RESEARCH BRIEF

Emerging Microgrid Business Models

Peter Asmus Mackinnon Lawrence
Principal Research Analyst Senior Research Director Published 1Q 2016

1. Executive Summary
The majority of the microgrids operating today are pilot projects or R&D experiments. However, the
industry is now moving into the next phase of project development. It appears that the main technology
components of microgrids are reaching maturity, with energy storage technologies making the most
dramatic leaps within the past 2 years. The key to future growth rests with greater flexibility in regulation
and public policy that, in turn, are spawning business model innovation from market players both large
and small. This is not anticipated to ever be a one-size-fits-all market, but progress is being made in
standardizing the process of design, creating viable third-party contract structures for development, and
identifying key value stream components common to most microgrids.

Due to the diversity of microgrid segments (see Chart 1), the business cases for microgrids continue to
evolve. The modularity and highly variable configurations of microgrids make calculating an overall return
on investment for all microgrids virtually impossible. Through their ability to enable networking and
sharing of resources to match loads, microgrids can play a role in realizing greater utilization of existing
generation and load resources. Thus, microgrids are expected to ultimately lower the cost per kilowatt-
hour. Yet, resiliency services enabled by technology are not free, and each microgrid segment leans
toward a different business model. This report reveals the latest thinking among utilities, technology
vendors, and regulators about emerging business models that can take this market to the next level.

Chart 1 Total Microgrid Power Capacity Market Share by Segment, World Markets: 4Q 2015

Commercial/
Direct Current Industrial
0% 5%
Community
13%

Utility Distribution
13%
Remote
54%

Institutional/
Campus
9%
Military
6%

(Source: Navigant Research)

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 Emerging Microgrid Business Models

2. Business Model Taxonomy

2.1 What Is a Microgrid Business Model?
With respect to microgrids, a business model defines the way in which a microgrid project or business is
planned, implemented, and executed to meet strategic objectives. Strategic objectives can range from
community resiliency to renewable energy integration to greater profit for a new economy enterprise such
as a data center. For a microgrid to be commercially and financially viable, it must address both the
technical (e.g., plan, operations, components, and functions) and commercial (e.g., revenue, expense,
and profit) components of the business model definition.

While there is a logic to this way of summing up a project’s technical and commercial viability, what does
the term business model really mean when it comes to microgrids? As simple as that question may seem,
the answer is not easy. If one dons the perspective of a utility, for example, the answer depends upon
how the utility is regulated. Is it vertically integrated, does it operate in a competitive retail market, or is it
exploring options with an unregulated business in service territories other than its own? Another
complicating factor in defining a microgrid business model is that a microgrid is a collection of
technologies organized into a system which then is either supported or challenged by a wide diversity of
market actors playing in the energy service ecosystem (see Figure 1).

Figure 1 Microgrid Commercial Ecosystem Mapping: Business Model Considerations

Community
Incl. local
community,
ratepayers, society-
at-large, etc.

Stake-
holders

User Microgrid Macrogrid

Incl. users of Incl. owners of Incl. distribution
microgrids, owners microgrid assets, service providers,
of other onsite DER, representatives of wholesale market
etc. microgrids, etc. operators, etc.

Roles
Value
Streams
Incentive & Suppliers
Constraint Makers Incl. manufacturers,
Incl. policymakers, project managers,
regulators, influencers, financing providers,
etc. etc.

(Source: Navigant Consulting, Inc.)

Rather than mapping out what a vertically integrated microgrid business model might look like, this report
focuses instead on the methods by which microgrids are being developed today under current market
conditions. The examples presented show how different market segments gravitate toward different
development strategies that reflect preferred resource mixes, existing contracting vehicles, and lessons

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 Emerging Microgrid Business Models

learned from adjacent markets such as solar PV and energy storage. Navigant Research deems these
pathways to deployment as business models.

Whether exploring opportunities for the U.S. military in off-grid environments for forward operating bases
or large complex systems exceeding 100 MW for a utility in the eastern United States, the controls
platform (software plus integration with control devices such as smart inverters) is the gateway technology
for successful business model deployment. Regardless of architecture—top-down, bottom-up, centralized
or distributed, proprietary or open source—it is the controls platform that determines whether any
business model for microgrids will work and deliver value. As the pyramid in Figure 2 illustrates, from an
end-user/customer perspective, the two largest barriers today are the lack of standard financing packages
for microgrids and the sheer number of vendors vying for shares of the microgrid market.

