Diving into the solar microgrid revolution

The following is an edited excerpt from "The Microgrid Revolution: Business Strategies for Next Generation Electricity" (Prager, 2016).

Electricity, typically AC, has historically been a relatively homogenous product in homes and offices. Now, with "distributed generation," electricity produced as a function of location (say, rooftops) as well as technology (say, photovoltaics) can be produced economically at smaller scale. It can be generated and used as DC power for home electronics or LED lighting. Such technological possibilities allow novel business models.

A whole lot of electricity demand can thus be met by new technologies, with no overlap with traditional AC electricity. Thus, DC and AC electricity can be mapped to different uses and constitute distinct product-markets from a business development viewpoint.

Many such electricity applications can be splintered off from the traditional application set, each a distinct new business. The electricity network may fractionate into specialized networks, for example for street lighting, traffic signals, water pumps or highly fine-tuned networks with tight performance requirements for research. The scale of operations for such distinct product-markets can be small or large and unbounded by geographical restrictions.

Normally, in typical opportunity analysis, and for determining a business direction to pursue, it is sufficient to specify the product-market and propose strategies for pursuit: to expand into a new market or develop new products, or both. But in assessing opportunities in renewable energy, we need an additional dimension of location to fully develop business options. 

Whereas typically product is a function of technology, in renewable energy, the product is equally and also a function of location. Further, location as Latitude-Longitude combination is insufficient. We need also to consider the spatial aspects of the solar (or wind) collection surfaces. Is it East or West facing, or located on a roof?

Electricity 2.0: The center does not hold 

Each of the customer segments, products, technologies, locations or spatial attributes may be combined in distinct ways to create new businesses. The question is: Who will undertake such fractionation of the existing business? Surely, entrepreneurs and new business initiatives of a variety of companies, like real estate companies, IT companies and the existing utilities.

"When you are falling," said Joseph Campbell, "dive." Applied to the electricity industry, this strategy for incumbent distribution utilities suggests: "Don’t dilly-dally, don’t prevaricate — plunge headlong into restructuring." Absent such repurposing, the present assets of distribution utilities will become less valuable over time, lending credence to the utility "death spiral" speculations that, while plausible, are not inevitable. Admittedly strong medicine, but the alternative is certain decline.

"If it ain’t broke, don’t fix it" does not apply to the electricity industry. The system is environmentally, topologically and economically broken and obsolete. But it works. But, so did pagers when cellular phones arrived and horse-drawn carriages when the automobile appeared.

'If it ain’t broke, don’t fix it' does not apply to the electricity industry.

Consider the transformation underway: Besides individual homes, water pumps for irrigation, streetlights on a campus or in a city, sprinkler systems for lawns and traffic signals can be "grid independent" with comparable or superior economics.

Despite technological advance and the possibilities of "personal" power through rooftop solar and batteries, the industry ownership structure, and the regulatory framework, remains eerily the same. Yet the animating force around which the industry is built — the "natural monopoly" assumption — no longer holds, even in distribution, as individual homes seek progressive grid-independence, a kW hour solar at a time. Competition in electricity distribution does not need overbuilding; the electricity "loop" may be unbundled as happened in the telephone industry to usher competition.

Users will continue to press switches in their habitual ways, but they need less electricity and are delivered in different ways by new players. The times call for dismantling and restructuring of the electricity infrastructure. We confront a "(re-) make" or "upgrade" decision, the latter seemingly easier. The right thing to do is to re-constitute the system, to dive.

Microgrid economics

The question arises: By what path may we reach Electricity 2.0? Sound economics must undergird such fundamental transformation as proposed here. The economics of product-markets is straightforward and requires standard business plan development. […]

Microgrids are new, and their economic modeling complex. To the question “Are they economical?" our answer is that they soon will be, even as standalone systems — let alone when grid-tied or tied to other neighboring microgrids to form a cluster. Thus, even the prospects for individual microgrids or clustered microgrids look good.

We need to compare the economics of microgrids with the economics of the existing macrogrid, and show that the former is superior to the latter, even without considering environmental and climate change externalities. Then a case may be made for substitution, provided the benefits are compelling enough.

Let us assume the microgrid is a standalone business with a certain market value. If the economic value of the [standalone] microgrid surpasses the economic value of the macrogrid for the same serving area, then we have an argument in favor of microgrids and strategic action.

But how can we compare the value of the electricity network of today, which is an aggregate, with the value of small parcels of the grid, comprised of hypothetical microgrids? Today, electricity prices are standardized over a huge customer base; costs are also in the aggregate.

