Utilities Face Another Wave of Disruption

 | Jul 01, 2013 | 6:00 PM EDT  | Comments
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Utilities are in for another shock. Just as they were gaming wind power, solar power and demand-response programs, another disruptive technology is appearing. Some utilities will embrace it; others will see it as a threat. No matter what, this technology will change how we will interact with utilities.

The technology is about microgrids. Microgrids are what they sound like: Small grids. Unlike their ancestors, microgrids are packed with technology. They will provide small groups of consumers with reliable and low-cost power. It is an exciting area, the technology is whiz-bang, and billions will be made.

Microgrids will be as disruptive to utilities as Microsoft (MSFT) was to computing or cell-phones were to the old telephone system. As with most disruptive technologies, change will come mostly from the outside.

Some of the new technology will be arriving from the military. Ships and large aircraft have been using microgrids for decades. For the military, power delivery is a mission-critical system without which most combat platforms would fail.

An aircraft carrier is a good example. It is a small city, and it places varying demands on the ship's power systems. A ballistic missile submarine's microgrid is even more important: It needs power to surface. So too are microgrids built for the Air Force's C-17 Globemasters.

Conceptually, there is little difference between an aircraft carrier and a utility operating on an island. Their utility systems are mission critical, they operate in isolation, they are subject to violence from combat or weather, and they cannot connect to a larger grid.

As renewable energy systems become commonplace, island utilities, such as Guam Power Authority, Hawaiian Electric Industries (HE), Caribbean Utilities and the Puerto Rico Electric Power Authority, have a new dynamic to manage. They have to not only manage random demands on their system, they also have to manage supplies that can suddenly appear and then disappear.

Island utilities are finding renewable energy attractive. Wind and solar power have become essential resources. When crude oil jumped to $90 or so per barrel and when delivered diesel prices broke $20 per million British thermal units, wind and solar resources became a bargain. However, it is only a bargain if it can be managed efficiently and effectively.

Enter microgrids. Their command, control and communication systems ensure that the island's least-cost supplies are always first in line and that the higher-cost supplies are dispatched last. More importantly, these systems make decisions quickly and automatically.

The military is pursuing microgrid technologies for large bases. The Department of Defense needs secure energy and the ability to operate when utility grids are down or in rolling brownouts. DoD wants energy supply from utilities. It wants to use more base-supplied renewable energy from wind, solar and waste-to-energy. DoD also needs independence from utilities.

The Investment Angle

Microgrids will not be limited to the military or island utilities. Other consumer groups will soon realize their benefits. Those groups will soon start deploying microgrids on the mainland. Initially, it may be local distribution utilities such as Consolidated Edison (ED) and Northeast Utilities (NU). They and their state regulators are motivated to mitigate power blackouts, like the one caused by Hurricane Sandy.

The early adopters are likely to be real estate developers of new housing developments, shopping malls and industrial centers. Their motivation to include microgrid technologies in their plans will be similar to the motivation of military and island utilities. Developers will want to offer a differential product at a higher margin by assuring buyers they will not be stranded by power blackouts.

Another motivator is impressive tax credits. If developers add renewable energy and related resources to their microgrids, they can immediately book investment tax credits and possibly production tax credits.

Developers can use their microgrid to aggregate customers and take advantage of demand-response revenue. They can also offer lower energy costs to tenants as property managers seek competitive sources of power.

There are discussions currently under way where microgrids can be built that take advantage of market-based energy. For example, if a supplier within the microgrid has too much production, for a fee it can share surplus production with other members before those members use typical utility sources.

As Microsoft learned in the computer business, the possibilities of microgrids are endless. In time, small cooperative utilities and other nonprofits would see huge benefits in adopting microgrid technology as they modernize their systems.

Boeing (BA) and Siemens (SI) are current leaders in microgrid technology. Their current focus is the military. In time, they will be joined by other military and computer companies to provide new technologies to plain old utility systems.

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