The second barrier can actually be viewed as a sign of an emerging healthy market. Yet, too much choice
can also deter customers from moving forward. Given the large numbers of players involved in different
components of the microgrid value streams, customers may lack confidence—and often do not have
enough information—to make good decisions about whether to proceed with a microgrid project.

Figure 2 Microgrid Commercial Development Pyramid

Microgrids
entering
commercial
development
phase

Controls
platform is
market
differentiator

Microgrid Lack of
models and standard
vendors are financing is a
diverse major barrier

(Source: Navigant Research)

Below is a brief description of the most common business models being deployed by microgrid owners,
developers, integrators, and utilities today.

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 Emerging Microgrid Business Models

2.2 An Inventory of 10 Microgrid Development Paths

What follows is a summary table of 10 microgrid business models that Navigant Research has identified
as preferred vehicles to capture a portion or all of the development and ongoing revenue generated by a
microgrid project. Then a short summary of each of these business models is presented, peppered with
examples of vendors deploying such strategies in the market today. Finally, this section maps each of
these 10 business models to the primary market segments identified in Table 1.

Table 1 Microgrid Business Model Matrix: Global 2016 Snapshot

Large Small
Technology Technology Revenue
Business Model Prevalence Maturity Vendors Vendors Geography Potential
Owner Financing
High High No No Broad Medium
& Maintenance
Utility Rate Base Low Low No No Broad Medium
Pure Component
High High Yes Yes Broad High
Sales
Software as a
Low Medium No Yes Limited Low
Service
Government
Energy Service Low High Yes No Limited Medium
Contracts
Power Purchase
Agreements Medium Low Yes No Limited High
(PPAs)
Direct Current Low Low Yes Yes Limited High
O&M Low Low No No Limited Low
Pay-As-You-Go
High Medium No Yes Broad Low
(PAYG)
Design, Build,
Operate, Own,
Low Medium Yes No Limited High
and Maintain
(DBOOM)
(Source: Navigant Research)

2.2.1 Facility Owner Financing and Maintenance

The most straightforward way to build a microgrid is for the facility owner to finance the project and then
maintain the assets. A majority of grid-tied microgrids running today use this business model, especially
projects deployed in the leading market segment of campus/ institutional microgrids. Often, some level of
facility owner financing is also involved with R&D/pilot projects. The most common scenario is that
significant legacy assets already exist, such as diesel generators, combined heat and power (CHP), and
distribution infrastructure. The owners are seeking either to green their supply portfolio with customer-
owned assets or to gain efficiency through new technology.

Once the new technologies are introduced to the resource mix, a more sophisticated integration is
required and the incremental upgrades are paid for by the facility owner. The economic benefits of
increased efficiency and reliability then flow back directly to the facility owner through reduced operations
costs. As microgrids become more complex and focus on integrating distributed renewables and/or

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 Emerging Microgrid Business Models

advanced energy storage, these projects are being shifted to private developers. They often rely upon a
power purchase agreement (PPA), as discussed in Section 2.2.6.

2.2.2 Utility Rate Base

In an ideal world, a utility would be able to place the costs of designing, building, and maintaining a
microgrid into its rate base. Today, the deployment of microgrids by utilities within a grid-tied context is
not a mature market. As just noted, facility owner financing is most appropriate for customer-owned
microgrids, which account for the vast majority of microgrids that have already been deployed.

Less common (though expected to grow in scale over the next 10 years) are microgrids deployed by
utilities themselves. To date, most utility systems using this rate-base approach are public power entities
in rural, off-grid markets, such as Alaska, Australia, or South Africa. Investor-owned utilities (IOUs) such
as Commonwealth Edison in Illinois have been supporting state legislation that would set an important
precedent for rate-basing community resilience microgrids owned and operated by the utility (on the utility
side of the meter). In 2014, Central Hudson Gas & Electric was the first U.S. utility to propose rate-basing
microgrids under a narrow category: those that serve communities such as a summer camp at the end of
long feeder lines and which therefore represent the most economic means to bolster reliability. (It also
proposed a fee-based microgrid service for commercial customers. The rationale for this pricing structure
was that such microgrids could not be supported under a rate-base business model, since the majority of
benefits would flow to a single customer.)

