Operated on wide ranges of scale, from solar rooftops to military bases, microgrids are now being utilised on all seven continents. And the operations and maintenance market is set to capitalise, as Ross Davies reports.
The future of the microgrid markets appears to be brighter than anticipated.
Last year, market intelligence provider GTM Research was forced to revise its forecast for US microgrid capacity by 2020 from a previous figure of 3.71 GW to 4.3 GW. With current capacity around 1,649 GW, that’s an uptick of 116% – assuming growth holds.
There’s no reason why it shouldn’t. The present shift from single-ownership of microgrids to multi-stakeholders – commonly utilities – means project costs can be split, avoiding the need for substantial capital investment. For local communities, this makes microgrids especially attractive.
In the US – where GTM Research predicts market worth could swell to $1.66 billion in the next three years – military bases have been particularly fervent in their use of microgrids. In fact, 52% of the aforementioned capacity is believed to come from bases. Data centres, too, are moving the dial, contributing 27% of capacity stateside.
And it’s not just in the US. In its latest report on the sector, Navigant Research identified 1,842 active microgrid projects, spanning 135 countries across seven continents. They are enjoying prevalence in the Asia-Pacific region, while nano-grids – smaller versions of microgrids – are taking off in Africa and Latin America.
With more projects comes the need for more operations and maintenance (O&M) services. Peter Asmus, a research analyst within Navigant’s energy research arm, believes that vendors are consequently, seeing an opportunity in the O&M of microgrids as an additional source of sustaining revenue. .
Calculating O&M revenue opportunities
Calculating O&M revenue opportunities, however, is a complicated undertaking.
“Perhaps the most important factor in determining O&M revenue opportunities has nothing to do with technology,” says Asmus.
“As a result, it is the most difficult attribute to quantify. It is the question of what business model is deployed to bring the microgrid design into reality.”
A survey of projects tracked by Navigant in 2015- 16 revealed “some interesting results”, Asmus tells me.
If measured on the basis of microgrid capacity, power purchase agreements – a contract involving two parties, whereby ones generates electricity and the other buys it – account for 45% of US installations (excluding military stationary bases). Owner financing (16%) and utility rate base (15%) followed behind.
But rate-basing of microgrids by utilities can be paradoxical when it comes to O&M revenue opportunities.
“On the one hand, rate-basing tends to provide a disincentive for innovation, since all costs are essentially passed through to ratepayers,” explains Asmus.
“On the other hand, rate-basing can also provide enough head-room for robust O&M. Since utilities are often held to a higher performance standard than third-party infrastructure projects, this could lead to relatively robust O&M programs.
“But, of course, from a market vantage point, rate-basing models may limit third-party vendors from accessing potential O&M service delivery pathways. Unless, of course, a utility outsources the O&M for microgrids.”
The owner financing business model is perhaps the most simple value proposition, believes Asmus, as the host and operators are “one in the same under the simple version of this business model”.
However, the incentive under this business model is to have as little O&M risk exposure as possible. While this can secure the avoidance of risks that could potentially lead to major equipment failure, “it also implies a conservative technology mix that an on-site energy manager feels comfortable with”.
Fixed vs. variable O&M
So what are some of the main factors that need to be taken into consideration when working out O&M revenue opportunities?
For micro grids predominantly powered by natural gas or diesel generation, fuel costs are the primary component of O&M cost.
“Natural gas fuel, in particular, is usually provided by the incumbent natural gas utility, though exceptions, which also provide bulk fuel purchasing services, do exist,” says Asmus.
When it comes solar and storage microgrids, fixed O&M costs are the primary O&M cost-revenue component. With solar and storage expected to become more commonplace, this represents a golden growth opportunity. Does this apply to wind, as well?
“The same fixed O&M revenue opportunity would apply to other non-fuel technologies such as wind power, though, for the most part, the integration of wind into microgrids is limited to remote microgrid applications,” says Asmus.
“In the case of both wind and solar, the lack of fuel costs results in fixed O&M dominating potential O&M revenue opportunities.”
According to Navigant’s research, fixed operations and maintenance revenue opportunities are generally seen as greater than variable O&M – even for highly utilised generation assets with frequent asset dispatch.
Furthermore, potential revenue from fixed plant O&M is typically greater than the sum of fixed equipment O&M for each microgrid-enabling technology asset. Therefore, this fixed O&M category, says Asmus, is a potential growth opportunity with the widest variety of market players within the value chain.
“Because it is not specifically tied to any individual piece of equipment, it is not necessary to be a supplier of that piece of equipment to the microgrid to play in this space,” he explains.
“However, a vendor offering focused solely on O&M for microgrids that the entity did not serve another role in the project value chain – such as a developer or technology supplier – would be challenging.
“The leading market player candidates to provide plant O&M services include the microgrid controller provider, project developer or system integrator – especially if a single firm provided all three of these essential microgrid services.”
The shift to renewables
Fixed O&M costs and revenue for specific equipments tend to be lower for fuel-powered assets – compared to solar and storage.
And with the market shifting towards a higher penetration of greener energy sources, might there be increasing O&M opportunities for renewable and storage equipment providers?
“It is the vendors that maintain the overall performance of the entire microgrid plant that are most important from an O&M performance and revenue generation perspective,” says Asmus.
“If focused on fixed O&M, they, too, benefit from markets tilting toward renewables.”