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Microgrid Trends Shine Spotlight on Role of Utilities and Policy Makers

Over the past few years, microgrids have gained traction among utilities, customers and local governments. A forthcoming report from Guidehouse Insights identifies 1,639 microgrids in the U.S., representing 11,496 MW of total capacity. Given the anticipated increased frequency of natural disasters due to climate change, the value of microgrids as a resilience solution is growing.

During a recent SEPA Microgrid Working Group call, participants explored this growing demand, and how policy makers and regulators are beginning to take action – both as a response to increased deployment, and to further the commercialization of microgrids.

Market Demand Leads Policy
Over the past few years, policy makers in the U.S. – especially on the West Coast, Hawaii and Northeast – have proposed (and often enacted) legislation promoting microgrids. All told, lawmakers in 18 different states have proposed or enacted 112 bills over the past 5 years (see Figure 1). The majority of this legislation is intended to spur growth and commercialization of microgrids as a tool to provide local energy resilience and facilitate clean energy deployment. Lawmakers, utilities and stakeholders are beginning to recognize that public sources can be leveraged to fund societal benefits, reducing the burden on utility rate-payers and facilitating regulatory approval.

Figure 1: Microgrid Legislative Activity by State: 2015-2020 (Source: SEPA & EnerKnol, 2020)

In 2011, Connecticut was the first state to pass microgrid legislation. The northeast region has since led the way by total number of bills per state, with the top three states: New York (15), Massachusetts (14), and New Jersey (13). The most recent state from the northeast to pursue legislation is Maine, which proposed L.D. 13 earlier this year. It addresses many of the challenging policy questions surrounding microgrids, especially as utilities move more aggressively into this space.

Key features of L.D. 13 include:

  • Clarifies that microgrid operators are not classified as public utilities, and therefore, they are not held to the same regulatory scrutiny as utilities.
  • Directs regulators to approve microgrid proposals up to 25 MW if they are deemed to be in the public interest, perhaps opening the door for rate recovery.
  • Requires microgrids to meet the state’s renewable portfolio standard requirements.

A Focus on Clean
As of August 2020, the SEPA Utility Carbon Reduction Tracker included 56 utilities in the U.S. that have publicly stated carbon or emission reduction commitments. In combination with growing action at the state and local levels, these policy shifts towards clean energy are directly influencing clean energy requirements for microgrid development. Like Maine, many states have emphasized the potential positive contribution from microgrids to achieving carbon reduction goals.

As shown in Figure 2 below, the resource mix comprising microgrids is transitioning to clean technologies, mirroring utility and state-level trends, as well as global trends.

Figure 2: Selected Microgrid Capacity by Technology, World Markets: 2020 (Source: Guidehouse)

Solar PV and energy storage are the leading two DER choices for microgrids, and over the next decade, these two resources are expected to increase market share. By 2029, solar and energy storage will represent 78.4% of new microgrid capacity. Meanwhile, the four fossil fuel DER technologies – diesel and natural gas gensets, fuel cells and combustion turbines, are expected to decline from 35% market share in 2020 to 17% by 2029.

A Spotlight on Utility Action 
The availability of grant programs, PACE financing, microgrid tariffs and other incentives – such as the Green Resiliency Fund in Massachusetts – present new opportunities for more collaborative and successful partnerships between customers, local governments and utilities. This is an important policy shift, given that utilities across the country have suffered several setbacks in their attempts to rate base microgrids. For example, the Maryland Public Service Commission has rejected microgrid proposals from BG&E and Pepco due to their inability to demonstrate benefits beyond the microgrid boundaries. In contrast, Illinois regulators permitted ComEd to rate base a portion of their Bronzeville Community Microgrid, since the utility significantly leveraged public funding and made the case for it as a demonstration project; two very important criteria for many regulators.

Utility BG&E Pepco ComEd
Proposed Location Maryland Maryland Illinois
Estimated Cost $16.2M $63.4M $25M
Proposed Assets Natural Gas Solar PV, Battery Storage, Natural Gas Solar PV, Battery Storage, Diesel, Natural Gas
Regulatory Approval Obtained No No Yes

The California Public Utilities Commission (CPUC) has directed utilities in California to develop microgrid tariffs that establish compensation mechanisms for projects that can improve resilience against wildfires (SB 3119). The CPUC also approved microgrid directives in June 2020 that establishes a new Community Microgrid Enablement Program in PG&E’s service territory.  This program seeks to encourage the commercialization of microgrids by providing incentives in the form of credits to offset distribution upgrades.

Other legislation on the West Coast has focused on how microgrids can provide emergency response and preparedness against natural disasters, including earthquakes. Oregon has passed multiple bills, implementing utility pilots and encouraging the Oregon Department of Energy to explore microgrids projects. These policies helped propel the Portland General Electric’s Beaverton Public Safety Center microgrid project – a joint utility-city investment featuring solar PV, energy storage and a back-up diesel generator.

Another trend is the pairing of microgrid policy with efforts to accelerate energy storage growth. In Colorado, legislation passed in 2018 allowed Xcel Energy to invest and file for inclusion in the rate base of up to 15MW of energy storage. As part of a community resiliency initiative, Xcel proposed deploying small battery systems at seven customer sites to form microgrids in a joint investment with their customers, who will gain back-up resiliency benefits for emergency preparedness.

Hawaii has also pioneered a microgrid services tariff, which articulates that microgrid operators are responsible for making the case for monetizing the societal and resiliency benefits of microgrids.

In a recently published paper, “How to Design Multi-User Microgrid Tariffs”, SEPA and Pacific Energy Institute share microgrid tariff development best practices and recommendations for utilities and regulators who are exploring tariffs for third-party multi-user microgrids. The paper includes a framework to provide guidance on organizing and structuring microgrid tariffs (see Figure 3).

Figure 3: Multi-User Microgrid Tariff Framework (Source: SEPA)

Call to Action
Among the recent policy and market developments, four clear messages stand out, shining a spotlight on the role of utilities and policy makers in the growing demand for microgrids:

  • Utilities and policy makers are using microgrids as a strategy for deep carbon reduction
  • Utilities are developing microgrid tariffs to establish appropriate compensation mechanisms
  • Resiliency planning is driving the demand to evaluate potential microgrid sites for critical infrastructure
  • Leveraging the availability of public funds with joint customer-utility investments can reduce the financial barriers of microgrids

All SEPA members are encouraged to join SEPA’s Working Groups. To learn more and dive into actionable next steps towards a carbon-free energy future, register for the SEPA Working Groups Virtual Meeting, taking place on September 22 – 24. The Working Group Virtual Meeting offers an opportunity to participate in short, interactive sessions exploring the work of each Group, and trends and challenges presented by the transition to carbon-free. The meeting is free for SEPA members and $199 for non members.

For more microgrid case studies and resilience strategies, check out SEPA’s Microgrid Playbook, Case Studies and Case Study Live series on SEPA TV.