Many substation and distribution automation projects being developed by utilities could easily morph into
microgrids in the near future. Instead of islanding being the primary focus, which is often the case with
third-party microgrids seeking higher levels of reliability, the capability to island would be lower in priority.
The main goal of the microgrid would be integration of distributed energy resources (DER) to help support
the reliability and resilience of the utility distribution system.

2.2.3 Pure Hardware Component Sales

Like any other form of infrastructure, the least risky business model is to be a straightforward supplier,
especially of hardware products such as distributed generation (DG), smart meters, or switchgear. Many
technology vendors view microgrids as just another destination for their product. This is particularly the
case for firms selling energy storage, smart meters, and (especially) different forms of DG. That said,
companies active in the microgrid space are creating partnerships to better integrate these types of
components with the networking, optimizing, and economic leveraging aspects of microgrids. As such
efforts increase, this pure component sales business model may begin to fall out of favor. For example,
Cummins, a manufacturer of clean diesel systems, has created partnerships with SunEdison (solar PV),
Northern Power Systems (wind), and Tangent (controls) as it looks to provide a more complete microgrid
solution for customers.

There are some companies, such as General Electric (GE), that sell both hardware (DG, energy storage,
and distribution grid components) and the software controls for microgrids. In 2015, GE created a new
DER-related services company called Current. The company is shifting from selling GE hardware
products (such as solar and batteries, which are now viewed as wrong bets) to an explicit focus on digital
innovation—such as software coupled with balance sheet financing. The largest revenue source for
microgrid market participants is the sale of DG hardware, often representing between 60% and 75% of

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 Emerging Microgrid Business Models

the upfront investment. Navigant Research expects vendors active in this space to view microgrids as a
submarket that will grow over time. Ultimately, strategic partnerships may emerge that could offer bundled
microgrid packages of components, as underscored by the Cummins example.

2.2.4 Software as a Service

On the opposite side of the spectrum from microgrid business models consisting of pure component sales
are models which offer controls that create a network for a microgrid as a service. While sales of DG
hardware will likely always be the largest portion of microgrid revenue, the most challenging technological
task is the networking function. Because there are so many approaches to controlling and optimizing
microgrids, this is the space where Navigant Research expects the most creativity. Customers just want
their microgrid to work, so an attractive value proposition for vendors would be a software service
agreement whereby the vendors take on the risk of performance.

A few vendors are already moving into this business model, among them Power Analytics and Green
Energy Corp. However, few microgrids have been deployed on this basis, so it is difficult to project
whether this may become the leading platform of the future. One can surmise that companies that are
more focused on open architectures, plug-and-play functionality, and the ability to seamlessly network
diverse renewables and energy storage devices would have an advantage in developing and
implementing such business models.

2.2.5 Government Energy Service Contracts

During this industry’s nascent stage, many microgrids deployed in the United States for government
entities have prescribed contract vehicles that dictate the terms for any viable business model. This is the
contracting approach most frequently deployed in the U.S. Department of Defense (DOD) microgrids
market. Because of how firms are prequalified to do business with the U.S. DOD, this contracting
approach is the one most frequently used in the U.S. military market. There are two primary versions of
this approach.

The first is energy savings performance contracts (ESPCs), a common vehicle for energy efficiency
upgrades. There are no upfront costs, and facility upgrades are paid for by the savings accrued through
efficiency. These ESPCs can be extended to 25 years for federal government agencies. Microgrids can
be bundled into these vehicles as long as energy savings can be clearly identified and quantified.

The more generic utility energy services contract (UESC) can be a sole-source contract and may involve
the local utility. The idea is a holistic approach to energy management to capture economies of scale.
Like ESPCs, these can feature terms as long as 25 years.

