Why Arizona Public Service Sees Microgrid Investments as Risk Worthy

Feb. 6, 2017
Utilities are notoriously risk adverse. So why did Arizona Public Service (APS) take a chance on microgrid investments, not once but twice?

Utilities are notoriously risk adverse. So why did Arizona Public Service (APS) take a chance on microgrid investments, not once but twice?

By take a chance, we mean the utility chose to install two microgrids without getting pre-approval for cost recovery from state regulators. So if the Arizona Public Service Commission now disapproves the microgrid investments – after the fact — APS shareholders foot the bill.

It’s the kind of bold move that utilities often shy away from.

“We just felt like it was the right thing to do. Period,” said Scott Bordenkircher, APS director of T&D technology innovation and integration.

The APS customers wanted the microgrids, and they made sense from a business perspective, he explained during an interview with Microgrid Knowledge at last week’s DistribuTECH conference in San Diego.

The projects include a 25-MW military microgrid operating at an air station in Yuma, Arizona and a nearly complete 63-MW data center in Phoenix for Aligned Data Centers.

The public service commission is now reviewing the microgrid investments as part of of the utility’s larger rate case (E-01345A-16-0036), and expects to render a decision by July 31.

Microgrids are the “right thing to do” for APS because they pencil under its business model – not just for the customer directly served by the microgrid, but also for the utility’s overall system, Bordenkircher said.

For the customer, the microgrid provides back-up power without a lot of headache. APS handles everything from fuel contracts to testing of controls and maintenance.

And for APS as a whole, the microgrid averts more costly investments to strengthen the grid. When not generating back-up power for the customer, the microgrid provides a stack of grid services, among them capacity, peaking capacity, voltage regulation, frequency response, and spinning reserve.

By offering the services less expensively than alternative investments, the microgrid benefits all APS customers, averting greater pressure on their rates.

Thus, the microgrid is not “an adder. It is a replacement. And it is replacement at much less cost,” Bordenkircher said.

Microgrid investments spur economic development

In addition, microgrids foster economic development, he said. APS, which serves most of the state, sees microgrids as a draw for data centers and similar businesses dependent on high quality power.

In fact, APS’ willingness to invest in a microgrid was part of the reason Aligned chose Phoenix.

“They were going to need the back-up generators one way or the other. They could either pay full price or they could pay 50 percent of the price — which was where their share came out. So, that was definitely an assistance in bringing them to our area,” he said.

To make the APS economic model work, the microgrid must be islandable, so that the local customer has back-up power when the grid fails. The microgrid also must run parallel to the grid and be dispatchable 24/7 to provide the grid with services when they are needed.

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Given that each party benefits, the customer pays for part of the microgrid, and APS the rest. The utility rate filing puts the Yuma military microgrid cost at $21.6 million and the data center microgrid at $5.6 million.

Will APS stop at these two projects? No, the utility is searching for other microgrid partnerships, particularly customers that need back-up generation, among them defense/critical infrastructure facilities, other data centers and municipal services.

“Long term – especially given the kind of success we’ve had so far in the construction cycle and the testing and the way things are looking — it is definitely a model that we would like to pursue,” he said. “We are really hoping for a positive outcome from the commission.”

In fact, Bordenkircher sees microgrids as a good play for the utility industry in general, and expects to see a heightening in microgrid investments.

“To me, it represents a new business model for utilities that I think can bring significant value to all utility customers if you do it right, if you site it at the right location, if you build the right type of system,” he said.

He added: “Again it comes down to doing the penciling and doing the math and saying, ‘Economically is this viable? Is it the right thing?’ We’re confident we are on the right side.”

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About the Author

Elisa Wood | Editor-in-Chief

Elisa Wood is an award-winning writer and editor who specializes in the energy industry. She is chief editor and co-founder of Microgrid Knowledge and serves as co-host of the publication’s popular conference series. She also co-founded RealEnergyWriters.com, where she continues to lead a team of energy writers who produce content for energy companies and advocacy organizations.

She has been writing about energy for more than two decades and is published widely. Her work can be found in prominent energy business journals as well as mainstream publications. She has been quoted by NPR, the Wall Street Journal and other notable media outlets.

“For an especially readable voice in the industry, the most consistent interpreter across these years has been the energy journalist Elisa Wood, whose Microgrid Knowledge (and conference) has aggregated more stories better than any other feed of its time,” wrote Malcolm McCullough, in the book, Downtime on the Microgrid, published by MIT Press in 2020.

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