Will microgrids be
Global Power & Utilities
Digital Disruption
of Utilities
October 2015
Our research shows that in
2020, the use of microgrids
can provide anywhere from
US$64b to US$171b in
electricity cost savings to
commercial companies in 20
countries we analyzed.
utility killers or
saviors?
Everything comes full circle. In 1882,
the first public power station was built
by the Edison Electric Light Station in
London, England. It was a disruptive
technological advancement that began
as a series of small, distributed energy
generation systems, or microgrids.
Today, these same microgrids, which
once served as the utilities’ launch pad to
electricity supremacy, are becoming the
advancement that threatens their very
survival.
In mature economies, microgrids have
reemerged as a disruptive force that
enable commercial and industrial
companies, as well as residential
customers, to self-generate power. They
can serve as a supplemental source of
energy that reduces their reliance on the
traditional grid system. Alternatively,
they can act as a stand-alone power
generator that eliminates the need of
the traditional grid entirely. In emerging
economies, microgrids serve as a lifeline
where electricity is either unreliable or
non-existent.
As the technology to more effectively
operate microgrids improves, and the cost
of solar energy and storage technology
falls, microgrids are creating real
opportunities for companies to reevaluate
their energy plans.
Will microgrids be utility killers or saviors?

Yet, for all the opportunities they offer electricity by companies identified for the

What is a
consumers, they present an equal or model will increase to US$1.6t in 2020.
greater number of threats for utilities
Utilities are undertaking efforts to find

microgrid?
companies. Top-line revenues, driven
efficiencies — from shale gas in North
by energy sales or throughput volumes,
America, to efficiency improvements in
are at risk. For utilities, the combination
fossil fuel power plants and investments
of affordable microgrids that could lure
EY defines a microgrid in renewables around the globe — to
customers and long-term increases in
as a form of distributed energy costs does more than squeeze
counteract this trend. However, to date,
these efficiencies have had an insignificant
generation. Unlike margins; it rocks the very foundation upon
impact on electricity costs.
which they’ve built their business.
traditional grid At the same time, new technologies,
Given the disruption microgrids have
systems, microgrids the potential to cause in the wake of the
combined with cheaper photovoltaics,
energy storage and inverters for energy
are decentralized and challenges the sector already faces, utilities
management, have the potential to make
located close to the should be asking: will microgrids be utility
microgrids broadly viable and cost effective
killers or saviors?
area they serve. They for companies by 2020.

tend to derive their

power from renewable
energy sources or
cogeneration and
operate with capacities
of 10 megawatts or less.
Microgrids can serve as
a supplement to a larger,
connected grid system or
as a stand-alone power
source.
A powerful incentive for
change
A seismic shift across the global energy
landscape is fracturing the business model
utilities have been using for decades.
Overall, electricity costs continue to
rise. Fossil fuels, grid reinforcements
and new build projects, levies and taxes,
government-driven environmental
mandates and C02 are working in concert
to increase costs. According to estimates
derived from a microgrid research model
EY has developed, the amount of spend on
A jolt of reality for utilities
To better understand the impact microgrids
will have on the utilities sector, EY
developed a methodology for calculating
the gross potential for cost savings for
commercial and industrial customers. Based
on our research and the cost dynamics of
newer technology and cheaper solar energy
and batteries, we believe that in 2020, the
use of microgrids can provide anywhere
from US$64b to US$171b in electricity
cost savings for commercial companies
operating in the 20 countries we analyzed.

Solar photovoltaic Global installed energy storage

prices have fallen for the grid and ancillary services
power capacity will grow from
by
80% Battery prices are
since 2008 and are expected
forecasted to drop
to keep dropping
538 MW 21GW between
in 2014 in 2024 40% to 60%
by 2020

Approximately
346 GW
of new distributed solar
photovoltaic panels will
be installed globally
by 2024

2 | Digital Disruption of Utilities October 2015

 Will microgrids be utility killers or saviors?

What could happen in the year 2020?

Cost savings and operational value potential for commercial entities
(in % of status quo electricity cost)

0%–10% microgrid cost savings potential

11%–20% microgrid cost savings potential
21%–30% microgrid cost savings potential
Over 31% microgrid cost savings potential

Cost savings and operational value potential for industrial entities

(in % of status quo electricity cost)

0%–10% microgrid cost savings potential

11%–20% microgrid cost savings potential
21%–30% microgrid cost savings potential
Over 31% microgrid cost savings potential

Digital Disruption of Utilities October 2015 | 3

Will microgrids be utility killers or saviors?

Microgrid research methodology

EY selected the largest 10 OECD (The Organisation for peak load shaving using on-site storage. The model selects the
Economic Co-operation and Development) and the largest 10 cost-optimal electricity mix in 2020, considering the above
non-OECD economies upon which to develop a scenario model constraints.
to determine the feasibility of widespread use of microgrids
The primary saving potential for corporations is defined as
by 2020. Together, these countries represent 73% of global
the sum of energy cost savings, peak load shaving savings
GDP and a population of 4.4 billion in 2020. We projected the
and savings by reducing the value of lost loads and increased
electricity markets, the cost for microgrid generation (diesel
power quality to the corporate operations and the heat value
genset, natural gas combined heat and power (CHP), and
from CHP. These are expressed as maximum savings potential
photovoltaics) and lithium ion storage technology to the year
for commercial and industrial corporations for each country in
2020 for each country. We then created four scenarios to test
question. Actual uptake will vary greatly depending upon local
the impact of the differences in interest rates, power prices, fuel
and company-specific factors.
prices and technology costs.
When calculating potential market values, we used data and
Our model differentiates between commercial and industrial
projections from a variety of sources that we consider reliable.
customers and considers technical limits to the amount of
When no data was available, we performed our own projections
self-generated electricity. The model assumes incentive-free
based on what we consider most likely. In cases where
operation of photovoltaics and storage. When modeling CHP,
reasonable estimates cannot be made, we have excluded the
we included the value of heat provided. The model assumes
savings effect. However, we believe that there are significant
that there is an energy and a power price component in every
other savings that we have not quantified.
country. The power price component can be mitigated with