Another twist to these contracting vehicles is enhanced use leases (EULs), which allow private
developers to lease underused U.S. federal property for a project of direct benefit to the United States.
EULs are the most expensive financial instrument due to typical project fees. Such an approach requires
a deep private sector pocket, but the lease may last as long as 75 years. The EUL structure also has the
advantage of allowing the microgrid to sell energy services and excess capacity derived from assets
inside the fence back to the utility grid.

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 Emerging Microgrid Business Models

2.2.6 PPAs
The PPA is a common approach to developing an independent power project, whether it be a large-scale
wind farm or a rooftop solar PV installation. It is, in practice, often pegged to the utility cost of providing an
identical energy services, priced at or just below this cost, and then increases by 1%-5% annually over a
20-year term. It is designed for a third party that acts as a virtual utility in terms of delivery of energy
services to take advantage of various tax credits and other subsidies. This is the business model that now
leads the U.S. residential and commercial solar PV markets.

Moving forward, PPAs are expected to become the primary vehicle for non-utility, grid-tied microgrid
projects for private sector clients. Similar to the ESPC described above, there are no upfront costs for the
customer. In the case of solar PV, deep private sector pockets own the hardware and lease out the
systems until all tax credits and accelerated depreciation benefits are maximized.

Some vendors in the commercial space are now moving forward with PPAs for microgrids, taking on the
risk of performance in exchange for capturing of revenue streams from ancillary service sales. In order for
this business model to work, the network controls architecture needs to be streamlined and—ideally—
open. This limits customized engineering costs for new hardware that is added to the microgrid over time.
Performance also needs to be monitored closely.

PPA solar projects outperform those installed by smaller contractors, since the financial success of those
projects hinges on good design, installation, and maintenance. Since microgrids are much more complex
than a simple solar PV system, companies willing to enter into long-term PPAs must be conscious about
risk and choose suppliers wisely. Companies should favor simple, elegant controls that do not require
customization each time a new resource is integrated into the microgrid. Among the leading innovators in
this space is Leidos Engineering, which wraps the value of thermal energy into its PPA structure via
combined cooling, heat, and power (CCHP), as shown in Figure 3.

Figure 3 Energy Solution Bundle Blended PPA Model

(Source: Leidos)

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 Emerging Microgrid Business Models

2.2.7 Non-Synchronous Direct Current

In terms of technology, the most novel of all microgrid business models is developing a non-synchronous
direct current (DC) microgrid. This approach represents a completely different take on the microgrid
business model, based on the disruptive technology of grid-tied, DC-based, non-synchronous microgrid
architectures. Interestingly enough, this approach dates back to Thomas Edison in the late 19th century.
Edison’s initial foray into the provision of electricity involved DC microgrids. The primary advantages of
the DC approach is its modularity in adding new components (such as a battery) without the need for
substantial re-engineering, as can be the case with an alternating current (AC) microgrid due to the need
for additional inverters and other supporting hardware.

This unique business model is currently being offered by Bosch, Emerson Network Power, and—with a
few novel twists—Pareto Energy. It involves developing DC microgrids that are non-synchronous with the
larger AC utility grid and so do not violate the utility AC monopoly franchise. This approach can speed up
the permitting process because it avoids the time-consuming and expensive interconnection studies
required for many DG projects that must synchronize frequency with the AC grid.

Unlike most AC microgrids, which have a single point of common coupling with the larger utility grid, DC
architecture can interconnect with the larger grid at several points. This results in greater flexibility in
power flows, grid segmentation, and other energy service exchanges. Another advantage is that the
stiffness of a DC backbone can often ride through power quality issues created by variable frequency and
voltage spikes and sags. Finally, the elegance and modularity of a DC microgrid fits in with other DC
technologies such as solar PV, energy storage, and LED lighting, all of which play a greater role in large
commercial buildings.

Among the biggest barriers to this approach is both vendor and end-use customer ineligibility for
government incentives to reduce capital costs. Many such incentives are tied to the size of the inverter. In
a DC system, these inverters are greatly reduced or eliminated altogether, thereby making these
hardware components more expensive. This may be only a temporary issue.

2.2.8 Operations and Maintenance Contracts

Operations and maintenance (O&M) contracts are a common way to ensure microgrid performance.
These contracts are often rolled into utility-developed microgrid projects. For microgrids not developed by
a utility or under the owner financing and maintenance model, O&M contracts represent opportunities for
both utilities and other vendors to capture relatively small revenue streams from microgrid deployments.
O&M contracts are designed to maintain optimum performance and are likely to become increasingly
popular as microgrids move into the mainstream.

