Good for Society and Utilities
Following Hurricane Sandy’s impact in New York City, Long Island, and New Jersey, policy makers examined a variety of measures to fortify the electric grid, to make it more resistant to outages caused by extreme weather events, and to restore power more quickly in the event that it is lost. The deployment of microgrids was one of the solutions.
The aftermath of Hurricane Sandy revealed what industry experts have long known: utilities and their regulators have underinvested in the nation’s electricity infrastructure, creating a grid that is more unreliable than a modern economy needs. Sandy’s aftermath—long delays in restoring power, communication lines out, world-class hospitals evacuating patients, sewage treatment plants dumping waste into waterways—underscored that the grid’s one-size-fits-all standard of reliability lacks justification in a world where some services are more important than others. The primacy of emergency services aside, many believe that we also need to reevaluate how society prioritizes the investment of rate-payer dollars to operate, restore, and upgrade the transmission and the distribution components of the electric grid.
While the grid has suffered from underinvestment, the technology sector has undergone revolutions in cellular communications, microprocessor capability, and Internet connectivity. These revolutions have enabled the development of microgrids, small-scale electricity systems for one or more large users that combine efficient generation of power, its carefully monitored use, demand response, and energy efficient technologies in a single geographic location. These microgrids operate in parallel with or islanded from the larger grid. And these microgrids are typically developed by third parties: universities, independent developers, and other first adopters of new technology.
More importantly, these microgrids can provide what the public now seeks: critical institutions and key components of infrastructure functioning even when power is lost to the larger grid. They also bring competition’s creative forces to the electricity grid, which has long suffered a dearth of innovation.
In a region rich in microgrids, critical institutions will remain operational during blackouts, renewables will be deployed with ease, emissions will decline per unit of power used, and the grid and institutions that depend on it will each become more efficient and more resilient. Microgrids enable large public or private institutions—hospitals, water and sewer treatment plants, universities, economic centers, shelters, and housing complexes—to obtain a secure supply of power or to restore it more quickly in the event of a blackout. When the larger grid loses power, institutions with microgrids can remain operational for weeks. Microgrids also enable host institutions to manage their own electricity use and reduce costs and the larger grid to increase its efficiency and reduce its cost. Microgrids benefit the host institution with increased resiliency: secure power and/or the ability to restore power rapidly in case of an outage; the grid with increased efficiency and reduced operational and capital expenses; and the public, with critical public safety, communications, health, water, transit, and economic infrastructure functioning during emergencies.
A growing number of world-class microgrids exist today in the United States and across the globe. Universities, hospitals, and other institutions with a public service mission are increasingly deploying microgrids. The host institution understands microgrids as among the most cost-effective means of fortifying the grid, increasing the resiliency of critical infrastructure, and protecting the public against increasingly common extreme weather events.
Challenges to Deployment
Three barriers have prevented the wider and more rapid deployment of microgrids.
First, microgrid developers have to persuade their customers, microgrid hosts, that the benefits of microgrids exceed the costs. In the electric area, it is hard to obtain an accurate assessment, and even when it’s available, that assessment is difficult to understand. The host institution typically is not in the electricity business. It requires an unusual degree of leadership for a major healthcare, educational, or housing provider to understand the benefits and then make the decision to secure them by deploying a microgrid. It is no accident that many of the early microgrids were deployed by universities with significant internal expertise in engineering and the hard sciences.
Second, pricing is not transparent. Reliability does not have a price under the current grid’s regulatory regime. It’s accordingly difficult to price increased reliability. Moreover, improved reliability has broad social benefits, such as a hospital that functions during an emergency, that the host institution cannot identify or monetize.
Finally, regulations constrain the full development of microgrids. Even if customers can learn about microgrids and decide that the benefits exceed its costs, the optimal deployment of a microgrid requires both an understanding of bulk power pricing—a notoriously nontransparent market—and an ability to work with local utilities and with the independent system operator (ISO) or regional transmission organization (RTO), some of which may view microgrids as damaging to the macrogrid’s reliability and to wholesale market design.
Given the somewhat dysfunctional electricity markets, it is clear what governments, few of whom are enamored of the status quo, are likely to do. Removing informational barriers and pricing public goods are part of a government’s mission. A government will also enact legislation and promulgate regulations to promote competition in this sector and will insist that regulated monopolies act in the public interest to facilitate development by many entities, even within the utilities’ own service territory.
Finally, microgrids are going to be unique components of electricity infrastructure. They do not fit within the governing central station model of power generation: electricity generated by large plants, sent long distances over transmission lines, and finally fed through distribution lines to passive end users. They also do not easily fit within the regulatory construct that has grown up around this model.
The conventional view is well known within the industry. Features of microgrids—generation but not within the central station model, assets owned by important institutions that are neither utilities nor connected to the industry, and a fundamental economic interest and technological capability to drive down energy use and increase the efficiency of the grid—might make the deployment of microgrids somewhat antagonistic to utilities and the central station model of power generation.
But this conventional view is dated. Technology here, as elsewhere, intrudes with unstoppable force.
Utilities accepting that will have a major role in the deployment of microgrids for several reasons. First, the deployment of microgrids is technically complex. Utilities should have a major role in siting them (as they play a role in facilitating the siting of new generation via the procedures of the ISO/RTOs) to ensure that they benefit the larger grid. Second, utilities should help set standards for their design and site-specific configuration so that debacles like the failure of the NYU Langone and Bellevue Hospital’s back-up generators never occur again. Third, utilities could share in the financing of microgrids with the host institution, provided that the public benefits of the particular microgrid deployment are clear and quantifiable.
A few caveats are in order. First, utilities are not likely to be allowed to monopolize the microgrid business. Much like federal law prevents common ownership of transmission and generation assets within a market to ensure healthy competition and a fully functioning market, many state laws will prohibit the monopoly of utility ownership of microgrids. Second, while the view that microgrids threaten utility sales is accurate, other factors (such as the deployment of power-hungry data centers) will help maintain the underlying huge levels of electric demand, especially in urban areas. One of the benefits of microgrids is their extraordinary ability to create efficiencies in and reduce the costs of electricity usage. By allowing utilities to invest in (without giving them a monopoly) microgrids, regulators can create a new regime that fairly compensates utilities and their investors for participating in this new world.