Globally, the adoption of Distributed power generation (DPG) solutions such as solar, wind, small hydro, geothermal, small reciprocating engines and others has been gaining significant traction since the past decade. The integration of DPG solutions into the power grid has become a major challenge for the power utilities across the globe. The traditional top-down electricity business model: utility selling to consumers is changing, and a bottom-up model of a bi-directional network dominated by DPG and prosumers is becoming popular. Microgrids (MG) and Virtual Power Plants (VPP) will be the key to integration of DPG into the network effectively.
MG is an energy system consisting of a group of interconnected loads, distributed energy resources, consumers, and optional storage that acts as a single controllable entity with respect to the grid. VPP is often correlated with MGs. It is a virtual network that is dependent on software systems to remotely control production from a cluster of DERs that are grid connected through smart grid technologies.
Utilities are Wary of MG and VPP
Presently, power utilities consider DPG as a challenge; MGs and VPPs serve non-utility sponsors such as towns, military installations, and university campus and is a cause of revenue erosion for the utility. Besides grid safety concerns, grid stability effects and operation are other trepidations in the utility’s way. Moreover, utilities need to charter an equitable and fair allocation of cost or fees. Customers with distributed generation sources need more equipment from the utility to support interconnections. However, cost split to be paid to utility is not yet clear.
New Business Model for Utilities
MGs and VPPs can be actively integrated into the utility’s business model to ensure reliability as well as grid stability, and increase energy capacity. The utilities’ need to be part of the energy transition including DPG and grid management can be realized by being supportive and active participant of the emerging MG and VPP market.
Utilities need to perform effective energy management. Decentralized electricity requires additional costs that need to be incentivized. These involve transaction costs such as signing contracts, transferring money, and refunding Transmission System Operator (TSO) and Distribution System Operator (DSO) to the DSO for payments made to the DG operator. Such incentivisation relies mainly on a strong regulatory regime to neutralize undesirable incentives and offer a positive one.
Lack of policy drivers, especially in emerging nations, can be a challenge for utilities. This is to develop a positive business case for MGs. For example, the renewables targets and the aggressive mandates to limit greenhouse gas emissions are implied mainly in the United States and the member countries of the European Union.
MG is an emerging market, while VPP is still in nascent stage. Till 2020, exponential growth is forecast for MGs, especially for rural electrification application in the developing nations. VPP is likely to gain significance in developed nations such as the United States, Japan, and EU countries, as it is likely to get integrated into smart grid plans and smart city projects.
The trend is shifting toward implementation of advanced MGs with smart technologies and new layers of intelligence, where MGs are foreseen as building blocks of smart grids. This is considered as a cell in the stack of interconnected distributed energy resources and customer loads that are controlled by interactions between the MG and the utility while incorporating Demand Response and energy efficiency measures.
Hotspots for MG and VPP, Global, 2016
North America has the highest share of MGs in terms of installed capacity in communities, institutions, and commercial sites. Military MG is the major application segment, accounting for an estimated investment of $1.6 billion annually by 2020. The unreliable nature of the extensive US power grid makes MGs an attractive option for high power quality and high reliability electricity supply for industries, research centers, and data centers.
In addition, North America has the biggest Demand Response (DR) based VPPs. The American Electric Power Service Corporation’s (AEP) VPP project in conjunction with EPRI is a large VPP simulation demonstration project in central Ohio that involves 110,000 AEP customers and includes energy storage devices, energy management systems, and other smart devices.
Europe is focused on DER such as solar, wind, hydro, and geothermal. These DPG solutions are driving the need for MG and VPP. MG market is in testing phase and power equipment companies are investing in pilot projects. DER assets are being owned and operated by consumers due to which European Distribution System Operators (DSO) are making efforts to develop new business models and alter their traditional practices. However, technical immaturity, utility reluctance, and current cost structure make the MG market restricted to niche operations.
European VPPs are DPG focused with large scale solar and wind projects. In the United Kingdom and France, VPPs are utilized for peak shaving especially in winter. An emerging trend is DR based VPP. The United Kingdom, France, Finland, and Belgium have advanced DR market, while in Germany the market rules and regulations do not favor DR VPP.
Asia-Pacific: Japan is the pioneer in the Asia-Pacific MG market. Government backed R&D agency NEDO, and Ministry of Environment (MOE) funds MG project in the country. The earthquake and power outage of 2011 have led to the implementation of VPPs to mitigate emergency crisis. With the commercialization of Vehicle to Home (V2H) charging in Japan, VPPs with batteries in EV fleets linked to commercial and residential buildings have become trendy in which a cluster of small generators and storage systems behave as a single unit with the help of power electronics and communication systems.
Australia is also promoting MG development. Government supported ARENA agency has funded several MG projects since 2012. In the rest of APAC, rural electrification projects are mainly bringing in MG developments. Some of the notable ones are the 1,000 islands project in Indonesia, solar photovoltaic program in the Philippines, and off-grid projects in Malaysia. Sarawak Energy in Malaysia, Perusahaan Listrik Negara (PLN) in Indonesia, and power corporations in the Philippines are targeting rural electrification with MGs.
The Last Word
MG market will develop faster than VPP until 2020. Traditional utilities are reinventing their business models and are becoming smart energy integrators by balancing energy supply-demand, managing information networks, and running smart grid programs. In this model, power utilities will be neither owning power plants nor selling power to the grid, rather they keep the demand-supply balance in check and run DR and smart grid programs. The sooner the utilities adapt to these new proactive business models, opportunities for VPP and MGs will be subject to rapid growth.