab that Reed says will have solar, wind, and gas generation. Funded by the university, it will serve as a utility distribution level microgrid. The power lab will develop new technologies which will be demonstrated in early stage applications.
The city has a lot of first-responder facilities and it is looking at consolidating them into one facility where a microgrid with rooftop solar and generation is under review.
Reed and his students have already designed a microgrid at PITT OHIO, a trucking facility about 13 miles northeast of the University of Pittsburgh. The microgrid is powered by 180 solar panels, a 38-foot-tall wind turbine, and battery storage, all integrated through a direct current (DC) architecture that supplies power for the lights, electric forklifts, computers, and battery chargers at the trucking facility. A 20-foot addition with a second turbine will be built on top of the existing wind turbine allowing the microgrid to store up to 70 kWh.
S&C Electric has developed three Microgrid Guidebooks which review the following: analyzing whether a microgrid is right for you, how to build a microgrid, and short- and long-term microgrid care.