The global market for grid-tied utility microgrids is expected to grow just under a billion dollars in 2020 to approximately $6.8 billion annually by 2029. Peter Asmus, research director at Guidehouse, explains the story behind the numbers.
The electric utility industry may have started with microgrids when Thomas Edison pioneered the delivery of kilowatt-hours from his Pearl Street Station in New York in 1882. However, the fledgling industry soon abandoned this highly competitive retail market centered around localized microgrids and shifted to a centralized monopoly model. This change occurred mostly due to the available technology, which shifted from direct current to alternating current; the latter enabled the construction of large thermal power plants that could send power to customers over long distances. This scaling ability showed more favorable economics than small microgrids serving individual or small clusters of customers — at least at that point in time.
This utility industry’s monopoly model survived for over a century, but it began to shift several decades ago with the deregulation of wholesale supplies. This deregulation fostered initial innovation with renewable energy projects, then retail competition. Today, a major overhaul of the entire electricity delivery ecosystem is underway, a transformation Guidehouse refers to as the emerging Energy Cloud. Climate change, sophisticated cybersecurity threats, and aging grid infrastructure all are key drivers encouraging utilities to reconsider the original microgrid value proposition. The one size fits all solutions typically offered by utilities may now be obsolete.
Advanced metering infrastructure and other smart meter-based approaches aim to elevate service to the entire grid. Microgrids take a more targeted approach, relying upon the once controversial practice of islanding a subset of customers from the larger grid and offering different levels of service. Most microgrids are not deployed by utilities, so this approach to resiliency historically has been viewed as a threat. However, if utilities deploy microgrids, the fundamental value proposition shifts. Rather than focus on the needs of a single customer or a select group of customers, the microgrid can reinforce reliability in problematic areas while bolstering reliability for the overall grid.
Regulatory barriers to utility microgrid deployments
The market barriers to microgrids deployed by utilities are not completely unique. All microgrid market segments face regulatory challenges. Nevertheless, outside of remote systems like those deployed in Alaska, utilities have typically not led the way upon this distributed energy resources (DER) platform in industrialized economies with traditional grid networks in place. Many microgrids have been deployed in response to perceived shortcomings of utility service, whether the issue for customers was reliability, resiliency, cost, or preferences for greater renewable energy. Most microgrid advocates would argue that the current regulatory and institutional forces are stacked against non‑utility microgrids due to often lengthy interconnection protocols and other detailed project approval procedures. However, there is an equally compelling argument that a different set of challenging rules frustrate utilities seeking to offer microgrids to their customers.
Technology advances typically outpace regulations. In the case of microgrids, however, the recent rise in power outages around the world underscores the fact that the regulatory process is not set up for quick and streamlined approval processes. This issue is evident in California, where utilities such as Pacific Gas and Electric (PG&E) sought to deploy 20 microgrids at key substations before the 2020 fire season, which would have transformed California’s utility into a global leader on microgrids. Instead, PG&E will rely upon temporary generation portable “microgrids” dependent on liquid (most likely diesel) fuels for resiliency services.
Utilities are also held to a higher standard than other energy service providers; as a result, they must jump through higher regulatory hoops than their third-party counterparts. For example, when San Diego Gas & Electric moved forward with its Borrego Springs microgrid, the company had to design and install diesel generators that could withstand a 100-year flood scenario. If these DER assets had been installed by a non-utility third party, they would not have had to abide by such contingencies.
Beyond issues such as timeframes for siting and construction, larger concerns exist in terms of how microgrids fit into a regulatory regime that has revolved around universal access and an obligation to serve. These ideals, which were articulated to justify large electric utility monopolies, may need to be revisited and revised. There is a growing push to reward utilities on performance (which could include new metrics) instead of on traditional guaranteed returns on capital investment. The former approach is a move in the right direction. Under some circumstances, other challenges exist because much of the capital traditionally deployed by utilities will shrink since most electricity will come from generation assets they do not own. Performance-based ratemaking may have to center around the energy and grid services enabled by investments in distribution and transmission infrastructure, with a new focus on innovative ways to integrate customer assets into the grid.
Pandemic-related impacts on microgrid growth
Guidehouse Insights will soon release a short report looking at which microgrid segments are benefiting (and which may suffer) from the impacts related to the coronavirus outbreak. What does this mean for the utility microgrid segment?
The jury is still out. One could argue utilities live by tighter regulatory requirement and planned projects may be less susceptible to short-term factors. However, utilities face challenges beyond microgrid deployments and such cutting-edge technology ventures often face delays during a crisis. Furthermore, many previously hopeful signs for major microgrid programs have failed, such as a proposed fleet of front-of-the meter utility distribution microgrids by ComEd, and (more recently) Pacific Gas and Electric’s and Southern California Edison’s rollouts of stationary microgrids using clean energy assets in California.
In the end, Guidehouse Insights’ reduced capacity for utility microgrids in 2020 and 2021 compared to previous forecasts. Still, overall global market growth is robust. The total global market for utility microgrids is anticipated to be 779.9 MW in 2020 and grow to 3,739.6 MW by 2029 at a compound annual growth rate (CAGR) of 19.0%. Globally, utility microgrid implementation spending starts at $2.3 billion in 2020 and should increase to over $10 billion annually by 2029, at a CAGR of 17.9%.
These figures include both grid-tied and remote microgrids. Utilities led the microgrid market with remote systems in regions of the world such as Australia, since traditional grid infrastructure did not exist in western Australia. The same can be said for island nations and much of Asia Pacific and Latin America. Focusing on grid-tied microgrids, North America emerges as the largest market, despite challenges with rate-basing, the coronavirus outbreak, and increased competition from third-party microgrid developers. However, it will not be the largest market for grid-tied microgrids 10 years from now.
The global market for grid-tied utility distribution microgrids is expected to grow just under a billion dollars in 2020 to approximately $6.8 billion annually by 2029. Fueled by aggressive utility microgrid programs in Puerto Rico that still face deep uncertainty today, but which Guidehouse Insights believe will ultimately prevail, Latin America moves into first place over the next decade. North America is the other major market for grid-tied utility distribution microgrids.
Perhaps the most thought-provoking role utilities now play in the microgrid market is that of investor in projects located outside of their regulated jurisdictions. This role allows utilities to take advantage of microgrid growth without necessarily taking on the risks of seeking regulatory approval during a time of flux. This approach enables utilities to generate new revenue from projects that do not challenge their own regulated business.
To all forms of utilities — whether privately or publicly owned, or whether they operate within an industrialized economy or in the developing world—microgrids represent a transformation to a future where the majority of electricity consumed will not be owned by utilities. In this brave new world, microgrids stand out as a framework to manage increased technology and business model complexity, harking back to concepts that helped birth the industry over a century ago.
Peter Asmus is the research director leading Guidehouse Insights’ microgrids solution and supporting the microgrids tracker and virtual power plants solutions.