Microgrids are new, and their economic modeling complex. To the question 'Are they economical?' our answer is that they soon will be, even as standalone systems.

Microgrid economics, in contrast, require local and specific assessment of the generation potential, geographical attributes and revenue potential of a local market. One method to compare between the two might be to "levelize" the valuation problem to the common denominator of $/kWh.

Knowing the load profile, we designed a microgrid comprised of solar panels, batteries and gas or diesel-based generators for the homeowners association, or HOA (in California). We assumed the hardware would be installed at the serving sub-station. We used web-based prices for solar panels, inverters and batteries. We assumed set-up and operating costs, interest rates, and project life. Given today’s costs, what is the price in $/kWh, at which we could offer electricity using microgrids? Our answer: ~ $0.20/kWh.

Now, $0.20/kWh is lower than the average price paid by the residents of the homeowners’ association in that particular neighborhood; the highest pricing tier is ~ $ 0.33/kWh, which nearly all homes reach each month. We concluded that this HOA could peel away from the grid and save money. The economics may be improved by sharing resources among a federation of microgrids in the neighborhood — battery banks, common solar deployment locations, centralized network management.

Some microgrids could be business parks with daytime peaks, and others, primarily residential microgrids. Economics may also be improved by new "behind-the-meter" services; by network optimization; demand management; and by seeking volume discounts on equipment. We thus conclude [that a] cluster of microgrids represents greater economic value than the value of the aggregate, consolidated grid.

By far the greatest impact on electricity economics, however, will arise from slackening industry boundaries, and letting telecom services become a part of the electric utilities' portfolio of services. We now turn to that proposition. Already, the World Bank tries to leverage the presence of cellular towers in rural areas to piggyback electricity access. But that is simply the start of a bigger story.

What death spiral? 

With competition for microgrid services, and competition also for product-market segments, will the utility business shrink? Not necessarily, provided the IOUs think of opportunities more broadly. Literally, the electric utilities need to think outside the box, the historically clear-cut but increasingly fungible industry boundaries. 

Consider what EPB, a non-profit municipal electric utility in Chattanooga, Tennessee, has done. They have built the U.S.’s fastest ISP infrastructure, offering one gigabit per second bi-directional broadband for $70 per month. Other utilities can also become broadband ISPs, one microgrid at a time.

The U.S. has long had a sub-par broadband infrastructure […] The de facto duopoly of the cable companies and the telephone companies has ill-served the U.S. consumer with their paltry speeds at a high price, and indeed this has likely affected entrepreneurial opportunities for economic growth.

The customer has been shoehorned into becoming a consumer of content and less a generator of content, especially rich content. Should a consumer generate rich content, the options for sharing it have been constricted by this capillary-sized upstream speed.

EPB changed all that; therefore, it is the preferred ISP for Chattanooga, not the telecom or cable companies. Why cannot all electric utilities replicate EPB’s success? They can. Even if a fraction of the customers of an electricity utility get broadband from them, and this represents as small a revenue stream as $30 incremental per month, the economics of the overall electricity system improves dramatically and the electric utilities of today become among the most powerful network service providers of tomorrow.

In deploying symmetric gigabit broadband ... the electric utilities will attract the best residential and business customers from today’s broadband ISPs — the cable and telephone companies.

In deploying symmetric gigabit broadband, several times the speed of today’s Internet, the electric utilities will attract the best residential and business customers from today’s broadband ISPs — the cable and telephone companies.

Starting an ISP business with greenfield infrastructure, anchored in microgrid or sub-station sized service areas, likely has compelling advantages. While the network topology and configuration of electric utility driven broadband may be novel, the competencies necessary to deploy them are well established.

Will the regulatory environment permit wholesale electricity industry participation in broadband services? The public interest clearly lies in encouraging such competition.

Whereas the cable and telephone companies bundle entertainment, telephone services and broadband today, the electric utilities may bundle electricity, security, home energy consumption monitoring and similar services as well. Internet-based streaming content delivery already threatens the satellite-based hub and coaxial cable-based distribution of cable companies. Electric utilities can accelerate this trend.

More interesting to consider are the economic consequences — for towns, cities and the nation as a whole — of the entrepreneurial energies unshackled when high-speed upstream broadband makes a host of new services possible. The duopoly of telephone and cable companies has effectively strangled such upstream bandwidth based products and services.

All considered, electricity distribution companies, with the right strategies, might be among the most attractive investment prospects today — should they focus on microgrids and ISP services.