Ways Microgrids Derive Value: Location, Location, Location

July 18, 2016
Deriving value from microgrids its about location, location, location.

How microgrids derive value depends on energy prices, wholesale market rules, subsidies and other location-dependent factors, as explained in the following excerpt from our report: “How Microgrids Can Achieve Maximum Return on Investment (ROI): The Role of the Advanced Microgrid Controller.”

A microgrid uses its software intelligence to precisely coordinate its energy supply and demand in a way that extracts maximum value and performance from its resources. An advanced microgrid does so with an eye toward the microgrid’s internal economics and the outside market. So the level of value the microgrid secures is location dependent; it is influenced by rules, regulations and market conditions that vary by states, regions and countries.

Some ways the controller derives value include:

▶▶Integration and optimization of renewable energy (solar photovoltaics and wind) and battery energy storage systems

▶▶Utilizing thermal energy from CHP

▶▶Participating in utility-run demand response programs

▶▶Managing controllable loads via Building Automation Systems

▶▶Forecasting weather and managing load and generation accordingly

▶▶Optimizing economic dispatch and unit commitment

▶▶Automating operations and control reducing the need for on-site operators

▶▶Providing energy resiliency/averting power outages

The microgrid controller configures and dispatches the most reliable and economic mix of resources for use at any given time. This might mean integrating on-site renewable energy with other generation resources to overcome the ‘variability’ of solar and wind —the problem of non-production by these resources when the sun doesn’t shine or wind doesn’t blow. To make up for any lag in energy production from renewables, the controller can tap into battery storage, reciprocating engines, central grid power (if it is connected to the utility grid) or some other resource. The microgrid can even plan ahead in making these decisions by tracking weather forecasts.

The controller also derives value by tracking market prices for power to determine when it’s most advantageous for the microgrid to use its own generation versus buying power from the grid. In some instances, the microgrid may even supply power to the grid, as well ancillary services, such as frequency control. The utility or grid operator pays the microgrid for these services, which creates a revenue stream for the microgrid.

The controller also works with Building Automation Systems to analyze energy use in buildings served by the microgrid, and to determine where and what time of day it can ‘shave’ energy use without affecting the comfort of occupants. During high cost energy periods in summer afternoons, for example, the Building Automation System may increase the temperature by one or two degrees to reduce load per the microgrid controller instruction.

Meanwhile, the microgrid might rely on CHP for continuous operation to serve its base load requirements —the minimum electrical needs of the microgrid host over a 24-hour period. CHP also will offer value by way of thermal energy. CHP uses wasted heat produced in power production for heating buildings, warming and chilling water, producing steam or for some other use valuable to the customer. This distinguishes CHP from conventional power plants, which let the heat waft unused into the air or water. A microgrid controller optimizes CHP systems by ramping up or down capacity to match the forecasted load as well as to maximize economics of the system in relation to utility rates.

It is important to note that the advanced microgrid controller handles all of this coordination—forecasting, dispatch, interaction with the central grid — automatically. No human intervention is required

Location specific value

How well the microgrid is able to secure some of these values will depend on where it is located geographically. Several external factors influence the ability to fully use microgrid software management, control, and optimization capabilities. In discussing these factors, we will focus on the United States because analysts expect it to be the most active microgrid market in the near term.

Some of these locational factors include:

▶▶Utility electric rates

▶▶Natural gas prices

▶▶Grid operator rules and markets for ancillary services

▶▶Availability of demand response programs

▶▶Local rules for net metering

▶▶Renewable energy credits and other financial incentives

Local utility rates are one of the most important influences on microgrid value. Like most distributed energy, microgrids tend to pencil out best in regions where utility rates are high. If utility rates increase over time, as they have historically, the microgrid may be able to show a widening of savings over its lifespan. This is particularly true if at least part of the generation used by the microgrid has fixed, or even zero fuel costs, as does wind or solar energy.

Utility rates vary widely in the United States. For example, in Hawaii, the state with the most expensive electricity, rates for commercial customers were 24.21 cents/kWh as of February 2016. In contrast, Oklahoma has the lowest average rates in the country, at 6.90 cents/kWh, according to the U.S. Energy Information Administration. It’s not surprising, therefore, to see early microgrid activity emerging in places like the Northeast and California, where retail electricity rates are high.

Natural gas prices also play a role in determining microgrid value, especially since microgrids often include CHP plants, and many CHP plants are fueled by natural gas. CHP’s economic advantage is based on what’s known as the spark spread—the difference between gas and electricity prices in a region. The CHP plant’s heat rate, or efficiency, also is considered in determining spark spread. A CHP plant’s best economics generally occur where electricity prices are high and fuel prices low. (See more details on calculating spark spread for CHP here. In addition, the Environmental Protection Agency CHP Partnership offers a spark spread calculator.)

Revenue sources for microgrids

Depending on where the microgrid is located, it may have the opportunity to accrue revenue by selling ancillary services, such as frequency control and black start capabilities, to the local utility or regional transmission organization (RTO) or independent system operator (ISO). RTOs/ISOs manage wholesale power markets that serve two-thirds of electricity customers in the U.S. and more than one-half in Canada. A microgrid’s eligibility to sell into these markets, and prices paid for the services, will vary depending on which RTO/ISO the microgrid is located in.

Microgrids also may earn revenue by participating in utility or grid demand response programs, where the microgrid agrees to reduce its power use from the central grid when the grid is under strain. This is commonly a hot summer day when power prices peak and it is more advantageous for the grid operator or utility to pay the customer to reduce energy use than to produce it.

Net metering—a utility credit from the utility for power from on-site generation added to the grid —also can improve the microgrid’s bottom line. Most U.S. states have net metering policies, but the value of net metering varies, depending on whether the programs offer the credits based on wholesale or retail rates.

In addition, several states offer various renewable energy credits and emissions credit programs that a microgrid can participate in, if its generation sources qualify. Utilities typically buy the credits to comply with state renewable portfolio standards, requirements that a percentage of their portfolio comes from green energy. Some states, such as Massachusetts and New York, offer incentives for CHP. And finally, microgrids may benefit from federal tax credits, such as the 30 percent investment tax credit now available for solar projects and the 2.3 cents/kWh production tax credit for wind energy.

Read more about how microgrids derive value in our report, “How Microgrids Can Achieve Maximum Return on Investment (ROI): The Role of the Advanced Microgrid Controller,” downloadable at no cost, courtesy of Siemens.

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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