What Does a Microgrid Cost?

April 26, 2016
What does a microgrid cost? It’s complicated. Experts from ABB, Hitachi, S&C Electric and Siemens explain what customers should consider when pricing microgrids.

When asked, “What does a microgrid cost?” ABB’s Nathan Adams responds, “What does a house cost?” Just as houses span from builder basic to celebrity mansion, microgrids range in size and sophistication.

Or as S&C Electric’s David Chiesa puts it: “If you’ve seen one microgrid…you’ve seen one microgrid.”

So there is no quick and simple price to give a prospective customer. Sources we’ve interviewed cite project proposals as low as $250,000 to as high as $100 million. Generation typically accounts for most of the cost.

To get a better understanding of what goes into microgrid pricing, Microgrid Knowledge recently talked to Sally Jacquemin of Siemens, and Steve Pullins of Hitachi, along with Chiesa and Adams. Below are their insights.

What Do You Already Have?

Sally Jacquemin, Siemens Microgrid Business Manager

Many microgrids are not greenfield, but build upon existing electrical infrastructure, which helps reduce the overall cost. So a threshold question that Siemens asks a customer is, “What do you already have installed within your energy infrastructure?”

Perhaps a military installation has a solar array, but decides to expand it into a microgrid upon realizing that solar, alone, does not guarantee power when the grid goes down. Or maybe a college campus already operates a CHP plant and wants to add solar and advanced optimization through a control solution.

“Generation is the largest cost. If you already have on-site generation, then you are looking at smaller grid infrastructure and control investments,” says Jacquemin.

Next, Siemens determines 1) If existing infrastructure must be upgraded with grid automation technology and 2) How sophisticated the microgrid controller needs to be.

Sally Jacquemin, Siemens

Does the customer want the ability to island and reconnect to the grid?  Do they want to optimize efficiency of generation mix or participate in the wholesale ancillary markets and demand response? Do they want a microgrid that can be expanded in the future in terms of size or capabilities?

“If you have answers to those questions, now we would be able to go through and say, ‘There is existing CHP, so that is not going to be a cost. They want to add solar, so that is going to be a cost. The grid infrastructure is not automated; it is old and manual, so that is going to be a cost. And the control functionality they want is advanced, so that is going to be cost.”

Siemens would then dive deeper into the system requirements to determine the size and type of equipment required.

Of the three main components of the microgrid – generation, infrastructure automation and control — the microgrid controller is usually the smallest part of the overall project budget.   The cost will vary based on the microgrid controller’s sophistication and project complexity.  Most customers see a positive payback within two to three years of purchasing an advanced controller from Siemens, Jacquemin says.

“The major cost of the controller is the engineering time to support each customer’s system configuration. We map to all electrical infrastructure devices as long as they speak an industry accepted communication protocol.  This may include everything from sensors, meters, building automation systems, generation assets, batteries and more,” she says.

Beyond Sticker Price: What’s the Value?

Nathan Adams, ABB

Nathan Adams, ABB General Manager, North American Microgrids

Location and size of the microgrid also play a role, Adams says. Cost can add up for a microgrid if it’s located in a place where construction isn’t easy, like a dense urban environment, especially if a lot of distribution reconfiguring is necessary.

Scale influences price – although not always as one might think. True, larger microgrids will likely be more expensive than smaller microgrids — but in gross terms, not necessarily on a per kilowatt basis. In fact, generation for a very small microgrid tends to cost more per kilowatt than a comparable larger version. For example, a 50-kW solar array is more expensive per kilowatt than 1-MW solar array.

Like generation, the control system also is subject to economies of scale. Consider an 80 kW and an 800 KW microgrid, both directing similar configurations: a solar array, two gas-fired generators and energy storage. The control system for the smaller microgrid will likely cost less in real dollars but consume more of the overall project budget than the control system for the larger one.

“Your control system may be a little less [costly] in smaller ones, but it’s going to be a much larger portion of the cost than in the larger one. So they do suffer – or gain advantage – from economies of scale, depending on how you look at it,” he says.

Adams warns microgrid customers against the temptation to overload the microgrid’s functionality. Going back to his real estate analogy, he says the customer may want to forego the microgrid equivalent of granite countertops and swimming pools when price is an issue.

Customers read about all of today’s smart energy “bells and whistles” and want them included.  “They don’t realize that all of these things can add up to a lot of extra cost,” he says.

Ultimately, Adams tries to focus the customer on value over cost. He identifies what they need, possibly resiliency, avoided fuel costs, decreased outages. Then he helps them optimize the microgrid’s assets and identify possible value streams. For example, with a grid-connected microgrid, the customer may be able to use the asset to lower utility demand charges or gain revenue by selling capacity or providing ancillary services to the grid.

How do new microgrid customers react to cost?

“I’ve seen it go both ways when you put the number in front the customer. Some people think they are getting a great deal and some people think they are not,” he says.

The reaction is based on the assumptions the customer brings to the table – which can be unpredictable since a microgrid isn’t something you “can price shop around at Costco or Walmart,” Adams says.

How Can I Afford a Microgrid?