The greatest need for such business models is for systems in remote locations serving low-income
communities where skilled labor and engineering expertise are rare. The weak link in these off-grid
markets has been thought to be the failure of lead-acid batteries, followed by degraded performance of
solar and wind generators. In Nepal, for example, over 250,000 dead lead-acid batteries have been found
scattered across the countryside. In the Kathmandu region, over half of the solar PV systems installed are
not delivering power as promised due to poor designs and no O&M.

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 Emerging Microgrid Business Models

Diesel generators are also critical to overall microgrid performance, since they are present in virtually all
remote microgrids. They, too, can fail without ongoing maintenance. In fact, one study by Echidna Energy
of 111 diesel sites in Southeast Asia representing 192 MW found that only 70 MW of power was actually
available. This represents a capacity factor of approximately 36%, a ratio normally associated with
variable renewable energy resources. Furthermore, 74% of the diesel systems operating provided
electricity for less than 12 hours daily.

Most grid-tied microgrids have been deployed within a campus environment, where O&M is handled in-
house. As PPAs become more common throughout the growing population of microgrids, O&M functions
are expected to increasingly become part of the overall project bundle since economic viability will hinge
on actual microgrid performance. This is also a portion of the microgrid value stream in which utilities are
expected to play, as they seek a larger role in managing the microgrids proliferating within their own
service territories, whether they own them or not.

2.2.9 Pay-As-You-Go
Perhaps the most unique business model in terms of financial innovation is the pay-as-you-go (PAYG)
model, aimed at accelerating the progress on the energy access front being championed by organizations
such as the United Nations (UN), World Bank, and various philanthropic foundations. In this model, the
microgrid may be financed by several mechanisms but customers pay for energy as they use it.

The primary challenge for the smallest forms of microgrid aggregation in the developing world is this: How
does one capture revenue streams to support a sustainable business venture from the so-called bottom
of the pyramid? It is estimated that over one-fifth of humankind lacks modern energy services. According
to the UN, more than 95% of these potential customers live in Sub-Saharan Africa and Southeast Asia,
with 78% residing in rural areas. While the cost of providing universal access to the electricity grid and
decentralized electrification systems would be in the tens of billions of dollars annually, these costs also
represent potential revenue to vendors of microgrid products and services.

A PAYG strategy for critical infrastructure, such as power supplies, is growing in popularity. This is
especially the case when applied to small, remote microgrids (and nanogrids) in the developing world,
where all that is needed is enough electricity for lights, computers, and cell phones. The key to this
business model is to keep service costs flat and ensure the ability to turn off service when customers do
not pay. Among the leading innovators with this approach is Simpa Networks in India. Billed as a
progressive purchase, the firm relies upon smart meters to measure consumption. Customers purchase
power similarly to cell phone users who rely upon prepaid cards. The difference is that Simpa customers
are slowly investing in their own solar PV systems, which are typically paid off within 3-5 years.

While not a mandatory enabling technology for microgrids, smart meters play a key role in remote
systems by accounting for energy usage on an individual customer basis in small village power systems.
For example, energy theft is a huge issue in developing country markets where existing utility grid service
is often weak, and embedded subsidies have created a cultural rationalization that power should be low-
cost or free. Without a reliable, granular way to track actual energy usage, the business model for these
emerging microgrid markets is currently not sustainable on the back end. One could therefore argue that
smart meters are more vital to remote microgrids developed under a PAYG business model than any
other form of grid-tied microgrid application.

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 Emerging Microgrid Business Models

2.2.10 DBOOM
The final example of a microgrid business model is reliance upon one entity to handle everything
associated with upfront microgrid design and planning, construction, and ongoing operations. Siemens is
the first private sector company to offer such an approach. The company’s microgrid value proposition
lies in offering a comprehensive solution. Siemens’ turnkey capabilities pull together financing, consulting,
advanced grid technology, generation assets, O&M, and an adapted supervisory control and data
acquisition system sized for microgrid management,—all within a comprehensive systems integration
package. The company offers a broad microgrid business model approach based on the concept of
design, build, operate, own, and maintain (DBOOM). This approach is also being used by PowerStream,
a municipal utility based in the Canadian province of Ontario. (The utility added the letter E to the end to
represent energize.) This DBOOME model is also set to be applied to smaller nanogrids within
PowerStream’s service territory.

