Community Microgrids – Can Capital Innovations Accelerate their Adoption?

Andy Zetlan, a consulting director at SGL Partners, is the guest author of this interesting article about community microgrids and financing options.

The microgrid era has begun worldwide, and investment is now creating showcase examples that enable evaluation of their economics and operational value. Most US investment has been around office campuses, including businesses and universities, and contribute to experiences with energy storage and other equipment that is continuing to progress in maturity. Financing is usually some level of public/private partnership, with funds being spent to ensure that energy for businesses, schools and other organizations is more resilient in the face of service interruptions caused by issues such as the devastating storms that have taken down utility infrastructure in recent years.

Microgrids are installed for different reasons, but in general, benefit users in the following ways:

  1. Provide reliable, continuous power supply
  2. Reduce power cost, which can remain relatively level over a long period of time (e.g. decades)
  3. Enhance use of renewable energy sources to help meet or exceed environmental objectives
  4. Provide high quality power for those processes that require it

Despite their newfound popularity, there are many impediments to microgrid deployments. In some regions, regulatory issues are prominent, with utilities and commissions working towards approaches that make sense to both, even if initial steps may run counter to current business models. Other impediments include the capital cost to transition and the level of knowledge and cost to operate. Yet others are limited by lack of adoption of more “transactive” rates, which are optional today, but are critical to enabling the growth of microgrids.

While communities have been showcased in some projects, many communities haven’t considered the use of microgrid technology. Yet cities and towns may have the most to gain. Installation of microgrids can ensure the availability of communications with emergency and other remote personnel, the consistent operation of police, fire and EMT services, and the ongoing operation of centers reserved for those impacted by lost utility infrastructure.

Communities also can apply microgrids to ensure the least disruption to other utility services like water and wastewater. While many have some backup power, microgrids could enable cities to utilize renewable energy instead of emergency fossil fuel generation in place today. This could also enable communities to address renewable energy requirements.

The major issue always on the table is financing – and I believe that microgrids are about to turn a corner on this issue soon. Typically, microgrids are financed through debt and grant financing, with both state and federal programs supporting their development. Going forward, we are seeing a new approach that may help move the microgrid business forward. Private investment is entering this market.

With private investment, the owner of the community or facility will no longer need finance and operate the microgrid with its related energy production and storage devices. Instead, the community or facility owner will contract with a firm to build and operate the microgrid. This new type of firm will fund the project in return for flat energy payments over many years at payment levels that are lower than today’s costs. The model is similar to that of an Independent Power Producer (IPP) who owns and operates a power plant, and receives payment for energy produced through contracts to supply. In the case of microgrids, the payment stream is usually the result of a single contract with the community, business, school, or other entity.

Contracts will include a Service Level Agreement (SLA) that outlines the minimum performance parameters for the microgrid, and any penalties for unsatisfactory performance. In essence, this new microgrid arrangement is similar to IPP contracts to provide power, except for the parameters that are expected from a microgrid.

Is this happening now? Not quite yet, but the opportunity is around the corner. In fact, Investor-owned utilities might want to be in the business of owning and operating microgrids, if regulatory hurdles can be overcome, but in general, the private sector is poised to move.

The opportunities to move critical energy demand onto microgrids may happen sooner than you think!

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