Why the future of microgrids won't look like the past
GTM Research's latest report shows a wide open industry on the verge of a boom
The microgrid market is poised to more than double in the next five years, both in terms of installed capacity and annual value. But as grid edge technologies rapidly proliferate, it's a new wave of cleaner, more flexible, and increasingly complex microgrids being developed, and they have the potential to vastly alter the United States power landscape.
According to GTM Research, total microgrid capacity in the United States will likely exceed 2.8 GW by 2020, rising 127% from 1.3 GW at the end of this year. And the annual market value is expected to grow 267% during that period.
While those numbers are clearly significant, they don't tell the whole story. Microgrids being deployed today are more flexible, advanced, and often much smaller. Enabled by emerging technologies being developed through new types industry partnerships, value propositions are becoming viable that previously were infeasible or too expensive.
“We really think that microgrids for critical infrastructure in cities and small communities will grow fastest over the next five years, driven by solar PV adoption, CHP incentives, and state resiliency programs on the east coast as well as in California,” said Omar Saadeh, a senior analyst with GTM and the author of the report, "North American Microgrids 2015: Advancing Beyond Local Energy Optimization," released earlier this month.
Microgrids for public institutions will also grow faster than average, as well island-based systems.
“There's a lot of talk right now about state resiliency programs for small projects,” Saadeh said. “We identified this as a sweet spot for microgrids.”
Less than half of microgrids operational today are below 1 MW of capacity, about 49%, but that is expected to change. The microgrid landscape has been driven by universities and the military so far, with some high-profile and enormous projects dominating the numbers (there's a 160 MW military grid in Georgia, the University of Texas at Austin has a 137 MW grid, and San Diego Gas & Electric has 26 MW serving Borrego Springs).
“If you look at capacity, universities and the the military lead the way to date,” Saadeh said. “The military has a very unique value proposition for reliability. … In the future we predict a somewhat different playing field.”
"The accelerated deployment of small-scale microgrids is increasingly evident," the report reads. "In the period 2013-2015, small-scale microgrids represented 54.7% of newly commissioned microgrid projects. The 35 small-scale projects commissioned between 2013 and 2015 only represent 2.6% (8.6 MW) of total deployed microgrid generation capacity (329.2 MW)."
The evolving fuel mix
The biggest shift ahead will likely be the fuel mix. Conventional fuels dominate the current market, with renewables making up just 6% of operating capacity. But that balance will begin to turn over the next five years, driven by solar PV adoptions. GTM said it expects renewables to make up 19% of new capacity installed this year.
By 2020 renewables will make up more than a quarter of installed capacity and will account for 54% of the capacity installed in that year.
“We're moving away from our fossil fuel dependency,” Saadeh said, pointing to island communities like Hawaii where a reliance on imported oil has kept resident's power bills high, and utilities have struggled to bring rooftop solar online. With microgrids increasingly used as an integration strategy, Saadeh predicts the share of solar will reach almost 25% of microgrid capacity by 2020 – a 1,190% increase from 2015 levels.
Standardization is key to growth
In some ways, one of microgrids' most fascinating aspects – the hyper-specific nature of the projects – has held back their growth.
“In a market where every project is very different, it makes it difficult to produce the standardized, cookie-cutter platform which is often sought-after,” Saadeh said.
But emerging partnerships between the industry and technology vendors are beginning to change that. Take, for instance, Southern California Edison's recent interest in developing smaller battery storage. The utility recently issued a request for proposals for storage solutions which could be developed uniformly, off-site, and installed within seven months of the contracting date.
GTM identified a “lack of standard approaches” for microgrids as one of the bigger challenges. And it's not just on the technology side: Project finance is an issue as well. When every installation looks different, developing valuation metrics is difficult.
As the report points out: “The more clear the intended benefits of a microgrid project are from the outset, the faster it can be developed. However, many projects are still developed in exploratory, step-by-step processes that do not readily lend themselves to project finance standards.”
But the technology side is the most obvious, where GTM cited a lack of standardization for microgrid controller technology. Several industry and research groups are working on developing standards, some with backing from the federal government.
Opportunity for a trusted vendor, industry leader
Currently, there's no real industry leader when it comes to developing microgrid control systems. And according to Saadeh, that's a big opportunity for whoever gets out in front.
“A lot of vendors have identified microgrid controls as a growth opportunity,” he said. “You're seeing vendors from building energy management, controls, grid services, all come up with these new microgrids control solutions. … Some of these solutions have been around for years, and some have been around a number of weeks.”
“The installations are immensely custom, which created interesting dynamics in the tech vendor community,” Saadeh said. Some vendors are trying to develop everything in-house, while others are developing strategic partnerships.
It's an area of opportunity because the costs associated with systems integration can make or break a project. “If you give a generator plug-and-play functionality in a microgrid, it can actually make the project economically viable,” Saadeh said.
The biggest challenge: regulation
While some states have developed strategies to encourage development of microgrids — seven states represent 80% of operational capacity today — GTM found it's more common that regulations could be hindering development and keeping microgrids from reaching full potential.
"While some regulatory momentum is supporting microgrid development, most of the current environment has prevented third-party-owned and -operated microgrids from functioning as small-scale utilities," the report found.
GTM said the top issues include: utility franchise rights; threat of a project being regulated as a utility; interconnection issues; and a lack of clarity surrounding how costs are distributed.
Among states, New York, which recently awarded 83 NY Prize grants to support microgrid development, leads with more than 200 MW of microgrid capacity online. Georgia (160 MW), Texas (155 MW), California (143 MW) and Maryland (90 MW) round out the top five .
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