Summary

A microgrid is a local electrical grid with defined boundaries, acting as a single and controllable entity. It is able to operate in grid-connected and in island mode. A 'stand-alone microgrid' or 'isolated microgrid' only operates off-the-grid and cannot be connected to a wider electric power system. It can be considered a local area network (LAN) where a Virtual Power Plants is a wide area network (WAN). Microgrids are most closely associated with remote off-grid environments, military bases, and other environments in which a high degree of resilience is needed. The leading generation technology used in microgrids is diesel, but solar PV either will soon or has taken over.

Viability (5)

The market is in the commercialisation phase. The best estimate we have is from Q4 2018 when there were 2,258 microgrid projects worldwide, representing nearly 20 GW. There are few engineering challenges left and all risk is purely commercial. Much of the commercial work today is working with Government and housebuilders to get more distributed energy resources installed with new buildings.

Drivers (4)

On the supply-side, microgrids are only now possible with distributed energy resources that can provide enough supply for the microgrid to operate without support from the electrical grid. As with Virtual Power Plants the growing adoption of residential solar, home electricity storage, and EVs makes microgrids viable. And then on the demand-side, Hurricane Sandy in 2012 brought attention in the US to the need for microgrids to avoid outages and massive economic costs. Concerns over the vulnerability of the grid to cyberattacks after the 2015 attack at the Prykarpattyaoblenergo power plant in Western Ukraine re-doubled interest in microgrids for national security. The $55 billion datacentre market has grown increasingly concerned about resilience fuelling interest from the large cloud players.

Novelty (4)

Microgrids offer one feature that the electrical grid cannot: reliability. The electric grid is vulnerable to storms and bad weather resulting in outages. This can be dangerous for places like hospitals, prisons and military bases. When electricity supply cannot drop under any circumstances, back-up generators are often used, but these products have limited capacity, can be expensive and use petrol to run. Microgrids running on solar and other DER compete with the electrical grid on price, with estimates suggesting savings of somewhere in the region of 20 and 30 per cent, a number likely to fall over the next few years.

Diffusion (2)

Microgrids are relatively complex solutions to roll out. They rely on consumers buying expensive solar PV, batteries, CHP and heat pumps to participate in a microgrid. Or for Government to subsidise the costs, which has proven challenging to date. Overcoming the large upfront costs is an opportunity for financing innovation in the vein of the automotive industry or from the mortgage market. However relative to Virtual Power Plants, island-mode microgrids offer less public good as they don’t contribute to a national pool of dispatchable energy, so any subsidy is likely to focus on Virtual Power Plants.

Impact (1) Medium certainty

The history of humanity is of increasing cooperation and coordination at larger scales which fits the Virtual Power Plants story, but not the microgrids. In the long-run, it’s likely island-mode microgrids will thrive in a small niche for military and off-grid living, but grid-connected microgrids will become VPPs as one big software-defined grid or “smart” grid. A microgrid is really just the ability to operate without connection to the electrical grid for reliability purposes. Any sufficiently advanced VPP software will move beyond the binary off-grid and on-grid configuration, routing energy based on a host of criteria creating ad-hoc local network potentially based on weather patterns ensuring bad weather never cause outages.

Timing (2020-2025) High certainty

The market was worth $19 billion in 2021 growing at 15% and will likely reach something like $60 billion by 2030. Compared to Virtual Power Plants with a size of less than a billion today but growing at 20-25% a year. There is certainly an investible market today, even if eventually it becomes subsumed into the VPP market.