Why the majors, electric utilities, and private equity firms all want to own US microgrids
The US microgrid market is growing, with a record 546 microgrids installed during 2019.
Most of those projects were below 5 MW. This is a continuation of the trend starting in 2017: smaller, more modular projects consistently grew each year. As the market has grown, it has also attracted increasingly diverse financiers, accourding to our latest report on microgrid finance.
As costs have gone down, investor interest has gone up
Increasing system standardisation and decreasing costs of energy resources has reduced development costs and boosted small microgrid growth.
Standardised systems remove the need for custom-builds – and less time is required for construction. That’s also made it easier for financiers to evaluate multiple projects: there is less due diligence costs on a portfolio of locations that run similar technologies and have the same business model than multiple customized systems with diverse business models.
The investor landscape is diverse – and will continue to expand
Diverse groups of financiers with patient capital are investing in US microgrids, ranging from investor-owned utilities to private equity groups. In the next two years, we predict that more private equity players will enter the market – especially those with experience in infrastructure and oil & gas. Many of these firms are looking for above-market returns with comparable stability of historic infrastructure investments.
In addition, more utilities will want to leverage their unregulated business arms to own and operate microgrids. These firms are interested in supporting customers as they seek resilience for their operations and electrify heating and transportation. The oil majors, as well as multinational corporations like Siemens, are also interested in becoming one of the vendors to help customers navigate this transition.
Resilience is a key incentive
Hurricanes Isiasas and Laura hit the US Gulf Coast and Northeast in August, leaving over 1.5 million people without power.
Faced with extreme weather events like these, it’s no surprise that 84% of third-party investors are primarily motivated by resilience and reliability. The central value proposition for many third-party-owned microgrids is saving on the costs of the traditional backup diesel generators, rentals or uninterruptable power supply systems that are normally required in the event of a blackout. Competing with traditional backup solutions has been enabled by providing financing options that require no or limited upfront capital. This financing allows customers to get the benefits of a microgrid without a large, upfront cost.
Unfortunately, with events like the recent blackouts in California, Wood Mackenzie sees the demand for modular microgrids using third-party financing only increasing.
What is a microgrid?
Microgrids are a set of distributed energy resources (DER) with unique capabilities. Wood Mackenzie defines a microgrid as a set of distributed energy resources with the following features:
- Ability to provide power and energy services within a geographic perimeter in both grid-connected and island mode
- Able to support loads totalling more than 100 kW in single or multiple buildings for at least 24 hours
- Distributed energy resources that can be controlled as a single entity
Wood Mackenzie further splits microgrids into basic versus advanced:
- Advanced microgrids have multiple distributed energy resources (DERs) and complex controls
- Basic microgrids have one DER technology
DERs that cannot run in parallel with the grid do not qualify as microgrids under our definition.
If a system with these features is isolated from the electric grid, we track it as a remote microgrid. We use the terms remote microgrid and mini-grid interchangeably in this and other reports.