Microgrids


Why develop small microgrid and renewable energy projects

What is a microgrid? A microgrid is an integrated energy system consisting of interconnected loads and distributed energy resources which as an integrated system, can be controlled as a single entity and operate in parallel with the grid, or in an intentional island mode.

The deployment of small microgrid combined with renewable energy technology (RET) projects, faces numerous barriers and risks. The most obvious is the perceived high financial cost ofRETs, the risks associated with financing one project and the inexperience of these types of projects relative to conventional generation technologies using fossil fuels, where development is historically proven. In countries where affordability is a major concern, energy prices fail to properly and specifically take into account the wider global and local environmental impacts of different technologies as well as their contributions to reducing the price volatility of energy and increasing energy security, many of these projects will continue to cost more than conventional technologies. Inevitably, this will deter their use.5

Accordingly to the World Bank, RET projects are more exposed to the limited availability of project financing than most conventional technologies, as the share of capital costs in their total cost is much greater. Conventional technologies will also generally find it easier to attract equity financing and, potentially, corporate financing of investment costs as a whole. This is in part due to the lower capital investment required by these technologies, and also the much greater familiarity of most potential project sponsors with conventional technologies.5

To overcome these barriers, it is important to minimize the capital cost exposure to financiers,and to make these microgrid and RET technologies look, more like conventional power plant financing.

The small scale of many microgrid and RET projects creates significant problems in obtaining private financing. Economies of scale in due diligence are significant, and many larger financial institutions will be unwilling to consider small projects. Typical due diligence costs for larger projects can be in the range of $0.5 million to $1 million. International commercial banks are generally not interested in projects below $10 million, while projects up to $20 million will find it difficult to obtain interest. But lower limits may apply for domestic and regional banks operating in smaller economies, particularly where these lack the resources themselves to make large-scale loans.5

Portfolio Approach for small projects.

Assembling a group of similar projects where the capital requirements may be between $5 million and $20 million for each project, could not only find financing interest on a local level, but also when combined, may be of interest to a lead entity and local lenders could syndicate the balance. Risk is now spread out over the portfolio, and not on a single project. Local lenders would then be supporting the local economy by adding value in job creation enhancing local skill sets and providing stabilization to the local community.

This approach also requires that the cost and the risk of these projects look and feel more like the development of a larger project, by reducing development and contracting costs thus providing more certainty to the lead entity

Reducing Development Costs and Risks

To minimize these development costs, it is important to standardize the following:

  1. A matrix criteria that quickly evaluates the successful factors of a smaller project
  2. Pre-funding agreements with financiers that match the above evaluation criteria
  3. A standardized contracting form that is easy to understand
  4. Pre-qualified contractors and operators

Reducing System Cost

As mentioned earlier, economies of scale are a current deterrent to developing smaller microgrid projects. The soft costs of a project comprise a larger percentage of the systems cost on smaller projects than it does on larger utility grade systems. Soft costs include; development costs, engineering, permits, interconnection fees, contracting costs, finance costs, and profits (theoretical and realized)

Soft costs for utility size systems can be 23% of the total capital cost. The soft costs of a smaller commercial size system can be upwards of 33% of the capital costs.

The hardware costs for microgrids and solar PV realize price breaks in the size ranges listed below. There is little or no price breaks on these costs for systems larger than 20MW. There are also smaller system price breaks usually occur within each of the following size brackets.

  • <1MW
  • 1 – 2 MW
  • 2 – 5 MW
  • 10 – 20 MW
  • 20 MW>

Installation/costs can be reduced by developing a list of pre-qualified and certified contractors and operators with experience in working these types of projects. If none are available in the local region, a training program will be established to train the local workforce on construction and operations of the technology to reduce the risk associated of system performance over the like of the project.

Contracting

Standardized Contracting is important to reduce the cost and risk on projects. The establishment of a Framing Contract that meets all local legal and regulatory requirements will be the same for every project thus minimizing the time attorneys will spend on negotiating . The Framing Contract will contain the basic elements required to conform to standard Governance principals. It will contain language covering; definitions, terms and conditions, force majeure, dispute resolution, indemnification, limits of liability, etc. If there are multiple Parties to a project, the Standard Frame Work document will be the same of all.

Included in the Faming Contract, will be a site specific Attachment which provides the information on the Project. This Attachment details the business case of the project, including the scope, the schedule and the pricing for that project. Other items contained in this Attachment will be; termination agreements, end-of project costs,

Financing Options

The risks associated with financing projects in LICs can be broken down into three broad categories:

  1. Behavioral patterns that change the funding habit of consumers for those services.
  2. Political interests that change during the projects life cycle.
  3. Difficulty in finding financial and incentive structures that align the interests of all parties.7

Understanding the level of risk and of each of these and must be addressed either through the contracting process or through a pricing mechanismcan reduce the risk exposure. This could be different depending on which of the below financing mechanisms is being used.

The following are types of financing that are often available to provide the capital requirements needed to support the project. Each needs to be reviewed as to matching the projects requirements.

  1. Self Funding — Internal Sources of Capital
  2. Capital Lease
  3. Green Bank
  4. Green Bonds
  5. PPA
  6. Grants
  7. Incentives