Market for microgrid operations & maintenance services on the rise

21 June 2017

With more microgrids comes the need for more microgrid O&M (operations and maintenance) services. Peter Asmus, a Principal Research Analyst within Navigant’s energy research arm, describes the growing market opportunity for these services. 

Navigant Research’s past market forecasts have focused on investments into the microgrid development value chain. This spending on the actual implementation of microgrid projects flowed to a diverse value chain of suppliers, technology providers, integrators, controls software vendors, and utilities. The forecasts captured the value of the assets as well as of the products and services that help to create a microgrid in the first place. As this fleet of microgrids worldwide grows over time, some vendors eye the ongoing operations and maintenance (O&M) of these microgrids as an additional source of sustaining revenue.

Our latest report examines revenue opportunities that can be captured from the ongoing O&M of microgrids. While an equally diverse set of opportunities present themselves in this area of the microgrid ecosystem, clarity on the extent and nature of how best to capture these revenue streams remains clouded. Nevertheless, the report puts a spotlight on the types of O&M revenue opportunities that are the most lucrative and available to the widest array of potential market participants.

The conclusion? That revenue opportunities for fixed cost O&M are typically significantly greater than those for variable O&M—even for highly utilised generation assets with frequent asset dispatch that incur relatively high variable O&M costs.

As is the case with forecasting implementation spending attached to new microgrid capacity, the only way to develop a valid market forecast for fixed O&M is to collect costs attached to key underlying microgrid enabling technologies. Fixed equipment O&M revenue can differ immensely between high capital cost equipment with zero fuel (solar PV) and low capital cost assets with high fuel costs (diesel generator). Fuel costs are excluded from the O&M revenue opportunity forecasts. Fuel is typically provided by incumbent utilities or long-term fuel suppliers that are not part of the typical microgrid value chain community. Though fuel can represent a majority of the O&M expense, with a few exceptions (such as Ameresco), microgrid developers and integrators rarely see fuel supply as part of their core offering.

Operational Microgrid Capacity Market Share by Region, World Markets: 4Q 2016

As a result, fixed O&M is essentially about limiting effects on moving parts. This is the most important factor in understanding the O&M revenue opportunity since microgrids can deploy multiple types of distributed energy resources within networks with wide ranges of scale. Nevertheless, the market for these fixed O&M services linked to individual components may also be limited, since they are typically provided by the vendor that sold the hardware in the first place.

Target Opportunity Should Be the Fixed Balance-of-Plant O&M

For reasons previously described, Navigant Research has determined that fixed balance-of-plant (BOP) O&M is the best open market opportunity available in the microgrid market. Here, too, the size of that opportunity varies widely. The scope of this potential revenue stream is linked to microgrid size, resource mix, business model, and systems integrator. In 2017, the fixed BOP O&M represents an estimated 69 percent of the O&M revenue opportunity; by 2026, that drops to 54 percent, which is still the largest market share for any single fixed O&M revenue opportunity.

While the methodology used to forecast present and future fixed O&M revenue starts with cost data per each class of asset, BOP data about the distribution of these assets within each market segment and each region of the world allows one to estimate opportunities globally. Unlike the annual implementation spending forecasts Navigant Research has performed traditionally, the size of the O&M market must take into account the cumulative installed base of capacity. Luckily, the study tracks identifiable operating capacity by both market segment and region in its Microgrid Deployment Tracker, most recently published in 4Q 2016. This data – while incomplete due to many vendors’ reluctance to provide specific project details – provides a good, although admittedly conservative, starting point for building out the fixed O&M revenue opportunities forecast.

Conclusion: The Role of Business Models on Microgrid O&M Opportunities

Perhaps the most important factor in determining O&M revenue opportunities has nothing to do with technology. As a result, it is the most difficult attribute to quantify. It is the question of what business model should be deployed to bring the microgrid design into reality. 

Microgrid Fixed O&M Revenue Opportunities by Region: 2017-2026

A survey of projects identified in the Navigant Research Microgrid Deployment Tracker with published online dates of 2015-2016 revealed some interesting results. If measured on the basis of microgrid capacity, the power purchase agreement model is the preferred path, representing 45 percent of the total identified installed microgrid capacity (excluding stationary base military microgrids) in North America. Owner financing (16 percent) and utility rate base (15 percent) followed. Almost a quarter of the projects (24 percent) failed to provide data on what business model was deployed, or deployed a different business model not identified in the survey.

