Despite their potential benefits, community microgrids face several institutional and financial challenges. Steve Hoffman, CEO of Hoffman Power Consulting, explains how microgrid developers and their project partners can overcome these barriers.
Community microgrids offer many reliability, resilience, cost reduction, and decarbonization benefits. However, in many jurisdictions, various financial, institutional (regulatory and legal), and perceptional barriers present key challenges to community microgrid approval and implementation. Based on a recent thorough review of successful community microgrids, we’ve identified feasible ways to overcome each barrier.
Limited Availability of Capital
In light of expenditures to manage or adapt to the effects of COVID-19, many communities and energy users have limited capital to invest in community microgrids. To address this, we recommend structuring projects using third-party ownership and financing, or various types of energy-as-a-service models, which minimize community/energy user upfront CapEx.
“To help ensure regulatory approval of a community microgrid, incorporate provisions for microgrid education, energy efficiency, clean energy, enhanced resilience and social equity.” — Hoffman Power Consulting
Multiple-customer microgrids, such as community microgrids, do not fit neatly into legacy regulatory concepts that U.S. public utility commissions established primarily for vertically-integrated electric utilities with centralized resources. Further, these commissions do not consistently define the legal and regulatory status of community microgrids. To address this, we recommend that microgrid project partners:
- Pursue microgrid projects in jurisdictions with regulatory activity that provides relative clarity on microgrid policies or expresses interest in microgrid implementation (e.g., California, Connecticut, Maryland, Massachusetts, New Jersey, New York, and others)
- Pursue community microgrid projects that regulatory agencies are likely to approve, by incorporating into microgrid proposals:
- Outside funding (e.g., local, state, federal, or private grants)
- Public/private collaboration
- Enhanced energy efficiency of the buildings in the microgrid
- Education on microgrids, resilience, and clean energy for students and the public
- Ways to support environmental initiatives, including meeting clean energy goals and local climate action plans
- Ways that the microgrid enhances grid, community, and energy user resilience, in the face of specific threats in the service territory, such as wildfires and extreme weather. (To learn more about how a community microgrid can enhance resilience, see Hoffman’s white paper “What on Earth is an ‘Oasis’ Community Microgrid?”)
- Develop microgrid projects in traditionally underserved neighborhoods to provide social and racial equity and environmental justice, address the impact on housing affordability, and emphasize these attractive aspects to regulators
- Prioritize microgrid projects in jurisdictions considering or implementing a distribution system operator (DSO) model, which can be more “microgrid friendly” for utilities
Microgrid as Public Utility
In some utility service territories, nonutility microgrids producing power for sale could be considered a public utility and be subject to significant regulations (e.g., obligation to serve). This can discourage communities from embarking on microgrid projects. To address this, we recommend prioritizing projects in jurisdictions that indicate flexibility in defining a multi-customer, non-utility microgrid as a utility.
Uncertain Utility Support
Some utilities may hesitate to support development of nonutility microgrids due to impacts on their revenue stream. To address this, we recommend:
- Working closely with the local utility early and often during project planning and implementation, in an effort to gain utility support and benefit from their staff expertise
- Identifying municipal utilities and rural electric cooperatives that are seeking microgrid partners; after reviewing dozens of applications for community microgrid planning funding (as part of the NY Prize), the New York State Energy Research and Development Authority indicated that microgrids in municipal utility or cooperative service areas have “an easier pathway to success.”
Perceived High Technical Risk
Although the technology exists today to construct and operate community microgrids, few are operating, and hence operational experience is limited. This may raise questions about the technical viability of such systems. To address this, we recommend:
- Learn from existing microgrids, use off-the-shelf technology, and incorporate best practices into new microgrid projects. (To learn more about lessons learned from community microgrid operation, see Hoffman’s white paper “Nine Lessons Learned from Successful Community Microgrids,”
- Locate the microgrid near a university/college that has a campus microgrid in order to demonstrate resource sharing across two microgrids and facilitate educational programs on microgrids
Perceived High Financial Risk
Due to these barriers, many utilities and communities perceive community microgrid projects to be risky propositions. To address this, we recommend:
- Selecting partners that share project risk, including microgrid service and solution providers, investors, local energy users, and neighborhood and community leaders.
- Describing and emphasizing to regulators how the microgrid avoids other necessary expenditures or investments in grid upgrades (i.e., microgrids provide non-wires alternatives)
Steve Hoffman is president and CEO of Hoffman Power Consulting, which provides client-tailored thought leadership and business content to microgrid developers and others. More information on this subject is available in Hoffman’s white paper “Six Barriers to Community Microgrids, and Potential Ways Developers Can Surmount Them.”