The advantage of this approach for the customer is that it represents one-stop shopping. For the
vendor—whether a private company or public utility—it theoretically captures all potential revenue
derived from a microgrid project, from upfront engineering and permitting to full-scale development, and
then ongoing O&M. However, this is the case only if the company—such as Siemens—offers the full
range of hardware, software, and integration products and services. The downside is that most
microgrids presently being developed include a variety of hardware and software vendors and perhaps
legacy service contracts and commitments since these projects are usually retrofits. Projects that are
eligible for such a complete turnkey offering are in the clear minority. This model is better suited to
greenfield microgrids.

Figure 4 Siemens DBOOM Microgrid Offering

(Source: Siemens)

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2.3 Mapping Business Models to Markets

The prior section provides a snapshot of development activities today. The identified business models are
development pathways forward for microgrids. Some business models are preferred in some market
segments as opposed to others, and new business models may emerge. For example, there is growing
interest in the PPA model, especially in the United States, as technologies such as energy storage
become more mature and control systems are validated in the marketplace. The rate-basing of microgrids
by utilities is likely to grow in popularity, but hinges on state regulators in the United States being able to
justify the system-wide benefits of microgrids with adequate data. While owner financed and maintained
microgrids are perhaps the most mature business model, these are likely to decline in importance as
third-party vendors develop more innovative technology and new financial strategies, piggybacking on
advances pioneered by the solar PV industry. For remote microgrids, PAYG is projected to continue to
innovate for smaller systems. Cash-poor utilities are likely to turn to the private sector for technology,
controls, and financing, and rely upon a variation of the PPA for such large-scale microgrids.

The primary issue for the maturation of microgrid business models is on the financial side of the
development process. While government regulations and market structures can set the stage for
microgrids, the missing pieces are prequalified sources of capital that can underwrite an entire microgrid
project. Today, many developers need to cobble together a variety of funding sources for different
components, which increases transaction costs and lengthens the development cycle. Microgrids are not
likely to ever be a cookie-cutter business. Yet, standard design processes for certain segments, along
with a pool of investment vehicles attuned to the specific needs of this mixed asset aggregation and
optimization platform, will likely emerge within the next 3 years.

Table 2 offers a general guide as to which of the 10 identified business models is most commonly
deployed within each of the primary seven segments tracked in the Navigant Research global database.
There are certainly exceptions. This table is primarily being presented to illustrate the diversity of
approaches one can use to develop a microgrid today.

Table 2 Mapping 10 Microgrid Business Models to Market Segments

Market Rate Direct ESPC/
Segment Owner Base Sales Service UESC PPA DC O&M PAYG DBOOM
Campus      
Commercial
  
& Industrial
Military     
Utility    
Community
  
Resilience
Remote       
DC   
(Source: Navigant Research)

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3. Conclusions and Recommendations

Bankability and replicability remain among the biggest current challenges for microgrid projects,
businesses, and markets. These challenges stem from a lack of consensus on clear, identifiable business
models that would be profitable across all microgrid market segments. Because the market is in an early
stage of development, technical and legal execution of demonstration projects can eclipse profitability
concerns. Nevertheless, there are companies, some of them quite small, that boast online microgrid
project portfolios in excess of 1 GW on a single continent.

Creative enterprises are moving forward with microgrid projects today. Successful microgrid projects will
likely be implemented in open markets with advanced wholesale energy trading, high retail electricity
prices, and market structures that foster third-party development early on to accelerate financial
innovation. Over time, there may be a shift to markets that also open the door to utility ownership and/or
operation of microgrids. When this latter step is accomplished, microgrids may be considered to be
mainstreamed.

Utilities also have multiple business models to choose from (see Table 3), depending upon the type of
market in which they operate and whether they seek opportunity on the regulated or unregulated side of
their businesses. One could create a similar table for other types of players, such as developers or
systems integrators. However, given the unique regulatory burdens placed upon utilities, it is the category
of market player for which the path forward is most complex and least defined.

