Are Microgrids Expensive?

Jan. 7, 2020
Asking ‘Are microgrids expensive?’ is a bit like asking what rocks cost. Are we talking about diamonds or driveway gravel? The discussion tends to be a long one. There is no elevator pitch answer. But here’s some pointers on figuring what a microgrid will cost you.

Asking ‘Are microgrids expensive?’ is a bit like asking what rocks cost. Are we talking about diamonds or driveway gravel?

Any discussion tends to be a long one. There is no elevator pitch answer for three main reasons.

First, microgrids vary dramatically in size and complexity and more importantly purpose, which creates a wide cost variance.

Second, what a customer actually pays and what the microgrid costs may not be the same.

Third, the cost of not having a microgrid — the economic damage of power outages — needs to be considered.

Unfortunately, articles in the popular press create an impression that microgrids are gold-plated technology.

“People think the cost is millions and millions and millions and there’s no way to justify the economics. I still hear that on a very consistent basis. So the education process continues,” said Clark Wiedetz, microgrid director for Siemens Energy Management.

A starting figure

A commonly quoted price range for a microgrid is $2 to $4 million/MW. But the figure requires extensive footnoting. Cost depends on where and why the microgrid is built and what kind of generation it uses. Nanogrids can cost in the tens of thousands while a highly complex urban microgrid planned for Cleveland has an estimated $100 million price tag.

Of course, when a building owner, business, hospital, college, community or other customer asks: “Is a microgrid expensive?” what they really want to know is what it will cost them

Government grants and other clean energy incentives can drive down customer costs. California, Connecticut, Maryland, Massachusetts, New Jersey and New York are among the states that give grants for microgrids or resiliency projects. On the federal level, tax credits for renewable energy can be applied to microgrid projects that use the applicable forms of generation. (No federal tax credit exists for microgrids themselves.)

By Sapunkele/Shutterstock.com

Perhaps most important, from the customer’s perspective, financing and contract innovations can significantly cut customer costs.

For example, the increasingly common energy-as-a-service contract requires little or no upfront capital paid by microgrid customers; they just continue to pay for their energy in a budgeted manner, much as they do if they buy it from a utility — except they have the added benefit of power from the microgrid when a grid outage occurs. A third party owns the project and takes the risk.

What energy actually costs

Mark Feasel, president, Smart Grid-North America at Schneider Electric, a pioneer in the energy-as-a-service approach, describes pricing a microgrid as a problem-solving activity. The customer probably is exploring a microgrid because of a need. Perhaps they are experiencing expensive and disruptive power outages or they may want to accelerate their progress in achieving sustainability goals. Can the microgrid help?

To start, it’s important to define what energy actually costs the customer.

Feasel encourages them to look beyond the kWh cost they now pay their utility to what energy actually costs them — both when the utility grid is working and when it’s not. 

“Sometimes there are some costs that aren’t embedded in the energy price. It might be the [work] shift that you had to send home when you had an outage, or maybe your product was damaged,” Feasel said.

Determining what a power outage costs is easier for some than others. For an industrial manufacturer, the equation can be a straight-forward calculation of lost product. For a hospital or nursing home, it’s more complicated and can come down to loss of life.

But it’s clear the cost of power outages is not small. For example, a Stanford University climate and energy expert estimated that a 48-hour outage to 800,000 California customers in October 2019 cost about $2.5 billion.

“Almost anywhere on the East Coast and almost anywhere on the West Coast, we’re likely going to be able to deliver you an integrated energy outcome that’s cheaper than you’re paying today, or at least at the same price.” — Mark Feasel, Schneider Electric. 

Sustainability goals represent another possible hidden cost. The customer may want to green its energy supply beyond what utility grid power provides. What’s the cost to reach the goal and has the customer yet calculated the figure into its energy budget? 

Once they establish the level of resiliency and sustainability the customer requires, the microgrid team can determine the mix of distributed energy resources and the capital cost of the microgrid.

The next step is to determine the necessary contract horizon to reach a monthly charge within the financial boundaries set by the customer. Some customers don’t want to pay more for energy than they already do on a monthly basis; in other cases they’ve set a budget for greater electric reliability or cleaner energy.

If the sole goal is price reduction, the customer may not be in the market for a microgrid, Feasel said. They may seek other services, such as strategies to reduce demand charges or tariff evaluation.

That doesn’t mean a microgrid won’t decrease your costs — it just depends on what the cost of utility power in your geographic location and what the project encompasses.

“Almost anywhere on the East Coast and almost anywhere on the West Coast, we’re likely going to be able to deliver you an integrated energy outcome that’s cheaper than you’re paying today, or at least at the same price,” Feasel said. 

Even if a customer ends up paying as much as they did for the utility power, the customer now has the added benefit of a microgrid, including power when the grid goes down.

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A range of microgrid costs

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Managing peak

Microgrids also are becoming increasingly appealing from a cost perspective for those managing risks associated with peak demand, such as 4CP in ERCOT, the coincident peak in PJM, and Ontario’s global adjustment.

“You’ve got to be able to predict when the coincident peak is going to be, before it occurs. That takes some fairly sophisticated grid level awareness and deep market knowledge. You can program those kinds of things into a microgrid controller,” Feasel said.

Microgrid projects also increasingly include more than just installation of the microgrid; the developer may take a comprehensive look at the energy facility, upgrade old equipment, add energy efficiency and advanced technology measures, and in some cases focus on water system improvements too. These measures can add capital costs, but increase operational savings.

Driving down microgrid costs

Clark Wiedetz, Siemens

Microgrid costs have been falling in recent years. This is largely due to a decline in the cost of the kind of supply assets used by many contemporary microgrids. Falling prices for renewable energy and battery storage heavily influenced a 30% decline in microgrid costs from 2014 to 2018, according to Peter Asmus, research director for Guidehouse.

Another factor driving down costs is standardization of components, according to Siemens’ Wiedetz. The industry adage ‘If you’ve seen one microgrid, you’ve seen one microgrid,’ is on its way out, he said.

“I don’t foresee us being able to say, ‘Okay, here’s your microgrid in a box.’ That being said, there are now more consistent designs,” he said.

That doesn’t mean the customized microgrid has disappeared, he said. To the contrary, customization is the hallmark of a sophisticated microgrid — one likely to have many assets in multiple locations. Utilities, in particular, continue to drive the development of the customized microgrid because of the complexity of their needs. Because customized microgrids differ greatly, it’s difficult to peg an average price. 

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Cutting corners — bad idea

Wiedetz, cautioned against a misstep he’s seen some businesses take to try to cut project costs.

This is when customers attempt to install part of the microgrid on their own. Sometimes they do so in hopes of moving the project along faster; other times they believe they can save money. But when the project proves daunting, they must bring in an outside company. Sometimes that means ripping out equipment and starting over.

“It’s a lesson learned,” Wiedetz said. “I tell customers: ‘Look, when you’re doing it yourself, realize your risk. When you make a mistake, you pay for that mistake and you now have eliminated all the savings that you originally thought you’d have by doing it yourself instead of turning it over to somebody that does this all the time.’”

So are microgrids expensive?

It’s clearly an ‘it depends’ answer, one born out of first understanding what it will cost you if you don’t install a microgrid.

We’ve asked other industry thought leaders to weigh in on the question: Are microgrids expensive. Sign up for the free Microgrid Knowledge newsletter for the next four articles in this series: 

About the Author

Elisa Wood | Editor-in-Chief

Elisa Wood is the editor and founder of EnergyChangemakers.com. She is co-founder and former editor of Microgrid Knowledge.

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