Evaluating business models for microgrids: Interactions of technology and policy

Policy makers are increasingly focused on strategies to decentralize the electricity grid. We analyze the business model for one mode of decentralization—microgrids—and quantify the economics for self-supply of electricity and thermal energy and explicitly resolve technological as well as policy variables. We offer a tool, based on the Distributed Energy Resources Customer Adoption Model (DER-CAM) modeling framework, that determines the cost-minimal capacity and operation of distributed energy resources in a microgrid, and apply it in southern California to three “iconic” microgrid types which represent typical commercial adopters: a large commercial building, critical infrastructure, and campus. We find that optimal investment leads to some deployment of renewables but that natural gas technologies underpin the most robust business cases—due in part to relatively cheap gas and high electricity rates. This finding contrasts sharply with most policy advocacy, which has focused on the potentials for decentralization of the grid to encourage deployment of renewables. Decentralization could radically reduce customer energy costs, but without the right policy framework it could create large numbers of small decentralized sources of gas-based carbon emissions that will be difficult to control if policy makers want to achieve deep cuts in greenhouse gas emissions.