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Microgrid Value Propositions

by Peter Lilienthal, Ph.D. on January 13, 2012

Microgrids are power systems that can operate autonomously using combinations of conventional generation technologies, such as diesel gensets and combined heat and power systems, renewable resources, other new generation technologies, such as micro-turbines and fuel cells, energy storage systems, and load management systems.  There are three distinct microgrid value propositions that are useful for segmenting their market: increasing reliability, reducing fuel consumption, and reducing emissions.

Microgrids for reliability

Microgrid Value Proposition Microgrids have 3 potential values – increased reliability, reduced emissions, or fuel savings.

Because most electric service outages are caused by disturbances in the electric distribution system the only way to avoid these outages is to locate electric generation and storage at the end user’s location.  Users with a need for high reliability have always had local backup systems.  These were typically battery-based uninterruptible power systems (UPS) for small loads and reciprocating generators powered by diesel, propane, or natural gas for larger loads.  Microgrids are a natural evolution that integrates these technologies with automated switchgear, load management, and renewable power systems.  This results in a cleaner and more efficient system that can operate for extended periods without fuel deliveries.

Microgrids for fuel savings

Although most energy systems have substantial economies of scale so that larger systems are more efficient than smaller systems, there are three factors that create an economic advantage for microgrids in certain applications.  1) Remote loads lack pipeline access to natural gas and are often too small take advantage of the economy of scale of large coal or nuclear generation facilities.  As a result, they rely on diesel and fuel oil for power generation, which makes hybrid renewable power systems very cost competitive. Over 5 million barrels of oil is consumed every day for power generation at a cost of $180 billion per year.   2) Solar photovoltaics are the fastest growing renewable power source and are just as cost effective in small applications as in large ones.  3) Finally, combined heat and power (CHP) systems can be very cost-effective, but only if the thermal energy can be used on-site.  A smaller CHP system can provide lower cost power than a larger power system that does not utilize its waste heat.

Microgrids for environmental benefits

Microgrids that use renewable power to reduce diesel consumption also reduce its environmental impacts.  More importantly, microgrids utilize load management and distributed storage to manage the variability of high penetrations of solar and wind power.  Currently, only remote grids are reaching very high penetrations of renewable power, but most governments have policy goals for renewable energy that will require new ways to manage its variability.  Microgrids isolate the larger grid from the variability of the renewable power sources.

Value propositions for specific microgrid market segments

Emergency Services

Hospitals, police stations, data centers, telecommunications facilities have always had backup power systems.  Simple diesel generators are adequate unless one of the following three conditions exist. Outages are so frequent that the operation and maintenance of the diesel generator becomes a problem. This is the case in developing countries, but not typically a problem in the developed world. Where organizations qualify for incentives for renewable energy or have sustainability goals hybrid renewable microgrids can be attractive.  The most compelling rationale for hybrid renewable microgrids for emergency services is the elimination of the need for fuel deliveries during a prolonged emergency.

Permanent Military Bases

Permanent military bases are a special case of an emergency service facility because the Department of Defense has established distinct goals for them to be able to operate autonomously for extended periods.  As federal facilities, they also have renewable mandates to meet.

Forward Operating Bases

Forward operating bases have the most compelling rationale for microgrids because fuel deliveries can represent an extreme logistical challenge that seriously limits their ability to fulfill their mission and jeopardizes the safety of the soldiers transporting the fuel.  The majority of the casualties in Iraq and Afghanistan have been associated with fuel convoys.  Without even considering the cost in lives and mission, effectiveness the simple economic cost of fuel delivery makes hybrid renewable microgrids extremely cost-effective.  They can also be an excellent contribution to community relations.

Commercial Facilities and Upper Income Households in Developing Countries

Most electric utility grids in developing countries are not reliable enough to meet the needs of commercial facilities and middle to upper income households.  Millions of small, polluting generators are operated every day throughout the developing world.  These generators operate frequently enough for hybrid renewable microgrids to be cost-effective based just on the reduced fuel and maintenance costs.

Village Power in Developing Countries

Over one and a half billion people have no access to electric power.  These villages are either too remote or too small to be served by conventional utility grids.  This was the original market that HOMER was designed to serve.  The most isolated loads can only be served by solar home systems but many villages, especially ones with existing diesels that run for a few hours in the evening could have 24 hour power with a hybrid renewable microgrid.  This is not a commercially viable market at the moment because of the lack of support infrastructure in these areas, but energy poverty is of great interest to many development agencies and philanthropies.

Islands

There are tens of thousands of inhabited islands in the world. The cost of power on these islands ranges from $0.40 – $2.00 per kWh compared to an average of $0.11 per kWh in the lower 48 US states.  These are ideal candidates for hybrid renewable microgrids because they often have an existing utility to manage the system and excellent solar and wind resources.  The fourfold increase in oil prices in the last 5 years has become a crisis for these economies.  They are highly motivated to adopt solutions.  They do require substantial technical assistance, including remote monitoring of the systems.

Mines

The mining industry has many remote sites that are powered by large diesel generation plants. They tend to have more technical and financial resources than island utilities.

Campuses

University and other campuses where many buildings have a common owner are beginning to install microgrids.  Microgrids can be economically attractive where they can utilize combined heat and power systems or where there are attractive incentives for renewable power.  Many universities have large endowments with a low cost of capital and a long term investment planning horizon that gives them lower hurdle rates for energy saving investments.

Ecotourism

Ecotourism resorts are a small but ideal market for hybrid renewable microgrids.  Many are located in remote and pristine areas without access to utility grids.  Diesel generators are incompatible with their desired marketing image and guest experience.

Renewable Energy Grid Integration

Microgrids with storage, load management, and distributed power can manage the variability created by high penetrations of solar and wind power.  In Denmark, Germany, Spain, Portugal, California, and Hawaii new renewable deployments are already being curtailed because the level of renewable power on those grids has reached the point where the grids at times have difficulty absorbing more variable and uncontrolled power deliveries from renewable sources. Microgrids with storage and load management provide a way to use renewable power on-site and deliver more controlled and stable power to the grid.  This will ultimately be the most important microgrid value proposition, but the first microgrids will be deployed in applications that can also benefit from the cost and reliability benefits.

Electric Vehicle Integration

Electric vehicles are another future market driver that has synergy with microgrids. A plug-in hybrid vehicle is a combination of distributed storage and generation that can serve as both a backup power system and a renewable smoothing mechanism.  Initial market research shows a very high correlation between early adopters of hybrid vehicles and photovoltaic systems.

These microgrid market segments vary by maturity as well as value proposition.  The most mature market is the off-grid market where most of HOMER’s 70,000 users are leading this transition.  The experience developed in this market niche is starting to become invaluable to the much larger market on=grid markets.

Microgrid Value Propositions Summary

Microgrids offer potential benefits in three distinct areas – energy security and reliability, economics, and fuel savings (which can be both an economic and environmental benefit, and in the case of military forward operating bases also a security benefit). Proponents of microgrid projects will benefit from clarifying which value propositions apply in their particular case.

 

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