Educating Private Investors Enables Microgrid Growth

When microgrids were in their infancy, they relied heavily on government grants, tax incentives, and other public funding sources to deploy demonstration and pilot projects. As their feasibility and efficacy was vetted and verified, larger-scale projects started to take shape. As larger projects become more widespread and public money begins to wane, host consumers and project developers will likely seek out other funding sources to assist with project development costs. This presents an opportunity for private financing institutions to enter the microgrid market and help boost its growth.

Private Funding Enables New Financing Models

Private financing can allow project developers and end consumers, in any business segment, to have more flexibility in financing the installation of microgrids. In some cases, a project developer may receive a loan from a third party to construct a project and then structure their contract with the end consumer such that no capital expenditure is required from the consumer. Instead, the consumer makes recurring payments to the developer over time to pay for the capital cost of the project. Some contract styles leverage an energy as a service approach whereby the developer retains ownership of the assets and the consumer makes ongoing payments for the energy produced or services provided throughout the contract period. Not only does this free up space on the consumer’s balance sheet for other investments related to their business practice, but it also streamlines their energy operations by outsourcing asset maintenance and operation to the developer.

Investors and Developers Must Work Together

Perhaps the most important consideration for a private lender when determining where to invest their money is the risk associated with the borrower paying them back. With microgrid projects, the risks associated with project development and operation can vary greatly based on many factors, including the technology involved, the use cases or application, the customer business segment, and the potential revenue streams available in the market in which the project is deployed. While those risks may be well understood by lenders for technologies like solar PV arrays and other standalone distributed energy resources (DER), they may be less clear in cases of complex configurations like microgrids that involve multiple technology types provided by different vendors and an optimization system.

Unlike standalone solar PV arrays, which are generally limited to selling excess generation back to the grid at a predetermined rate through net metering or net billing, microgrids can generate multiple revenue streams for the system owner. On top of selling excess generation back to the main grid, microgrids may also be able to participate in utility demand response programs or provide demand response services to the wholesale market in exchange for compensation. In addition to reducing the consumer’s reliance on volumetric utility power, microgrids can also reduce demand charges for certain customers, leading to increased bill savings. These revenue streams depend on numerous variables, including DER generation and customer load, retail electricity rates, utility program availability, wholesale market regulations, and demand charges. To mitigate financial risks, project developers, independent engineering firms, and other stakeholders involved in project design and implementation should assist potential investors in evaluating the risks associated with project development and operation.

To enable further project development, some developers in the microgrid world have formed JVs with financial institutions or have a short list of financial partners they can go to for upfront capital for project development. Schneider Electric has formed two microgrid JVs: AlphaStruxure with the Carlyle Global Infrastructure Opportunity Fund, and GreenStruxure with Huck Capital. Siemens formed Calibrant Energy, its own microgrid JV, with Macquarie Capital. Through collaboration, the disconnect between technical and financial understanding for an advanced energy project like a microgrid can be greatly reduced and potentially eliminated.