Microgrids - A Developing Growth Market
A journey of a thousand miles begins with a single microgrid, and so commences the transition from a twentieth (20th) century electric grid to the ever elusive twenty-first (21st) century "smart grid." The sheer size and complexity of the grid, and the daunting task of developing a smart grid requires a measured approach. To that end, key decision makers and utilities have taken a methodical approach by focusing on incremental steps, i.e. demonstrations, demonstrations and more demonstrations. As such, changes will not occur overnight, but rather, as an amalgamation of many small steps before any future concept of a smart grid develops.
In the early 2000's, the microgrid appeared as an alternative mechanism by which to accomplish energy security, and move the grid forward one localized step at a time. Upon my initial research into microgrids, I was not very impressed with the concept as a potential investment vehicle. In fact after considering complicated regulatory hurdles, I found it difficult to imagine how this solution could ever gain traction to reach meaningful sales. See Slide 22 - IEEE Draft Standard 1547.4. Apparently bearing my thesis out, in 2008-2009, there was very little investment in the microgrid concept. However, SBI Energy reported that worldwide 2010 revenues of $4 billion significantly eclipsed 2009 revenues with institutional and campus microgrids capturing upwards of 45% of the market.
In February 2010, a Forbes article prophesized that all the smart meters, rooftop solar panels and other "nodes" on the edges of the grid will require much more robust communications and controls along the "middle mile" of distribution substations and feeder lines to operate effectively. Further, the Vice President and General Manager of Siemens Energy's North American transmission and distribution division, Dave Pacyna, foresees microgrids as a natural part of the evolution of the smart grid. Specifically, Pacyna stated:
"When it comes to a utility figuring out how to manage this wide, dynamic set of resources and control points, the only way they can do that efficiently is to break their networks down into small nodes - i.e. microgrids - and then add a level of control on top of it."
As a corollary, this discussion reminds me of the "last mile" discussion, when JDS Uniphase and Digital Lightwave were working with fiber optics to run broadband to every house in the neighborhood. Any investor that followed that market knows what happened to the market capitalizations of those companies when the build out eventually took shape.
What is a Microgrid?
While concepts and definitions vary, microgrids are essentially smaller versions of the larger electric grid and are designed to serve localized electric loads. Microgrids incorporate distributed energy resources (DER) such as photovoltaic, wind, and micro-turbines in parallel with the grid. These energy resources allow the microgrid to run in islanding mode, and thus, the microgrid and the loads they serve are protected from disturbances in the larger grid. Islanding mode occurs when a microgrid disconnects from and runs completely independent or autonomous from the larger grid. The end result is hyper electric reliability by creating an "island of energy self-sufficiency." See also, Curbing Energy Sprawl with Microgrids, pp. 559-579.
Microgrids are much smaller than the larger grid, but at the same time, they are comprised of all the same components of the larger grid - power generation, transmission and distribution, and energy storage. Consequently, as each new microgrid comes online, they can be interconnected to form a much larger distribution entity, and thereby become the building blocks of what will eventually become known as the "smart grid."
Most current microgrids are locally-owned and not subject to the regulatory restrictions of utilities. Therefore, it is easier and less expensive to deploy technology, and as microgrid regulatory barriers are resolved and new engineering protocols implemented, new technologies can be swiftly selected. Peter Asmus, a senior analyst at Pike Research, recently stated:
"The main milestones [last year] (2011) was the IEEE standard and the other was the Federal Energy Regulatory Commission's regulations on demand response," . . . "now utilities, instead of worrying about microgrids disconnecting their loads from the grid at will are now saying, 'Microgrids are the most secure form of demand response.' In fact, microgrids are an ideal demand response resource."
Therefore, in effect, the implementation of microgrids has gone from problematic to potentially beneficial to all stakeholders.
Estimates of Future Growth
Over the last few years, Pike Research, the cleantech market intelligence firm and leading microgrid research house, has consistently increased its market expectations for microgrids. Specifically, on January 30, 2012, while acknowledging the regulatory hurdles, Pike forecasted that microgrid capacity worldwide would experience a compound annual growth rate of 22% over the next five years, reaching 4.7 gigawatts in 2017. If growth were to match Pike's estimate, the microgrid market would see $17.3 billion in annual worldwide revenue by 2017 in an average case scenario.
