- Sep 22, 2021 9:09 pm GMT
A host of technology advances are making the transition from fossil fuels to renewables and other technologies linked to clean energy increasingly cost‑effective. In many cases, lower carbon options, such as renewables and advanced batteries, are cheaper than traditional technologies, particularly from an ongoing operations and maintenance perspective. The International Energy Agency recently proclaimed that at sites with current low cost financing, solar PV is the cheapest source of electricity worldwide.
Steep drops in costs for solar PV are supported by a similar drop in energy storage costs. Since these resources are forecast by Guidehouse Insights to be the most commonly deployed distributed energy resources (DER) within microgrids, it stands to reason that risk averse commercial and industrial (C&I) customers are starting to take notice and action.
Why C&I Microgrids Gained Traction over the Past Decade
Without large government grants and other fiscal support, a lack of regulated monetary value for resiliency makes it more difficult for utilities and other highly regulated applications, such as stationary base military applications, to deploy microgrids. It is less important for C&I customers because they often have internal metrics that involve simpler math: the loss of company revenue when the grid is down.
The biggest gap in policy support for the microgrid market is this lack of a clear financial value placed on resiliency. In other words, the primary unique value proposition offered by microgrids—resiliency—is not recognized in any tangible way in the vast majority of markets in the US and worldwide. While new methods for valuing resiliency, both internal and external, also appear to be strengthening the business case for microgrids, C&I customers can justify investments and microgrid deployments without government guidance or support. Afterall, unlike other microgrid segments that may receive direct government support, C&I microgrids generally must stand on their own—with a little help from friends in the form of indirect incentives for the DER assets that populate microgrids. It is a lot easier to justify government help for a disadvantaged community or a military base than a profit-seeking business venture.
Modular and Energy as a Service Microgrids Are a Great Fit for C&I Customers
Two other trends support C&I microgrid growth. The first is modular microgrids, which commoditize standard microgrid offerings (especially hardware components) that can easily be pieced together, thereby shrinking design and deployment costs. This approach is more attractive to financiers as it creates portfolios of similar-sized assets. Although it is true that few microgrids are exactly alike, there are vendors—such as Bloom Energy, Scale Microgrid Solutions, Enchanted Rock, Tecogen, and many others—offering products and services that are moving the market closer to a plug-and-play paradigm. C&I customers, whether connected to a utility grid or not, are ideal fits for modular offerings because they seek lower cost solutions that can be deployed quickly and financed across project portfolios for firms with multiple locations.
The emergence of energy as a service (EaaS) microgrids is the second trend dovetailing with C&I microgrid growth. In EaaS agreements, the customer is not required to take on debt or pay out of their CAPEX budget for equipment upgrades or ongoing services—a key differentiating feature. This value proposition is highly appealing to C&I customers, as OPEX payments could be treated off the company’s balance sheet, allowing clients to spend CAPEX on priorities close to their primary mission.
A long-standing reluctance to spend CAPEX or take on debt for non-core elements of business is also part of the appeal for C&I customers. As customers do not take on debt or spend CAPEX budgets on EaaS projects, they can enjoy savings from day one, especially if their contract stipulates energy efficiency guarantees. Though the focus of microgrids has historically been more on the generation side of the energy equation, EaaS structures help facilitate thorough upgrades that broadly roll in efficiency and digital technologies. In rare cases, EaaS agreements do not include savings guarantees.
Investment Community Turns Up the Heat
C&I entities often operate globally. As such, they often encounter regulations that govern carbon emissions linked to their operations. These regulations, which can take the form of a carbon tax, cap-and-trade, or other regulatory mechanisms, generally create incentives to shift away from fossil fuels and toward the adoption of energy efficiency and renewable power generation. The cheapest way to comply with such government programs are demand-side management or to purchase renewable energy credits, which are available in many electricity markets around the world. However, wrapping a microgrid around onsite renewable generation assets may be appealing to C&I customers that also value resilience and more control over their energy supply portfolio or value their own management capabilities. A microgrid can serve as a platform to transform a regulatory burden into a technology innovation opportunity.
Along with government programs, decarbonization initiatives are picking up momentum in the private sector, led by large institutional investors, such as BlackRock and The Vanguard Group, which control a combined $12 trillion in assets. These investors, and growing numbers of other institutions, are demanding concrete actions by the private sector to reduce carbon emissions. As most large C&I customers have traditionally relied upon backup diesel generators for resiliency, these decarbonization drivers are anticipated to inevitably lead to microgrids. Ameresco and Schneider Electric are among the vendors targeting this opportunity.
Just how large is the C&I microgrid market? Guidehouse Insights released an updated forecast that includes both grid-tied and remote C&I microgrids worldwide. The forecast capacity starts at 1,212.8 MW (or $2.2 billion) in 2021, growing to 6,839.3 MW (or $11.3 billion) annually by 2030.
Chart 1-1. Total C&I Microgrid Capacity and Implementation Spending, World Markets: 2021-2030
(Source: Guidehouse Insights)
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