\n\tDefenders of the electric grid status quo have long argued that always-on baseload power generators like coal and nuclear plants are essential, and that variable renewables like wind and solar will remain bit players in power generation.<\/p>\n
\n\tThey argue this for several reasons: The grid isn\u2019t designed to accommodate them. They\u2019re too expensive. Or they aren\u2019t reliable enough, so they require 100% backup from conventional power plants at all times. An essay by former utility CEO Charles Bayless in the September 2010 issue<\/a> of the Edison Electric Institute\u2019s Electric Perspectives<\/em> magazine details the utility view of these issues nicely.<\/p>\n \n\tBut one by one, those arguments are being knocked down.<\/p>\n \n\tA recent data roundup<\/a> by renewable energy industry analyst Paul Gipe shows that variable renewables are meeting much larger percentages of grid power than previously thought possible in some European countries. Wind provided nearly 20 percent of Portugal\u2019s power and 30 percent of Denmark\u2019s in 2012. Wind and solar combined contributed more than 18 percent of Spain\u2019s power and 11 percent of Germany\u2019s in 2011. (More recent data shows that renewables now provide about 25 percent of Germany\u2019s total grid power, and as much as 50 percent of its peak power.) A\u00a0study by German engineers<\/a>\u00a0found that its grid can handle up to a 40 percent share of renewable power without needing much storage or baseload power for backup.<\/p>\n \n\tThe price argument is falling too, with various banks and researchers forecasting that solar will be cost-competitive<\/a> in much of the world by 2020.<\/p>\n \n\tNow the reliability and stability arguments, which were the main focus of Bayless\u2019 essay referenced above, may be about to lose their potency too, as large facilities and small communities start looking to microgrids to supply a level of service that utilities have been unable to provide.<\/p>\n \n\tA microgrid is simply an independent power grid that is able to balance generation and consumption within itself — just like the big grid does, only on a much smaller scale. It could be as small as an offshore oil rig, or as large as a military base or a small town. It might use storage to buffer renewable generation, or it might simply fire up a fuel-burning generator.<\/p>\n \n\tSome microgrids are replacing expensive and polluting fuels like diesel and kerosene in places that have never had access to reliable grid power, like Africa, India, Brazil, and Haiti. Others, like the ones<\/a> at Fort Bliss, Texas and the Food and Drug Administration\u2019s White Oak research facility in Maryland, are being built where grid power is available, but where the cost or risk of an outage is high enough to justify the expense of being able to \u201cisland\u201d from the main grid and be self-reliant.<\/p>\n \n\tSeveral university microgrids have served as critical disaster recovery havens<\/a>\u00a0in the aftermath of natural disasters, including a 13.4-megawatt system at New York University-Washington Square Park, a 3.6-megawatt system at Utica College in New York, a 1-megawatt system at Tohoku Fukushi University in Japan, and a 37-megawatt microgrid at Cornell University in Ithaca, New York. The Cornell system is powered by a dual-fuel combined heat and power (CHP) plant that can burn natural gas or diesel, plus a 1-megawatt hydropower generator and a small solar installation.<\/p>\n \n\tMicrogrids are big-ticket items, but for those who can afford them, they seem to be reasonable investments. The $71 million White Oak project is expected to save the FDA about $11 million a year<\/a>. The return on the roughly $60 million Cornell University project<\/a> [PDF] is expected to be \u201cconsistent with the long-term rate of return of the endowment and in the range of 8 percent to 10 percent.\u201d For a military base, of course, being self-reliant is \u201cpriceless.\u201d<\/a><\/p>\n \n\tDespite the new buzz about microgrids, the market is just getting started. Microgrid expert Peter Asmus of Pike Research has identified 405 projects<\/a> in the pipeline globally, and he expects deployment to rise<\/a> from $10 billion in 2013 to more than $40 billion annually by 2020.<\/p>\n \n\tIn addition to universities and military bases, islands are natural microgrid candidates because they\u2019re typically dependent on expensive liquid fuels to run their generators. At the recent Pathways to 100% Renewables Conference<\/a>, Asmus noted that as of 2011, solar is cheaper than diesel for any island, and mentioned two islands that are now pursuing the microgrid strategy. El Hierro, a Spanish Canary Island off the coast of Africa, has become the world’s first 100 percent renewable energy island by replacing its diesel generators with a microgrid powered by an 11.5-megawatt wind farm, 11.3 megawatts of pumped hydro storage, and solar PV and solar thermal systems. And Graciosa Island, off the coast of Portugal, expects to have a microgrid on-line by the end of 2013, with 65 percent of its supply provided by renewables.