The rate-basing of microgrids by utilities can be paradoxical when it comes to O&M revenue opportunities. On the one hand, rate-basing tends to provide a disincentive for innovation, since all costs are essentially passed through to ratepayers. On the other hand, rate-basing can also provide enough head-room for robust O&M. Since utilities are often held to a higher performance standard than third-party infrastructure projects, this could lead to relatively robust O&M programs. From a market vantage point, rate-basing models may limit third-party vendors from accessing potential O&M service delivery pathways. The exception is if a utility outsources the O&M for microgrids. 

Perhaps the simplest value proposition is the owner financing business model. The host and operator are one and the same under the simple version of this business model (In fact, the owner of the assets may outsource the O&M). However, the incentive under this approach is to have as little O&M risk exposure as possible. Though the incentive is to be prudent and avoid risks that could lead to a major equipment failure under a microgrid funded by the owner, it also implies a conservative technology mix that an onsite energy manager feels comfortable with. Most owner-financed microgrids lean toward the institutional/campus segment, and often focus on combined heat and power.

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WEF finds no progress made on greening economy

01 April 2019

The reports of two influential bodies, in the space of a day, have warned that no progress is being made to prevent major climate change. The World Economic Forum has warned that greening of the global energy transition has stagnated over last five years, while the International Energy Agency has confirmed coal use rose again last year.

The position of the Academies of Science from 80 countries, plus a majority of scientific organisations that study climate science, is that humans are causing rapid climate change – often referred to as global warming. Roughly 95% of active climate researchers publishing climate papers endorse the consensus position that since the industrial revolution, the boom in carbon emissions from fossil fuel powered human activity has heavily impacted the planet, with rising levels of CO2 and other greenhouse gases trapping heat from the sun causing global temperatures to rise – something which will have catastrophic results in the near future.

Despite the steadfast consensus among the scientific community on the matter, however, there has been little to no meaningful action to avert disaster. In fact, while the signing of the Paris Accord was met with great excitement, since it came into force, global carbon dioxide emissions have continued to rise. Today, they sit at their highest levels yet, after a strong economy and extreme weather stoked a surge in energy demand last year.WEF finds no progress made on greening economyAccording to the world’s energy watchdog, the Paris-based International Energy Agency (IEA), energy spiked by 2.3% in 2018 – the biggest leap since 2010 – with that demand largely being met with fossil fuels. As a result, global emissions of carbon dioxide hit the record high of 33 billion tonnes in 2018, a rise of 1.7% on 2017’s figures. Commenting on the findings, IEA chief Fatih Birol said the rise in energy demand was “exceptional” and a “surprise for many.”

Birol added, “We have seen an extraordinary increase in global energy demand in 2018, growing at its fastest pace this decade. Looking at the global economy in 2019, it will be rather a surprise to see the same level of growth as 2018.”

The suggestion from Birol that 2018 is likely to be an anomaly which will not be seen again is strange, considering the added strain which the boom in emissions will place on the environment. To suggest that heightened energy demand was driven by extreme weather – which is increasingly difficult to claim is unrelated to man-made climate change – and then to suggest that such a thing is unlikely to occur any time soon in spite of emissions having increased seems contradictory.

Regardless of this, the bad news was further compounded within hours of the IEA’s release. A report from the World Economic Forum released on the same day concluded that the world's energy systems have not become any greener in the last five years. Despite the agreement of global climate targets, falling green power costs, and mounting public and business concern over the catastrophic impacts runaway climate change could wreak, the WEF’s damning assessment warned that little to no progress has been made on making energy systems more environmentally sustainable since 2014.

Coal is the largest hindrance of change on this front, according to the report. Recent years have seen improvements in energy access and security, but far too many nations remain dependent on coal power for the new energy systems to have made any environmental gains. At the same time, major economies have failed to decrease or even slow the amount of energy they use per unit of GDP, leaving smaller actors who have made changes micturating into a gale. Change on the part of the world’s largest economies is therefore crucial to driving the development of a greener, more efficient global economy, the WEF concluded.

Commenting on the findings, Roberto Bocca, leader of the WEF's future of energy and materials division, said urgent action is now needed to move toward decarbonisation. He added, "We need a future where energy is affordable, sustainable and accessible to all. Solid progress in bringing energy within the reach of more and more people is not enough to mask wider failures, which are already having an impact on our climate and on our societies."

The news comes even as sustainability continues to be talked about as a ‘top agenda item’ at the majority of the world’s largest corporations. While 85% say that it will be more important still in another five years, it is clear that the majority of the world’s most powerful businesses are failing to walk the talk on the matter, regardless of what governments do.