Investing in Resilience & Access: The Global Microgrid Energy Landscape
PV array located at Northern New Mexico Community College that will be utilized in our Resilient El Rito community microgrid project with Kit Carson Electric Cooperative. (Photo credit: Kit Carson Electric Cooperative)
Private investment capital at scale will be necessary to achieve our global energy goals and to avert catastrophic climate change, while also meeting the United Nations Sustainable Development Goals and achieving universal access to clean energy. Microgrids (or mini-grids, as they are known in the developing world) are one essential component of this energy transition.
According to the U.S. Department of Energy, “A microgrid is a network of distributed energy resources and loads that can disconnect and re-connect to the larger utility grid as a single entity, allowing the connected loads to be served during utility outages. Microgrids can also be found in remote locations where they may not be connected to a larger grid.”
These small-scale integrated energy systems are becoming an increasingly common feature of the renewable energy landscape. They offer a high degree of resilience to utility outages caused by extreme weather events, aging assets, or cyber- and physical attacks on grid infrastructure, by disconnecting (or “islanding”) from the bulk grid and operating autonomously; and they present an opportunity to move more aggressively to 100 percent renewable energy right now. They are also considered to represent as much as 40 percent of the solution to energy poverty challenges worldwide, affecting over 2 billion people with inadequate access.
Other Potential Benefits of Microgrids
Microgrids, when connected to the bulk power grid (“grid-tied”) can also reduce regular utility per-kilowatt hour charges, avoid “peak demand charges,” profit from “energy arbitrage” (i.e., export surplus energy to the grid when prices are high, recharge the microgrid’s energy storage system when prices are low), and offer upstream “grid services” (e.g., frequency regulation, voltage support, capacity reserves, demand flexibility) which can yield revenue under certain regulatory regimes. They can also reduce utility capital expenditures by deferring or avoiding transmission and distribution system upgrades (“non-wires alternatives”) to address capacity constraints; and they are also being used to reduce wildfire risks by allowing utilities to de-energize (or in some cases, completely eliminate) high-voltage lines that can cause a fire. By helping to address the energy access challenge in remote rural areas (primarily in Africa and South Asia), renewable microgrids can replace (or preempt) the use of small petrol generators while enabling improved small business, agriculture, health and education applications.
Types of Microgrids & Use Cases
In the industrialized world, several main categories of microgrids represent distinct technical, performance and financial factors:
- Military bases: the U.S. Department of Defense is working to ensure a very high degree of resilience at all installations
- Commercial & Industrial: Commercial and university campuses, manufacturing plants, and even retail operations are increasingly deploying microgrids to advance their emissions reductions, achieve operational economies and reduce financial losses due to utility outages
- Utility microgrids: Utilities are beginning to enter the business of providing resilient renewable microgrids to meet customer demand; and are also utilizing them to sustain power during “Public Safety Power Shutoffs” used to prevent wildfires and to defer costly infrastructure upgrades
- Community resilience: Communities are acting to ensure continuous performance of all critical facilities and services via microgrids, through either utility or third-party microgrid partnerships
- Energy Sovereignty: Tribal entities are beginning to deploy microgrids as one important solution to achieving true “energy sovereignty” in their electric service
- Remote: Remote microgrids serve extremely rural communities (as well as mining and industrial locations) that have no grid access, most frequently in Africa and Asia, Alaska communities and some in Latin America
- Residential: Finally, home solar + storage systems (especially when combined with integrated electric vehicles and chargers) can easily comprise a small-scale resilience microgrid
The U.S. Microgrid Investment Landscape
Third-party microgrid investment opportunities on a project basis are somewhat limited in the industrialized world. Many of the major electrical systems engineering companies offer “microgrid-as-a-service” propositions with no capital expense for the customer, based on a power purchase agreement; these include Schneider Electric, with investment from the Carlisle Group, in AlphaStruxure (for very large projects) and with Huck Capital (mid-size C&I projects); Siemens Industry; and S&C Electric. Another, Enchanted Rock, installs microgrids on retail commercial premises so as to utilize them under blue-sky (i.e., normal operating) conditions to deliver services to the grid. In some cases, utilities have been approved to “rate-base” the cost of a microgrid (i.e., pass the cost through to its entire customer base). Compass Energy Platform works with communities to develop resilience microgrids, leveraging their partnership with InfraRed Capital Partners and other project collaborators.
The investment opportunity is somewhat complicated by the fact that resilience remains the primary motivation for building a microgrid, but apart from commercial operations (which can accurately assess the operational cost of losing power), it is difficult to quantify and monetize the value of resilience as an element of ROI. That said, several credible efforts are underway to establish a uniform basis for calculating the value of resilience, and microgrids of all types are projected to experience significant growth in the near term, especially with extreme weather events and cyber- and physical terrorism threats to the grid and the urgency of decarbonization.
A recent National Renewable Energy Laboratory report cited estimates of the global microgrid market ranging from $23 billion to $39 billion, with double-digit annual growth expected.
There may well be opportunities for specialized third-party funds in this space as microgrids (and their business and finance models) evolve and accelerate. As a point of reference, the American Green Bank Consortium, launched by the Coalition for Green Capital, has reportedly considered microgrids as appropriate investment opportunities within its energy portfolio.
The Investment Landscape in Developing Economies
A strikingly different picture emerges in the developing economies, where energy access, affordability, and reliability are the main challenges and capital is severely constrained. As measured by the World Bank Multi-Tier Framework, approximately 25 percent of the world’s population (over 2 billion people) suffers from some form of energy poverty or lack of access. As one example, in its report “Mini Grids for Half a Billion People” (focused on microgrids for access in Africa), the World Bank estimates that universal access will require more than 217,000 minigrids by 2030, at a cost of $127 billion, providing 430 million people with first-time access ($105 billion) and 60 million people with improved access ($22 billion). India presents comparable challenges, and additional under-served populations exist throughout South Asia, Alaska (where there is no “main grid” and microgrids serve all communities), parts of rural North America including Native American communities, Latin America, and the Caribbean Islands (highly vulnerable to extreme weather). Affordable and reliable access to renewable energy (U.N. Sustainable Development Goal #7) is a prerequisite for economic, agricultural, and commercial development, known as “productive use of energy”; as well as health, education, and community development.
There must be continued innovation in technology, policy, regulations, and other factors in order to meet this need; but several hundred minigrids are already in operation, and a basic model exists. The main obstacle appears to be sufficient risk mitigation so as to enable commercial project-based debt financing to flow at scale, on the order of 10 to 100 times current levels. To date, the primary sources of investment funds have been concessionary (a mix of philanthropic grants, international aid, subsidized loan rates) and some equity capital in mini-grid development companies. The Microgrid Systems Laboratory is exploring the feasibility of a “green bank” focused on energy access in Africa, and welcomes inquiries.
Article by David Breecker, President, Microgrid Systems Laboratory. The Microgrid Systems Laboratory is a non-profit collaborative innovation lab, working to accelerate the transition to a more sustainable, resilient, and equitable energy system worldwide in the programmatic areas of research, innovation, demonstration, and education. MSL is the winner of the Silver Award in the Smart Grid pillar of the 2022 Energy Smart Communities Initiative Best Practices Awards Program, given by the Asia-Pacific Economic Cooperation (APEC).