<\/p>\n \n\tA new threat, or a new business model?<\/strong><\/p>\n \n\tMicrogrids represent another aspect of a theme I have been exploring at Greentech Media: the transformation of utilities (see \u201cCan the Utility Industry Survive the Energy Transition?<\/a>\u201d and \u201cAdapt or Die?<\/a>\u201d). Like distributed generation, microgrids present both an opportunity and a threat to the way utilities do business.<\/p>\n \n\t\u201cWhile utilities have shown institutional biases against the entire concept of microgrids for decades, extreme weather events and the growing recognition of microgrids as potential sources of demand response resources are building engineering and cultural support for these systems in a variety of settings,\u201d Asmus said in April.<\/p>\n \n\tUtilities may be more friendly to what Asmus calls \u201cvirtual power plants\u201d (VPPs). VPPs may or may not have generation or storage capacity, so they cannot island, but they do have software to remotely and automatically dispatch and optimize generation, demand response, and storage in a single, secure web-connected system.<\/p>\n \n\tVPPs and microgrids could become valuable partners for utilities by relieving overstressed and congested points on the grid, reducing the need for building new generation and transmission capacity, and making it easier to manage voltages at grid extremities. Integrating VPPs, microgrids, and more renewable power into the grid requires more advanced grid management software, but it can squeeze a lot more utility out of both conventional and renewable generators, which is cost-efficient.<\/p>\n \n\tOn the other hand, if deployed at scale with storage capacity, microgrids could reduce the need for large amounts of baseload overcapacity sitting idle just in case it\u2019s suddenly needed. Instead of needing to suddenly ramp up 1,000 megawatts of power to compensate for an outage elsewhere in the grid, a network of microgrids could simultaneously reduce demand and export power to the grid in a distributed fashion, while maintaining the required frequency and voltage parameters.<\/p>\n \n\tIn other words, microgrids could meet both the reliability and stability criteria that Bayless argues can only be met by baseload generators. This would cut into the generation and the distribution revenue streams that are critical to the calcified utility business model, as well as the profit associated with constructing large capital projects.<\/p>\n \n\t\u201cWhen we propose a microgrid, we consider four business case scenarios,\u201d Steve Pullins, CEO of Tennessee-based Horizon Energy, a microgrid design and development company, told Fortnightly<\/em> magazine<\/a>. \u201cWe consider maximum savings, maximum renewables, grid independence, and maximum diversity. The difference in cost between the maximum savings and grid independence scenarios isn\u2019t very large.\u201d<\/p>\n \n\tWith the virtues of favorable economics and self-reliance at their backs, microgrids seem poised to gain market share and become a competitive threat that utilities can neither bury nor ignore. Pullins sees 24,000 sites in the United States as potential prospects, with perhaps 300 microgrids being built by the end of 2015.<\/p>\n \n\tBut utilities will have to consider carefully how best to address that threat. If they try to foist their stranded asset and network maintenance costs on a declining user base, it could prove counterproductive by pushing more consumers to consider microgrids.<\/p>\n \n\tAs Pullins observed, \u201cThis isn\u2019t microgrids challenging the regulatory model; it\u2019s customers challenging that model. Utilities shouldn\u2019t have misplaced aggression against microgrids.\u201d<\/p>\n \n\tInstead, utilities should actively encourage microgrid development and seek to integrate it into their business models as a low-cost way of ensuring reliability, grid stability, capacity, and energy. Instead of delivering as much power as possible at the lowest possible cost, they should refocus on delivering the service levels customers want, with appropriate dynamic pricing mechanisms.<\/p>\n \n\tUltimately, the transformation to distributed generation and grid management will require regulatory reform as well, so that groups of businesses and residents can create microgrids. In that, too, the utilities will need to be active and supportive participants.\u00a0<\/p>\n \n\t***<\/p>\n \n\tChris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books (<\/em>Profit from the Peak\u00a0and\u00a0<\/em>Investing in Renewable Energy) and hundreds of articles, and has been published by\u00a0<\/em>Scientific American, Slate,\u00a0the\u00a0<\/em>Harvard Business Review\u00a0blog,\u00a0<\/em>Financial Times\u00a0Alphaville,\u00a0<\/em>Quartz,\u00a0the <\/em>Economist\u00a0Intelligence Unit, and many other publications.<\/em><\/p>\n Tags<\/strong>: distributed generation<\/a>, microgrids<\/a>, utilities<\/a>, utility business models<\/a>, virtual power plants<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"