Nine Lessons Learned from NY Prize Stage 1

Back in February of 2015 I published a blog post titled “Seven lessons other states can learn from New York’s energy resilience approach,” in which I lauded the New York’s focus on communities – in particular by creating the NYPrize program to foster community microgrids. Now, 83 communities have completed the microgrid feasibility studies funded in this program. This week I enjoyed participating in the 2nd NY Energy REVolution conference and moderating the panel on NYPrize. This was a gathering of microgrid developers, utilities, community leaders, NY state officials, regulatory experts, and solution providers. There were multiple sessions that discussed what we, as an industry have learned about community microgrids – particularly in light of the end of the first stage of the NYPrize program. NYSERDA has commissioned a study of the 83 feasibility study reports to identify common key findings, trends, and critical challenges. In advance of that, I am going to couple what I heard this week at the REV conference with what our team at Hitachi has learned by conducting feasibility studies for twelve communities across NY state.

1. The market needs much more transparency and standardization around utility engagement. This is particularly true when it comes to rights of way, accessing existing utility infrastructure, and interconnection fees and procedures. Understanding what the utility is comfortable with and what will require arm twisting from local governments is important. Understanding the processes and permitting required is critical. Understanding what the costs and interconnection fees are going to be would be exceedingly nice. Some see these as issues of utility obstinacy. The truth is that the professionals we are working with at the utilities simply don’t know the answers to many of these questions right now. That is understandable. In addition, the utility franchise rules are typically granted through state legislation and municipal agreements, so the municipalities have more control of the transparency, processes, and exemptions than they commonly believe. We think this is an artifact of these franchise agreements being in place for decades where the institutional knowledge has long since retired. However, the market needs leadership from the PUC, the REV process and the utilities themselves to achieve clarity and transparency as soon as possible.

1. Determining a microgrid ownership model is a daunting challenge. Communities that are learning about microgrids for the first time must make a call early on as to whether this system will be owned by the local government, a third party firm, or some combination. There are benefits and drawbacks and legal limitations associated with each approach, but the amount of work required to do a proper due diligence on what ownership model is going to benefit the community most is a barrier to entry that most local governments are not interested in surmounting. For this reason, it seems likely that third party financing and development will be necessary to move this sector forward.

1. Scalability will help bring people on board with new technologies. Energy resilience, on-site generation and microgrids are not concepts that your typical community board member is fluent in. When those folks take the time to be briefed by subject matter experts, they still face the challenge of explaining to the public at large why they are installing new technologies that don’t adhere to traditional energy relationships. In many communities, the solution is to start modestly – developing a smaller system that people can see and get comfortable with before committing to a larger, more holistic solution. Good microgrid developers may need to think about this scaling approach from the very beginning and design systems that can be implemented in stages.

1. The technology is all there – it’s all about financing and business model. It is true that control software and system integration still need some ironing out and proving, but the basic building blocks of a typical microgrid are off-the-shelf technologies that are well proven in the market. This is an important point because if we, as an industry, present microgrids as a new technology solution, we are inviting skepticism and challenges that are unwarranted. If, instead, we present microgrids as an operational and business model approach, we will much more quickly get to conversations around the truly important issues of ownership and financing.

1. Quantifying and monetizing all of the benefits from microgrids is nearly impossible. NYSERDA hired Industrial Economics Corporation to evaluate all of the social benefits and costs of the NYPrize projects. Their work, while quite thorough, has little to do with what the market can actually act upon from a financing and project planning perspective. The true benefits of resilience are not bankable currently. There does not yet exist a way to generate payment for the economic development benefits of a local microgrid. Participants in the REV conference went even further, highlighting the importance of addressing the cost of suffering and the impact of energy on social justice issues. The cold reality of day is that we have no way to monetize these benefits and aren’t likely to any time soon.

1. Incentives are great, but banks can’t count on them. When we look at the more tangible benefits of government grants/incentives/rebates, we need to recognize that banks will not incorporate the vast majority of these benefits when considering investment. Other than the Federal Investment Tax Credit (which is clearly drawn out for the future), banks do not consider these incentives because the award of such grants are administered by utilities and state agencies, often at project completion. These grants can change at any time during the construction of the project, after the financier has committed the funding. Therefore, such grants represent an external, uncontrollable risk when included in the business model. This means that obtaining financing for microgrid projects requires looking at a purely worst case scenario. Many ‘on the bubble’ projects that are made feasible due to incentive programs will not be built for this reason.

1. Credit worthiness is going to drive design. As we first looked at NYPrize microgrids, we tried to design systems that would have maximum resilience benefit for the communities with which we partnered. As we move forward into more practical concerns about getting these projects financed, some real concerns have come up. How do you get a bank to finance a 25-year PPA for the corner grocery store. The reality is that most of the load in a system is going to have to be consumed by large institutions with excellent credit. Some NYPrize projects are going to experience a redesign as a result before they move forward. Smaller organizations that lease their space will need to represent only a small fraction of the system. This is limiting from a resilience design perspective.

1. Solicitation of microgrids as a service (power purchase agreements) is exceedingly difficult for communities. Once a community has completed a feasibility study for a potential microgrid, how do they partner with the firms with the expertise and capital to make them happen? Can the local government simply pick a firm they believe to be qualified? Do they need to write an RFP for development? If so, are they requesting that the responding firms propose a cost per kilowatt hour in a PPA? How will those firms be able to make such an offer without spending tens of thousands of dollars doing their own analysis? Beyond all of that, how do we resolve the fact that the firm in question is not providing service to just the local government, but other organizations as well? How do we coordinate the selection processes and contract negotiation across eight different organizations? There are workable solutions, but right now the industry is going to have to reinvent this wheel with each project.

1. There are many players out there in the microgrid space, but most of them are only addressing a small portion of a microgrid project. With a limited data set I will purport that most of the 83 communities in NYPrize have identified and partnered with capable, hardworking consultants and engineers in Stage 1. Those communities that are moving forward (either with Stage 2 or independently) are going to need a laundry list of services from detailed design, utility engagement, project finance, construction, commissioning, operations, maintenance, etc. Attempting to cobble together a team of experts that can provide these services is outside of the expertise (and likely appetite) of most local communities. Teams like Hitachi Energy Solutions, which are willing to handle every aspect of project development and financing are going to be a critical element of moving this market forward.

This list of lessons is certainly incomplete. More importantly, it raises many questions and provides few clear answers. We look forward to seeing the NYSERDA key findings report in the February 2017 timeframe. In my post next week I will provide a series of recommendations as to what can be done to turn these lessons learned into best practices to accelerate penetration of community microgrids in New York and beyond.