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Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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How Microgrids May Transform The Future Of Energy

By Michael McDonald - Apr 29, 2016, 11:27 AM CDT

Much of the focus in the debate over the future of the energy and utility industries is focused on the efficacy of renewable power plans to displace conventional fuel sources. While it now seems clear that renewable energy is certain to play a major role in the future of generation capacity, it’s unclear if fossil fuels will ever be displaced. That debate has overshadowed a more subtle altercation – the extent to which the structure of the electrical grid itself will change in the future.

The conventional centralized grid model is increasingly being challenged by proponents of distributed microgrids, which see efficiency and effectiveness gains in smaller systems. The debate in some senses is not new and goes back to the birth of electricity, and Tesla and Edison. Yet the modern version of that old battle may be even more interesting. Related: Why Canada’s Oil Industry May Never Be the Same

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Renewable generation at its core can be done either on a centralized basis, with large scale solar and wind farms combined with utility-scale storage, or on a micro-scale, with rooftop solar, distributed wind, and home battery technology. Microgrids could work on a home-by-home level or a neighborhood level. Either way, it would be a radical departure from industrial scale grids of today. And either system could be powered entirely by renewable energy.

With that in mind, the new Australian study showing effective parity between distributed renewable power and conventional fossil fuel generation systems is somewhat remarkable. One major downside to renewable energy generation schemes is that they require significant levels of investment in new capital facilities and equipment. The Australian study however points out that many conventional plants in that country are close to reaching the end of their expected life and thus could be replaced piecemeal over time. Related: Physical Gold Demand At A 6 Year Low But Prices Soar

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The study found that the Western Australia grid could be replaced by 85 percent renewable energy at a cost $124 per MWh versus $127 per MWh for a replacement conventional system. The cheaper renewable system relies on roughly 5,000 MW of wind power, 2,000 MW of solar PV combined with battery storage and molten salt solar storage. Using a distributed grid of thousands of PV installations and hundreds of wind generators reduced costs, according to the researchers. This cost reduction was due in large part to reduced need for thousands of miles of electrical poles, wires, transformers, and associated maintenance labor.

Beyond the insight into the potential efficiencies of the microgrid though, the study also makes another good point; the marginal cost of the last bits of generation capacity are always the most expensive. The final 10 percent of generation needs to be accessible on demand to deal with variation in capacity needs. This fact is true either for conventional fuels or for renewable fuels. It’s why expensive peaker gas plants exist, and it’s what creates a legitimate need for excess battery capacity under any realistic renewable generation scenario. Related: Weaker Dollar Continues To Drive Oil Prices Up

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