Microgrids and Utilities: Friend or Foe?

June 18, 2014
Will microgrids compete with utilities or complement them? The relationship remains largely undefined and worries some. EnergyEfficiencyMarkets.com explores the issue in the latest installment from “Think Microgrid: A Discussion Guide for Policymakers, Regulators and End Users,” now available for free download at ThinkMicrogrid.com.

‘Microgrids and Utilities’ is the latest excerpt from our Think Microgrid guide.

Microgrids face the same kind of risk as other energy projects – permitting issues, market penetration, financing, and fuel supply management. But one of the greatest and most talked about risks for a microgrid involves its relationship with the local utility.

The relationship is still largely undefined. The central question is: Will microgrids compete with local utilities or complement them?

Many advanced microgrid advocates emphasize that the microgrid is a counterpart to the local grid, not a detractor.

Still, there are potential friction points between utilities and privately developed microgrids, the same issues that tend to arise between utilities and other forms of distributed energy, such as interconnection standards, standby rates or submetering rules.


Utilities have both financial and technical concerns about how microgrids will influence their business model and the functioning of the central grid.

On the technical side, utilities worry that microgrids may harm the reliability of the larger grid through faulty interconnection, tripping or failing to island or re-connect correctly. Meanwhile, private microgrid operators offer another perspective. Some say they find it difficult, from a technical perspective, to deal with the utility’s legacy system and to navigate interconnection procedures.

On the financial side, utilities express concern about the cost to provide back-up power for microgrids, especially if they proliferate. (It also should be noted that some utilities have embraced microgrids and either have developed them or plan to.)

But much of the discussion centers around the ‘utility death spiral,’ the idea that customers will flee the system for distributed generation and microgrids in great numbers, leaving the utility with a rate base too limited to fund needed infrastructure without dramatic rate increases – which will in turn cause further customer flight.

Franchise Rights

One of the thorniest issues for microgrids involves utility franchise rules. In many locations, a microgrid cannot string wires across a public street to serve customers; doing so infringes on the local utility’s franchise rights.

In March 2013 Public Utilities Fortnightly article, “Peaceful Co-Existence,” Sara Brown and Paul McCary, point out that utility franchise laws vary widely throughout the United States. So ease of microgrid development varies widely too. The authors use South Carolina and Connecticut as examples of two extremes. In South Carolina, the state has jurisdiction over something as basic as the sale of power from rooftop solar panels to a host. In contrast, Connecticut allows certain microgrids to sell power across public streets.

A simple microgrid, such as one serving a college campus with no intervening public streets, could likely operate even in South Carolina without concern about franchise rules, say the authors. However, for more complex microgrids – those with multiple end users on multiple pieces of property with public streets – the franchise issue arises. Microgrids aren’t necessarily precluded in states with narrow franchise rules. But the developers depend on the goodwill of the regulators and local utility, or the utility’s willingness to form a financial partnership or agreement with the microgrid, say the authors.

Competitive Risk

The competitive playing field also raises questions of risk – especially in restructured states. Who should be allowed to develop microgrids?  Utilities typically cannot own or develop power plants in restructured states. Should they also be prohibited from microgrid development? Or might the state grant exceptions, as some have, in a limited fashion for utility development and ownership of renewable energy projects?

And if utilities do own microgrids, should they be allowed to charge a premium rate, given the high quality of the power? For example, if a utility builds a microgrid to supply quality power to a newly arrived data center, should there be a special tariff applied? Should utilities or grid operators create some form of locational pricing to attract microgrids to areas of the grid where they are needed, such as points of congestion?

And finally, how do we calculate and recognize the environmental value of a microgrid?

Environment Northeast points out in a filing before the Massachusetts Department of Public Utilities that the benefit/cost analysis for any grid modernization must consider the value of greenhouse gas emissions reductions. This issue is important to microgrids because many incorporate CHP, which the American Council for an Energy-Efficient Economy named as one of four key efficiency strategies to reduce greenhouse gases in its April 2014 study, “Change Is in the Air: How States Can Harness Energy Efficiency to Strengthen the Economy and Reduce Pollution.”  These strategies are particularly important in light of the Environmental Protection Agency’s rulemaking on carbon limits for existing power plants.

Effective state regulation can help utilities and microgrids navigate many of these risks. We will describe key state activities that encourage microgrids in the next article of our Think Microgrid series. 

Come back next week for a new article in this series, or immediately download the full report,  free of charge: Think Microgrid: A Discussion Guide for Policymakers, Regulators and End Users, courtesy of the report’s underwriters: the International District Energy Association, Schneider Electric and Microgrid Knowledge.

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.