As the pace of emerging technology for
microgrids accelerates and the costs for
photovoltaics and storage continue to
fall, we expect the savings potential for
commercial and industrial companies to
grow.
What this means for utilities will ultimately
depend on whether utilities see microgrids
as a threat or an opportunity.
The threats of microgrids to utilities are
significant:
• Cannibalization of the existing
business. Although initial discussions to
date have focused on grid defection, the
discussion has shifted to load defection,
which has lower barriers for electricity
customers to realize but is just as
damaging for utilities.
• Change in the role of the grid. Under a
scenario where there is widespread use
of microgrids, traditional utility grids will
shift from providing load to providing
capacity to back up microgrids. To date,
many utilities have regulatory structures
that do not align to this role.
• New entrants from outside the
utilities sector. Technology and
telecommunications are already looking
for a means of entry into the utilities
market and their customer base.
Utilities willing to reinvent their business
models have an opportunity to adapt to a
new era of power generation.
A path for utilities to
electrify the future
What would a path forward look like? There
are a number of actions for utilities to
consider.
Lead by collaborating rather than
competing
Companies that invest in microgrid
infrastructure may, at times, have excess
energy that they want to sell back to
the grid. By managing this service for
companies, as well as other services like
regulatory compliance and reporting,
utilities can gain access and control of
additional capacity, as well as demand
response for the grid. They would also be
able to lower system costs.

4 | Digital Disruption of Utilities October 2015


Seizing this opportunity would require
regulatory changes and the creation of a
smart electricity market. However, with
these changes, utilities would be able to
postpone needed and costly investments
in transmission and distribution grid
infrastructure. Provided the potential
is fully realized, we believe that utilities
globally could postpone or cancel billions of
dollars in transmission and distribution grid
investments.
In addition to collaborating with microgrid-
operating companies, utilities will want
to consider partnering with companies
that are at the leading edge of technology
development for the industry. An excellent
example of such collaboration is the
relationship Sunverge Energy (Sunverge)
in California is building with utilities around
the world to install customer-sited energy
storage. As a sector disruptor, Sunverge is
working with utilities, rather than competing
against them, to help them understand and
exploit the opportunities of new technology
or business models. This creates a win-win
for both parties.
Accelerate the development of new
products and services
Microgrids come with many benefits for
corporations — if they can afford to build
them. Utilities have an opportunity to
finance, own and manage microgrids for
their customers. Once on site, utilities
can work with companies to identify
opportunities to reduce waste in energy
usage — an often underused asset that
companies poorly track. Utilities can also
work with companies to achieve additional
energy efficiency savings through
contracting models where the savings are
shared between the parties.
Owning, operating and managing
microgrids for customers also enables
utilities to develop a service-based business
model that locks their customers into
long-term agreements. However, for this
Will microgrids be utility killers or saviors?
opportunity to provide value to both parties, In a world of digital disruption and
utilities will have to adopt a customer- disintermediation, microgrids have the
centric culture that is dedicated to power to save the utilities industry —
delivering exceptional client service in every provided they adapt. By reinventing their
interaction they have with the customer. business models, they can become leaders
in both the building of microgrid assets and
Work with regulators to keep pace capacity providers when back up needs
with change arise. They can develop products and
Exploring new opportunities will inevitably services that engage and delight customers,
mean working with regulators to ease forging long-lasting relationships and
regulatory constraints. Smart energy loyalty. And they can expand into new
markets and demand response services in markets, packaging their intellectual
particular will require changes to current property to help emerging economies build
regulations. new microgrid assets.
Utilities have excelled at lobbying For utilities that decide to maintain the
governments for tightening regulations status quo, microgrids will kill them. They’ll
for their advantage. They can now use this be disintermediated to the point of having
expertise to lobby the easing of restrictions assets and revenues that don’t match their
in areas that will enable them to have costs. Other companies, likely from outside
first-mover advantage in the burgeoning the industry, will come in and cannibalize
microgrid market. utilities’ business, picking off the best parts
of the business, piece by piece, until the
Shift focus to emerging markets utilities’ very survival will be at stake.
In decades of building, operating and
It’s time to choose. Do you want to be the
managing energy assets, utilities in mature
utility that microgrids save, or the one that
markets have built up a wealth of skills
they kill?
and knowledge that are the envy of many
emerging markets. Utilities could adapt
these skills and use them to expand into
emerging markets, where microgrids would
be the first step in a longer journey to
developing a larger utility infrastructure.
A call to action
Many industries, from media and
entertainment, to telecommunications, to
banking, already have transformed their
businesses in response to technological
change. It’s time for utilities to do the same.
As technology improves and prices fall,
microgrids have the potential to become
the primary energy source for companies
and residential consumers alike. Some are
even predicting that by 2035, microgrids
could become the base load in some mature
markets where there’s been significant
investment in renewables.
Digital Disruption of Utilities October 2015 | 5
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