One business model not included in the above list of 10 major development pathways is public-private
partnerships leveraging a municipal utility’s existing customer billing relationship with the development
expertise of a private developer, which then assembles the key supplier team. In this case, the revenue
flow to multiple parties. To the end-use customers—which would include residents—the transaction is
simple. This is an established way to develop infrastructure in selected markets, such as Canada, and is
now being pioneered with large-scale utility distribution microgrids.

Table 3 Utility Business Model Options for Microgrids: Pros and Cons
Utility Business Models Pros Cons
DBOOM Capture entire revenue stream Take on performance risk
Public-Private Partnership Leverage expertise of vendors Upside may be limited
How can such structures
Fill market niche in new PPA anticipate future revenue
Unregulated Financing
market streams from wholesale
markets?
Build markets outside of Is controls expertise available
Unregulated O&M
customer base in-house?
Fits well within current Market limited to single service
Regulated O&M
regulatory environment territory
(Source: Navigant Research)

What is different about the new microgrid paradigm compared to the utility status quo is that if the right
business model is deployed, these new networks offer both distribution utilities and their customers a host
of new ways to bolster reliability and manage variable, bidirectional resources that are mutually beneficial.

©2016 Navigant Consulting, Inc. Notice: No material in this publication may be reproduced, stored in a retrieval system, or transmitted by any means,
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 Emerging Microgrid Business Models

The key determining factor today is no longer proof-of-concept projects or even technology
breakthroughs. It is more a matter of which business models will take this platform to the next level in
terms of commercial deployments. This applies to both grid-tied systems—where interactions with host
distribution utilities remain an important factor—and off-grid opportunities, where the challenges revolve
around addressing issues of historic subsidies, energy theft, and logistical and ongoing maintenance and
customer billing concerns.

If one wants to be a bit provocative, one could argue that since the microgrid controls platform is the
gateway technology for success, the business models deployed for this single aspect of microgrid
operations are the most important of all. This is probably true; it is the most competitive and diverse piece
of the microgrid value chain. Internal data reveals that the cost swing for this portion of the microgrid
business is also the widest, reflecting the rich diversity of hardware and software options available to
provide varying degrees of functionality.

There is a stunning variety of business models. Here are three key takeaways:

 Since third-party microgrids lead on innovation, including in regard to financing, they are expected
to lead the way in structuring PPAs that account for the changing nature of organized markets for
ancillary services. These PPA structures are expected to help monetize the value streams
microgrids provide, especially as the microgrids they help pay for seek to capture the benefits of
transactive energy as these distribution level networks bring value up to the wholesale system.

 The primary business model for a publicly owned utility is to work with a private sector partner to
develop microgrids within the utility’s service territory For IOUs, the best opportunity today is to
invest via unregulated businesses; IOUs should investigate O&M options for third-party
microgrids within service territories, especially community resilience microgrids. As regulatory
institutions are provided data and metrics validating the system benefits microgrids create, both
public and private utilities are anticipated to move more quickly into the market, especially if they
seek to rate-base such projects.
 This market is so vast—for such a wide variety of applications and in so many regions of the
world—that it is likely the industry will never coalesce around one business model. Some
applications may lean strongly upon one model, but even that could vary by geography
depending upon the available resource mix, regulatory structures, financial options, and key
vendors involved.

©2016 Navigant Consulting, Inc. Notice: No material in this publication may be reproduced, stored in a retrieval system, or transmitted by any means,
in whole or in part, without the express written permission of Navigant Consulting, Inc.
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 Emerging Microgrid Business Models

Published 1Q 2016

©2016 Navigant Consulting, Inc.

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purposes only. The information has been obtained from sources believed to be reliable; however,
Navigant does not make any express or implied warranty or representation concerning such information.
Any market forecasts or predictions contained in the publication reflect Navigant’s current expectations
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Note: Editing of this report was closed on February 3, 2016.

©2016 Navigant Consulting, Inc. Notice: No material in this publication may be reproduced, stored in a retrieval system, or transmitted by any means,
in whole or in part, without the express written permission of Navigant Consulting, Inc.
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