To understand the significance of this growth in terms of capacity, Pike Research estimated in 2010 that in the U.S., microgrids accounted for approximately 450 megawatts of commercial and industrial capacity, and another 322 megawatts of campus and institutional capacity for a total of 722 megawatts. As such, Pike estimates that the capacity of microgrids will increase six-fold by 2017.
Microgrids have been developed for a number of reasons. In a September 2011, Microgrid White Paper, Siemens set forth the following types of markets that microgrids currently serve:
- Institutional and campus microgrids
- Commercial and industrial microgrids
- Military microgrids
- Community and utility microgrids
- Island and remote "off-grid" microgrids
Over the last year, the adoption of military microgrids has rapidly escalated and is self-evident in the number of technical conferences the military complex is holding.
Technology Adoption Cycle
For the last couple of years, smart grid investing has been akin to paint watching paint dry. As described above, modernizing the national grid is a very large and complex undertaking. Nevertheless, what began in the mid 2000's as a small push has slowly gained steam over the last few years. This push culminated in the Federal Electricity Regulation Committee ("FERC") demand response ruling last summer and the implementation of the non-binding IEEE 1547.4 interconnection standard. For further rapid development, the various stakeholders will have to push through the tendency to resist change. As a consequence, a number of trade groups have been pushing standardization and communication protocols forward. Notably, the FERC ruling and 1547.4 interconnection standard were defining moments and signified a monumental shift in attitudes. As a result, I believe the gathering momentum that has taken five (5) to ten (10) years to build is now coming to the cusp of the Technology Adoption chasm, and over the next two (2) to three (3) years, the microgrid market will leap across this divide.
In August of 2011, Siemens Energy published the Business Case for Microgrids: the new face of energy modernization, wherein Siemens outlined its vision to integrate energy efficiency, renewable generation, power monitoring and control systems into microgrids that will connect with the larger grid and disconnect or island when necessary.
Recognizing the explosive growth about to take place in the microgrid market, a number of large corporations have begun jockeying for position. Evidencing this sentiment, Mr. Asmus has stated that:
"In our new report, Military Microgrids, Pike Research has identified roughly two dozen military facilities in the United States that are currently engaged in smart microgrid implementations. The opportunity to help develop these microgrids has attracted a number of powerful technology companies, including [ABB,] Lockheed Martin, General Electric (NYSE:GE), Honeywell, Boeing, and Eaton. Yet the key to the success of these microgrids is often smaller, innovative firms, such as Encorp, Viridity Energy, and ZBB Energy."
While investing in some of the larger entities listed would certainly allow a play on this exciting growth market, unfortunately, most of the smaller pure play companies are non-public and not available for public investment at this time.
However, I have identified one publicly traded small cap pure play company in the power control electronics and energy storage space: ZBB Energy. ZBB is quietly building a portfolio of advanced power control electronics which may be utilized as control "nodes" in the CERTS Microgrid Concept. Additionally, ZBB has developed a flow battery which has proven its mettle in energy (Kwh) storage applications. As a consequence, ZBB is implementing these solutions in numerous microgrid demonstrations and deployments around the world.
Ultimately, the centerpiece of the power control platform is the EnerSection which is an energy storage agnostic power control platform/node. This system utilizes a Grid Isolation Disconnect (GID) to 'lock out' the grid connection if the utility power supply fails, and then, restart safely in an 'island' or Grid Independent mode. The EnerSection provides power to site loads by optimizing energy inputs such as the grid, diesel generation, photovoltaic, wind, and energy storage through a single power control platform.
For investors who want to benefit from the microgrid trend but cannot divine an appropriate strategy, a portfolio focused on the large established firms identified above would properly mitigate excessive risk. However, these large companies would not allow for a pure play in the microgrid/storage industry. After a year of watching this space, my power control electronics favorite is ZBB Energy. Nevertheless, while I believe ZBB has a bright future, it will have to overcome financing concerns, demonstrate solid execution, and show the ability to move product out the door before it will warrant a much better valuation.
Disclosure: I am long ZBB.