Financing Microgrids that Can Have a Mega-Impact
October 01, 2019
Approximately 1.1 billion people—or 14% of the world population—do not have access to electricity. Of those, more than 84% live in remote or rural areas. Microgrids can offer a viable solution to energy access and related challenges in areas not connected to the main electricity grid where it is too costly to extend the traditional grid.
The International Energy Agency projects that 42% of new energy generation capacity additions will need to come from microgrids to achieve United Nations Sustainable Development goal of 100% energy access by 2030.
Microgrids have many benefits and may be the least-cost option in many cases. However, there are significant barriers to financing microgrids. Written by NREL authors Eric Lockhart, Tim Reber, and Samuel Booth and Energy 4 Impact authors Peter Weston and Wakar Kalhoro, a recent publication, Financial and Operational Bundling Strategies for Sustainable Micro-Grid Business Models, explores those challenges and highlights the emergent solutions.
Microgrids Can Offer Advantages for Remote Communities
Remote communities face unique challenges because of their geographic isolation, including limited energy and water infrastructure, land constraints, harsh climate and extreme weather events, high energy costs, and heavy reliance on biomass and/or imported diesel fuel.
For those that opt to deploy microgrids, this strategy can offer a couple of key advantages.
Enhanced Health and Quality of Life
Electricity access can reduce the time needed to collect biomass for energy as well as the time needed to complete tasks that can be done with electricity, such as water pumping. More time during the day can create opportunities to develop businesses or attend school. Reduced reliance on biomass is also beneficial because it reduces the negative health impacts of burning biomass. In addition, reliable energy from microgrids can provide power for critical infrastructure like hospitals and health clinics.
Microgrids can also increase the resilience of a community. In the event of a disaster, a microgrid designed to provide resilience functions can continue to provide power and can typically be turned back on or repaired more quickly than a traditional grid. The recovery period of a microgrid can be faster and less complex than that of the traditional grid.
Microgrids also have the potential to make better use of local energy sources than the traditional grid. Because microgrids are highly localized and customized, they can be designed with local energy resources and uses in mind. The design can consider local renewable resource availability and create a reliable system with backup generation and/or batteries.
Remote communities often rely heavily on imported diesel, and in such cases, a microgrid’s use of local resources can enable greater energy independence. This can also increase resilience by reducing the economic impacts of high imported fuel prices that tend to fluctuate in response to geopolitical issues.
High Risk and Costs Present Barriers to Microgrid Financing
Despite the many benefits of microgrids, it can be difficult for developers to get projects financed. This makes it challenging to scale up microgrids for widespread deployment.
Microgrid investments are considered high-risk due to the lack of long-term track records, challenges in evaluating community energy demand and growing it over time, and the unique characteristics of each community and project. Investors do not typically have experience valuing microgrid projects.
The costs associated with microgrids also make obtaining financing difficult. Many microgrids are expensive because they are unique, custom installations. The typical levelized cost of energy (LCOE) is more than $0.60 per kilowatt-hour. NREL, Power Africa, and USAID explored how these high costs can be addressed with subsidies and grants or policies and regulations in Tariff Considerations for Micro-Grids in Sub-Saharan Africa.
Bundling Can Help Overcome Barriers
NREL and the U.S. Department of Energy developed a Quality Assurance Framework (QAF) to help address some of these root challenges. The QAF defines the different tiers of services microgrids offer. It also provides a framework for accountability and performance reporting. These components offer clear processes and standards that can make a microgrid a more viable option for a community.
The NREL E4I publication Financial and Operational Bundling Strategies for Sustainable Micro-grid Business Models introduces two financial mechanisms that can help microgrid developers overcome barriers: operational bundling and financial bundling. Bundling is when projects or different project aspects are combined into a portfolio to create efficiencies and economies of scale. This can make investment more feasible and attractive.
Though the study focuses on the applications of bundling in sub-Saharan Africa, such tactics can be used in the United States and across the world. U.S. territories (such as Puerto Rico and the U.S. Virgin Islands) or remote communities (such as Alaska Native villages) may benefit from microgrids but face challenges associated with the costs and uncertainties. Bundling may help.
Operational bundling is when similar projects are combined in a portfolio in a way that reduces development and operating costs. By combining similar projects in certain ways, developers can realize efficiencies and economies of scale.
There are different categories under which microgrids can be bundled into a portfolio:
- Design and engineering: Creating a portfolio of microgrid projects with a consistent system design has many benefits. It can make it easier to get equipment and potentially allow for better bargaining with suppliers. Consistent system design can also create a track record of performance to instill more confidence in investors. The NREL/ E4I report emphasizes that “standardized designs can also decrease real or perceived risk on system performance for prospective investors.”
- Installation and commissioning: Microgrids are complex systems that are subjected to variable environmental conditions. Consistent practices for installation and commissioning decrease variability in system performance for the project portfolio, which may be important to investors.
- Operations and maintenance (O&M): Consistent O&M practices across a microgrid portfolio can attract investors because these practices can lead to savings and decreased cost variability.
- Customer agreements: Standardized customer agreements are important for growing business operations. Creating customer agreements that meet legal requirements and establish clear expectations can help provide business stability and make a portfolio of projects more appealing.
- Standardized productive-use offerings: Encouraging power consumption by small businesses and industry can create more consistent demand. Ways developers can encourage productive use of energy (PUE) include considering PUE needs when designing the system, designating PUE zones near generation sources, and offering more flexible payment or financing choices.
- Performance monitoring and reporting: Collecting data across projects in a portfolio can increase investor confidence by improving transparency and standardizing metrics.
Financial bundling aggregates multiple projects into a portfolio. This may attract more investment because of the increased portfolio size. In addition, combining many different projects de-risks the portfolio.
Financial bundling also aggregates funds from different investors. This can be done in the following ways:
- Pooled funds for microgrid operations and growth: A microgrid growth fund allows multiple investors to invest in the development, construction, and operation of multiple projects. This method can reduce transaction costs because the processes are standardized. Spreading development and operating costs across projects may create economies of scale.
- Pooled funds for electrical appliances: A fund can be created to help the microgrid operator provide loans to its customers to buy electrical equipment. This creates local demand for electricity.
- Crowdfunding: Crowdfunding targets retail investors, not high-net-worth investors, opening the investment potential up to a larger audience.
- Export credit finance: Export credit agencies (ECAs) facilitate long-term funding on behalf of national governments for equipment-based exports. Though the ECA system may be less relevant to domestic audiences, this system could work for bundled microgrids elsewhere. This financial bundling method allocates risks to parties that can handle the certain types of risk, protects banks from political risk, and gives the borrower time to pay back the loan at a competitive fixed interest rate.
- Microgrids have many benefits and have the potential to support universal energy access.
- Microgrids are expensive to install, and it is difficult to get financing.
- Bundling can help developers overcome barriers they face in obtaining financing.
- Operational bundling of similar projects can allow the developer to achieve efficiencies and economies of scale.
- Financial bundling widens the net of potential investors.
- Communities can use either or both bundling methods.