The Main Benefits and Challenges of Microgrids for Utilities

With increasing attention to distributed generation, the conversation around the challenges and benefits of microgrids is becoming increasingly important.

Electric utilities have a mixed relationship with microgrids. On the one hand, microgrids are a promising tool for increasing electrical resilience and modernizing the grid.

On the other hand, microgrids represent a major mindset shift from the way utilities have historically operated. They also raise important questions about reimbursement for existing infrastructure.

But since distributed generation isn’t going away, utilities can’t afford to ignore microgrids. Despite the challenges, microgrids offer interesting opportunities for utilities.

What is a microgrid, and how does it work?

A microgrid is a local group of energy sources (often referred to as a distributed generation fleet) that is connected to the grid but has the ability to disconnect and operate independently, usually in the event of an electrical outage.

Microgrids are often tied to renewable energy sources but can also incorporate other sources such as diesel. The main push behind microgrids is to decentralize generation and increase local flexibility.

Why would an electric utility consider building a microgrid?

Microgrids owned and operated by a single large customer, such as a university, military base or commercial facility, have long been used for back-up power. But why would a utility build a microgrid?

For practical purposes, electric utilities can create microgrids for their own mission-critical operations. In the event of a power outage, a microgrid can supply electricity to the utility’s main offices for uninterrupted communications. They can also be used to restart offline electrical generators faster during an outage.

But electric utilities are also uniquely positioned to develop microgrids for their customers. With their deep knowledge of the grid, utilities have ready access to contractors and resources needed to build and maintain microgrids.

In some states, utilities are the only ones who can build multi-customer microgrids. For example, the California Public Utilities Code prohibits anyone other than a utility from distributing electricity to more than two customers.

These regulations create competition-sparse opportunity for utilities to develop microgrids — at least for now. If these regulations go away, third-party providers will almost certainly develop more multi-customer microgrids.

While third parties can collaborate effectively with utilities, an influx in independent microgrids increases the complexity of managing integration and security. If utilities wish to maintain the most control over microgrids, they will likely need to develop their own.

The Main Benefit of Microgrids to Utilities: Boost Grid Resilience

The clearest benefit of microgrids is increased resilience. During an outage, microgrids can temporarily disconnect from the central grid. Each “island” can continue supplying power from their own generation sources or battery storage.

While most microgrids aren’t designed to function as islands indefinitely, the ability to separate from the grid can be a game-changer during natural disasters, such as wildfires and winter storms.

Microgrid controllers can limit the number of customers affected by outages and prioritize electricity for critical services such as medical care. Electrical resilience can increase customer satisfaction, reduce the economic impacts of outages and even save lives.

Other key benefits of microgrids include:

Encouraging renewable energy adoption
Promoting economic growth through electrical reliability

The Main Challenge of Microgrids: Fixed Cost Reimbursement

For utilities, the biggest question around microgrids and distributed energy resources is about fixed costs.

When individual consumers are incentivized to generate their own electricity, they purchase less electricity from the utility. Some also generate enough power to sell back to the utility.

The problem is that utilities’ infrastructure costs are baked into their rates. Since net metering customers are still connected to the grid, they could potentially benefit from this infrastructure without having to support its fixed costs.

As a result, the burden of infrastructure costs is shifted to customers who don’t use net metering. Many people argue that this isn’t fair to other customers.

Utilities also worry that as more people choose net metering, they won’t be able to support the enormous costs of the infrastructure improvements that a modern, clean grid requires.

The ways in which utilities can offset these fixed costs depend on state regulations, but a few potential solutions include:

Pay net metering customers at wholesale rates instead of retail rates
Charge customers flat fees for utility infrastructure costs
Rely on government subsidies for infrastructure reimbursement

But fixed costs aren’t the only roadblocks for utilities considering microgrids. Other challenges include:

Federal and state regulatory barriers
Fundamental changes to the utility business model
Technical challenges of integration and maintenance

Joining the Microgrid Conversation

The topic of microgrids is a complex but important issue for electric utilities.

Utilities will need to respond to increased demand for distributed generation and answer questions about grid integration — whether or not they engage in developing microgrids.

Understanding the challenges and benefits of microgrids helps utilities to represent their interests and make informed decisions about creating microgrids of their own.

This article was originally published on January 2, 2020. It was updated and republished on June 2, 2021.

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