How Microgrid Business Model Innovation Will Support New Development Opportunities

Self-contained microgrids are emerging as a viable power option for users from datacenters to telecom stations to single family homes. While customer-owned microgrids are standard today, a new business model, Microgrid-as-a-Service (MaaS) offers a flexible ownership structure and presents the best opportunity to capitalize on this growing market, according to a new report from Lux Research. A microgrid does not encompass a single set of technologies, and given the diversity, there is not a single definition of what constitutes a microgrid. Lux Research evaluated three business models and their financial viability across a number of sectors and generation sources. The firm found that microgrid-as-a-service (MaaS) offerings are applicable to both on-and off-grid systems, and can enable utilities to cost-effectively and strategically retain customers while growing their microgrid services. 

Increased focus on local power quality and grid-wide performance, coupled with improved distribution generation and automation, has accelerated microgrid deployment in new sectors. Lux finds that the complex planning required to deploy microgrids is enabling microgrid products and new business models to emerge. For example:

  • Customer-owned microgrids constitute the majority of microgrid deployments to date. The customer-owned model, particularly at larger generation scales, can be an onerous system design and financial process for the customer.
  • Off-grid microgrid systems will see the cost of transmission and distribution infrastructure and diesel fuel costs as drivers of adoption. In on-grid or island-able applications, the cost of deployment will compete directly with the retail electricity rate as well as the installing entity’s perceived energy security costs. 
  • Off-grid microgrids are being deployed utilizing pay-as-you-go (PAYG) and Greenfield microgrid-as-a-service (MaaS) business models, where the installing entity owns and finances the microgrid on behalf of the subscribing customers or power purchasers.

Business Models for Microgrid Profitability

Lux utilized 15 different generation sources and cost/revenue inputs to build a bottom-up microgrid financial model. The model determined the financial performance of microgrids given sector- and business-model-specific input assumptions. In their report, Lux used internal rate of return (IRR) and levelized cost of energy (LCOE) as metrics to assess the financial viability of microgrids. The company found that: 

  • Costs vary widely depending on application and local conditions. For on-grid or island-able microgrid systems, retail electricity will be the hurdle rate, as economics are rarely the sole driver behind installation. These systems obtain value through a combination of qualitative and quantitative benefits including reliability, security, grid independence, and environmental impact. 
  • Energy storage is not an enabling microgrid asset unless high renewables are required. In the analysis, Lux modeled a three-hour lithium-ion energy storage system, which is not critical unless deployed in a region with inconsistent supply of diesel or natural gas.
  • MaaS offerings are applicable to both on- and off-grid systems, and can enable utilities to cost-effectively and strategically retain customers while growing their microgrid services. While on-grid systems will be best served by a third-party or utility-implemented MaaS, off-grid systems will be best served by Greenfield MaaS and PAYG business models. 
  • Greenfield MaaS will only be implemented when a site is sufficiently isolated or if the site does not have a large projected electricity load; otherwise, particularly with larger load sizes, it is more beneficial to build new transmission and distribution infrastructure at the client site.
  • For industrial clients, there is no standardized product for microgrid implementation, but rather a number of developers, system integrators, hardware and software control technology providers, and a select few utilities offering technology and development partnerships to implement microgrids on a site-specific basis.
  • The pay-as-you-go model shows promise in developing world. Small-scale PAYG microgrid models can help profitably serving the 1.3 billion people who lack access to electricity. In India, Mera Gao Power runs profitable solar-driven microgrids, serving 25-30 paying customers per microgrid installation.
  • Electricity and gas prices impact microgrid economics. As the retail rate of electricity increases, microgrids become a no-brainer investment as every 1 cent per kilowatt-hour increase in electricity rate translates into a 2% increase in IRR. Similarly, gas price fluctuations can drastically swing microgrid economics — a 50% price increase from $4 to $6/mmBTU can completely wipe out any economic benefits of a microgrid implementation.

In the near term, the most promising opportunities will utilize solar, natural gas, and backup power to support on-site generation, while architectures that require energy storage could see opportunities in conjunction with solar and natural gas generation, in addition to varying penetrations of all solar generation and energy storage. 

Source: Excerpted from “Microgrids: How Business Model Innovation Will Support New Development Opportunities” (published December 2013), part of the Lux Research Grid Storage Intelligence service. Reprinted with permission.