David Chiesa, S&C Electric

David Chiesa, S&C Electric Director of Business Development

Microgrids don’t have to be built all at once, but can be expanded and improved in phases, with additional sophistication and capabilities layered in over time.

By taking this approach, customers can invest gradually, gaining confidence as the microgrid proves its business case.

Again, it starts with evaluating existing infrastructure – both onsite and on the grid – and working with what you have.

“You can’t escape what’s already there, but if you can find a way to use what’s already there you can significantly lower your cost,” Chiesa says.

Once the existing infrastructure is leveraged, the project can begin to “sectionalize,” phase-in microgrid capabilities, starting with those that will serve a customer’s primary goals or the critical loads.

Often the customer’s primary goal is to improve electric reliability. In that case, the first phase might be to isolate a circuit and add controls so that the existing distribution generation can stay up and running.

Once the microgrid is built to give this customer reliability, the next step is to optimize it – find ways to make use of its resources for best economics. For example, adding control software opens up the opportunity to use the microgrid’s distributed generation to shave peak loads, time-shift loads or provide frequency support or other ancillary services to the grid.

“You build out the geography then you come on top of that with the optimization software,” he says.

Taking this approach, the customer can gradually develop a higher and higher functioning microgrid. S&C has identified six different levels of microgrid sophistication, stepping up from the simplest which has only a back-up generator to the most advanced microgrid with multiple forms of generation, energy storage, sophisticated controller capabilities and even the ability to coordinate multiple microgrids. (See chart.)

The highest microgrid in operation now is a Level 5. An example is the Oncor microgrid that S&C Electric helped build with a team of several other companies. The highest microgrid in planning is a Level 6, which opens the door to a grid of microgrids, where microgrids can interact with each other and share resources. A controller for a Level 6 microgrid is now under development by Commonwealth Edison.

Credit: S&C Electric

Where do customers go astray in their thinking about microgrid costs? They tend to overestimate the economic value of reliability, Chiesa warns.

“Customers want to pay for microgrids with improved reliability. That’s what we always hear: ‘I can’t afford to take an outage,’” he says.

But in actuality, “with the level of service you get from your utility, it is very rarely worth it (I don’t say never) to build this large, relatively expensive amount of infrastructure visa via the outages you can expect. There are specific locations where it makes sense, but for the vast majority it doesn’t. Because let’s face it, we get pretty good service from our utilities,” he says.

To improve the microgrid’s economics, customers should move up the value chain, using the resource not only for reliability but also to reduce their power bills.  There are a variety of ways to do this, among them peak shaving or time-shifting usage.

“When you talk about costs – about how you are going to pay for the microgrid – you have to think about the other benefits in addition to reliability. If you are just trying to build a business case off of reliability, it is very rare where that pays off,” he says.

Focus on Savings, Not Just Cost

Steve Pullins, Hitachi

Steve Pullins, Vice President at Hitachi Microgrid Solutions

When a customer asks “What does a microgrid cost?” it’s easy to delve into engineering speak about capital costs. But that’s not really what the customer is asking.

The customer wants to know: “What is it going to cost me to have this? And then the attendant question is: ‘How am I benefitting from that cost?’” One way is by reducing energy bills, Pullins says.

Electricity bill savings can be sizeable – and grow even more sizeable over time – depending on what’s included in the microgrid, its size, and where it’s located, according to Pullins.

Hitachi has a found a financial sweet spot for microgrids sized between 1.5 MW and 40 MW that include CHP, solar photovoltaics and energy storage.

The best savings typically accrue in areas of the country where utility costs are high – which explains in part the large amount of microgrid activity in the Northeast. But project bankability can occur wherever electricity prices for commercial customers exceed the national average, he says.

Pullins describes a “wedge of savings” that can widen over time. The microgrid customer’s savings would expand as utility rates rise, assuming rates follow historic patterns, he says.

“So you may have 5 percent year one savings on your energy bill. But then out there at year 10 it is 10 or 15 percent. And at year 20 it is 25 percent. So you get a wedge of savings over time,” he says.

A combination of factors creates the savings in a Hitachi microgrid design.

Fuel prices are one factor, or more specifically reduced utility rates for large volume use of natural gas for CHP.

Savings also accrue from use of intelligent microgrid controls that can fine tune service supply “every moment of the day, every day of the week, every week of the year,” he says.

Pullins argues that with solar and storage, a microgrid with CHP can beat a CHP-alone facility on price.

This is because CHP plants, alone, are not designed for load-following. Such use of CHP can double maintenance and decrease asset life, he says.

Adding solar and storage to the mix allows the CHP plant to run where it can achieve its lowest cost per megawatt, lowest emissions level, and lowest maintenance requirement, he says.  With its inherent variability, solar  becomes the load following resource. Energy storage takes over when needed.

“If we’ve built our algorithm properly we are eking out everything that we can, and we are doing that on a moment by moment basis,” he says.

***

So what is the bottom line on microgrid cost? No set price exists, reflecting the customized nature of a microgrid. And in any case, price tag alone offers a limited view. It’s not just what a microgrid costs, but what it achieves for a customer in the larger energy economy.

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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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