The supply of electricity provided by utilities may have started with microgrids when Thomas Edison pioneered the delivery of kilowatt-hours from his first power plant at the Pearl Street Station in New York. But the fledgling industry soon abandoned a highly competitive retail market and localized service and shifted to a centralized monopoly model. This was due in large part to the available technology, which shifted from direct current (DC) to alternating current, the latter enabling the construction of large thermal power plants that could send power to customers over long distances. The ability to scale in this way showed more favorable economics than small microgrids serving individual or small clusters of customers.

This monopoly model survived for over a century but began to shift several decades ago, first with the deregulation of wholesale supplies (which fostered initial innovation with renewable energy projects), then to retail competition, and now to a major overhaul of the entire electricity delivery ecosystem. As a result, microgrids are having a comeback. Though led by non-utility developers and key enabling technology providers, the role of utilities in this space is increasing as the pool of distributed energy resources (DER) increase and emerge as the leading source of energy supply and services over the next decade.

Distributed Energy Overtaking Centralized Supply Globally

These DER pools are more than just supply in the form of distributed generation like solar PV, fuel cells, distributed wind, and diesel and natural gas generators. They also include energy storage, EVs, and diverse customer loads within the potential DER mix. With this wider view of potential DER assets available to microgrids, these assets represent more than double the amount of centralized generation capacity coming online by 2030 on an annual basis worldwide.

With microgrids, utilities can capture greater value from DER to support their traditional obligation to serve while recognizing the new energy landscape. As extreme weather and related wildfires, typhoons, hurricanes, and tornadoes increase in frequency and duration over time, microgrids represent a way utilities can offer resiliency services. By grouping resources into systems that can enhance, rather than impede, overall grid reliability and resiliency, utilities that deploy microgrids can optimize DER to provide bidirectional value. Growing numbers of utilities worldwide are investigating options as to how they can best use their existing customer relationships—and new customer-owned assets—into future opportunities within the microgrid space.

Unique Challenges Face Utilities

The market barriers to microgrids deployed by utilities reflect that, outside of remote systems, utilities have not been in the driver’s seat when relying on this DER platform in industrialized economies with traditional grid networks in place. Many microgrids have been deployed in response to perceived shortcomings of utility service, whether the issue for customers was reliability, resiliency, cost, or preferences for greater renewable energy.

Technology advances typically outpace regulations. For microgrids, however, the recent rise in power outages around the world, particularly in places such as Japan and California, underscores how the regulatory process is not always set up to adapt to the need for quick action and streamlined approval processes. This has become an important issue in California, where utilities such as Pacific Gas & Electric sought to deploy 20 microgrids at key substations before the 2020 fire season but will instead now rely upon temporary generation microgrids dependent on liquid fuels for resiliency services. Utilities are held to a higher standard than other energy service providers; the regulatory hoops they must jump through are often higher than their third-party counterparts. For example, when San Diego Gas & Electric moved forward with the Borrego Springs microgrid, it had to design and install diesel generators in a way that could withstand a 100-year flood scenario. If these DER assets had been instead installed by a non-utility third-party, they would not have had to abide by such contingencies.

Beyond issues such as siting and construction timeframes, there are larger concerns regarding how microgrids fit into a regulatory regime that has revolved around universal access and an obligation to serve. These ideas initially articulated to justify large electric utility monopolies, may need to be revisited or revised.

What Utilities Can Do Today

Utility distribution microgrids make up 19% of the total microgrid market cumulatively according to the latest version of Guidehouse Insight’s Microgrid Deployment Tracker (see chart below). This figure is based on identified specific projects and their rated peak capacity. This market share has increased gradually over the past decade.

Total Microgrid Power Capacity Market Share by Segment, World Markets: 1Q 2020

This data undercounts total utility microgrids since many early microgrids were deployed by utilities in remote regions lacking traditional grid infrastructure. An upcoming report from Guidehouse Insights will include these remote systems deployed by utilities in its market forecasts. It will also segment the total market by private and public utilities.(Source: Guidehouse Insights)

The role of utilities in the microgrid space is surprisingly diverse. Not known for pushing the envelope on new technologies or business models, utilities have been pioneers in developing remote microgrids on islands and in smaller isolated villages. For example, the leading state in the US for microgrid capacity is Alaska. The majority of microgrids deployed in Alaska are by utilities serving remote communities.

The role utilities are playing with grid-tied microgrids—and, more specifically, the grid-tied microgrids that help utilities address climate change impacts, wildfire threats, and the resiliency needs of the larger distribution system—represents a major shift in the microgrid market today. It is here where utilities face both the greatest obstacle and the greatest opportunities.

The Guidehouse Insights’ report, Utility Microgrid Strategies Leveraging DER for Grid Benefits included the following recommendations. They remain sound advice today:

  • Advance microgrid deployments that address specific DER challenges.
  • Learn from other utilities with similar structures or DER challenges.
  • Develop both a short-term market entry strategy and a 10-year stretch goal.
  • Investigate more than one microgrid strategy simultaneously.
  • Engage with the market today.