Urban microgrids are high on the global development agenda. They are attractive for many reasons, most recently for their relevance to climate change adaptation and mitigation. They have proven resilient to extreme weather events, and, because they create commercial opportunities for low-carbon generation technology, they can reduce greenhouse gases from the urban sector in the long term. Clean technologies captured by urban microgrids include small-scale renewable energy and waste-to-energy technology, and burgeoning opportunities with smart grid/smart cities technologies like electric vehicles. For these reasons and more, urban microgrids have become integral to achieving Sustainable Development Goals 7 (affordable and clean energy) and 11 (sustainable cities and communities), bringing us closer to equitable and efficient economic growth around the world.
Urban microgrids were a major topic in June at the annual Asia Clean Energy Forum, hosted by the Asian Development Bank in Manila. Presenting on behalf of Chemonics, we made a case for the viability of urban microgrids in specific contexts.
What is an Urban Microgrid and Why Develop One?
An urban microgrid is an electrical distribution system that can be connected to a larger energy grid or operate in “island mode” on its own. It can be independently governed by a private entity or operated as part of a larger utility. The microgrid’s business model determines its customers base. If privately held and selling excess power back to the grid, customers are both the distribution company buying that power and the end users (or consumers) under its jurisdiction. In any case, a common characteristic of urban microgrids is that they often include generating “users,” — or prosumers — that both consume and produce power. These could be small businesses, buildings, or residences — like smart buildings with small generation systems or households with their own rooftop solar systems. When we all have electric cars with batteries that give power back to the grid at night, we will all become prosumers!
Why set up a microgrid in an area already served by an electric utility? After all, it must be more economical to rely on a system that is already in place — namely the “grid” — and many electric utilities would likely resist microgrids encroaching on their service areas. Despite prevailing opinions, there are some persuasive reasons for developing urban microgrids:
1. Resilience. Given the effects of climate change, developed countries increasingly require access to power following disasters. Formerly reliable centralized systems now experience shutdowns caused by severe storms that cost billions of dollars in damages, repairs, and productivity. Reliable power is especially important for essential services, such as hospitals, water supply, and emergency services. In developing countries, many of which experience long blackouts, uninterrupted power is essential for economic growth.
2. Renewable energy. Because they use renewable energy, microgrids are often installed so public or private developers can meet greenhouse gas emission reduction targets. Renewable energy with battery storage, through microgrids, can provide emission-free power to meet climate change mitigation targets and other air quality requirements.
3. Lower costs (sometimes). Although urban microgrid power is often more expensive than grid power, in some cases costs are lower. For example, providing reserve power to the grid from urban microgrids during peak load periods can often be cheaper than other “peak” reserves. Additionally, because power production and consumption are co-located, micro-grids avoid the costs of losses from high voltage transmission and distribution. Because of advantages like these, microgrids are growing quickly around the world, according to major industry players, and development financing institutions are offering concessional financing for microgrid developers.
Harnessing Green Sources of Power in Urban and Peri-Urban Contexts
Urban microgrids offer the exciting opportunity to turn underutilized assets and various types of “waste” into electricity and reduce greenhouse gas emissions. Electricity generated and stored by buildings and electric cars can also be harnessed by microgrids. General Motors’ OnStar Corporation recently demonstrated a microgrid in which a fleet of four Chevy Volts helped regulate energy flow from solar charging canopies with integrated storage. OnStar used TimberRock aggregation software to regulate the amount of charge going to each Volt in the fleet, and to determine when to sell energy back to the grid to help meet peak demand.
In lesser developed contexts, the islanded microgrid enterprise model — which relies on business performance — is succeeding, and the community-owned model — which relies on consensus and shared resources — is proving difficult. Systems based on the former have improved and expanded operations as opportunities arise, arguably contributing more directly to shared economic growth in their villages and towns. In Nepal, for example, the international non-profit Winrock International worked with hydro-powered mill operators who expanded over time to hydro-power electricity generation, creating a peri-urban economy that grew organically and now underpins local infrastructure. Meanwhile, in South Africa, USAID is supporting municipal low emissions development, contributing to the evolution of urban microgrids under the South Africa Low Emissions Development Program. In this case, Durban is effectively creating a mini distribution agency and will solicit direct private investment in new generation systems. Under current national law, cities may operate as mini-utilities and remain connected to the grid if they stay under specified total capacity and voltage levels.
Challenges to Viability
Given how new urban microgrids are and the complexities of dealing with an existing utility and grid, new guidelines, regulations, and financing are needed before we see widespread development:
1. Legal space to operate. In urban areas, the microgrid is in direct competition with the local distribution utility. It’s therefore important to clearly define and enable the legal entity that owns the microgrid.
2. Regulatory support. Developing new rules and providing regulatory oversight of microgrids will ensure that a similar quality of service is provided by neighboring microgrids and there is adequate competition to serve prosumers and non-generating consumers alike.
3. Economic viability. Public support may be necessary if investment and operating costs can’t fully be recovered through power sales to energy consumers and the local distribution company. This can be justified as public infrastructure with public financing models.
New York State may be leading the way in these efforts: In May, the state energy regulator, with the help of public and private stakeholders, issued a disaggregated tariff schedule that allows urban microgrid developers to raise project financing while continuing to cover their share of costs for maintaining the larger power grid under which they operate. This is just the latest effort under the state’s energy strategy to support private sector innovations, financing, and regulatory reform in the aftermath of Superstorm Sandy.
The Way Forward
Though microgrids are not a silver bullet, they are a valuable part of achieving Sustainable Development Goals 7 and 11. Sharing information on how urban systems contribute to overall economic growth and environmental sustainability — as the recent conference in Manila did — will get us closer to those goals. Urban microgrids should be supported wherever viable, easing the strain on urban services as cities rapidly grow, contributing to local empowerment, and ensuring greater private sector engagement. Donors, development agencies, and concessional financiers can help by supporting legal and regulatory reform and pilot projects, building capacity to analyze cost models, and proposing appropriate tariffs.
This blog was originally published by Chemonics.
Posts on the blog represent the views of the authors and do not necessarily represent the views of Chemonics.
Michael Ashford is a senior clean energy and infrastructure professional with more than 20 years of experience working with USAID, the World Bank, and the International Finance Corporation, as well as private and non-profit organizations. For USAID and the government of Nepal, Mr. Ashford led assessments and training for a public-private partnership project that financed run-of-river hydropower. He also completed return-on-investment analysis and training for energy efficiency and demand side management programs in Senegal. In the energy efficiency and biological sequestration sectors, Mr. Ashford co-led a feasibility study for the World Bank’s Proto-Type Carbon Fund and for carbon financing of greenhouse gas reduction activities. For private sector clients, he assessed project investment opportunities for biomass-fired cogeneration and coalmine methane recovery and use. Mr. Ashford also worked with the International Finance Corporation and Global Environment Facility to evaluate global small and medium-size enterprise investments in commercial entities that are reducing greenhouse gas emissions through their businesses.
Lisa Pagkalinawan is an environmental consultant for Chemonics’ Asia Business Development Team.