Experts: Innovative Financial Models Bolstering Rapid Growth of DERs

The rapid growth of distributed energy resources (DERs) is spawning new financing models that could send growth for the fledgling sector soaring, upending the power sector at an even more breakneck pace.

Industry executives at Distributech 2018 in San Antonio, Texas, this week noted that several trends are driving the growth of DERs, which are smaller power sources that can be aggregated to provide power necessary to meet regular demand. Examples include distributed generation, energy storage facilities, virtual resources formed by aggregation of several power generating or energy sources, microgrids, and cogeneration.

According to Mark Feasel, vice president of Schneider Electric’s Utility and Smart Grid division, the power sector is experiencing a suite of megatrends that he terms “3Ds + E”—digitization, decarbonization, and decentralization plus more electrification, which will be driven by electric vehicles, infrastructure electrification, and rural electrification.

Decarbonization will drive energy efficiency as well as thrust the power world toward more renewable capacity additions, he noted at a press and analyst briefing on January 24. Decentralized generation paired with digitization—including data and computing power, the internet of things, and mobility—is expected to disrupt efficiency, he said, and spur a general optimization of energy processes. At the same time, historically passive consumers are thinking about energy in a new way, seeking lower, more predictable energy costs and flexibility. They also want resilience as well as sustainability.

Feasel pointed to recent GTM Research that suggests U.S. microgrid growth by 2020 could exceed 3.71 GW. That compares to 1.54 GW of operational capacity installed as of May 2016. One factor accelerating microgrid growth involves heightened resiliency measures in the aftermath of Hurricanes Harvey, Irma, Maria, and Sandy, he said.

On January 24, Schneider announced it had signed a $4.5 million agreement with the City of Milford, Connecticut, to build an advanced microgrid. The project will involve installation of a 400-kV natural gas combined heat and power plant and a 100-kW battery storage system. Among Schneider’s portfolio of microgrid projects already under construction is completion of a “microgrid-as-a-service” project in partnership with Duke Energy to build two advanced microgrids in Montgomery County, Maryland. That project is set for completion in the third quarter of 2018.

Early this year, the company also expects to wrap up an innovative project in Wisconsin for the Gordon Bubolz Nature Preserve that will use Schneider’s EcoStruxure Microgrid Advisor software to manage the integration of DERs into a utility-scale hybrid microgrid. In January, meanwhile, the company commissioned a microgrid demonstration in Markham, Ontario, that will test the value of a smart electric (EV) charging system.

Interest in DERs has kicked so much and so quickly that “There’s more bankers walking around here at DistribuTECH than any year in the past,” Feasel noted.

Energy as a Service

Schneider itself is so bullish on the growth of DERs that in November it announced a strategic alliance with Dynamic Energy Networks (DEN), a newly launched company which offers energy as a service (EaaS). DEN has also joined ranks with investment giant The Carlyle Group and since acquired an executive team from Hitachi and RET Capital, which it says has “decades of experience in development, technology and innovative financial structures.”

EaaS essentially entails management of one or more aspects of a customer’s energy portfolio—it could be a strategy, program management, energy supply, energy use, and asset management—by applying new products, services, financing instruments, and technology.

According to Navigant Research, “while in its early stages, the EaaS market consists of third-party vendors, utility services companies, and potential business model disruptors deploying niche technical, financing, or procurement solutions like solar [photovoltaic] power purchase agreements, energy services performance contracts, and deregulated electricity market retail brokerage services.” As the EaaS market matures, it could spur outsourcing of energy portfolios and turnkey vendors equipped with a comprehensive set of technical, financing, and deployment model options. According to Navigant, the annual global market for the deployment of commercial and industrial EaaS alone could reach $221.1 billion by 2026.

For Karen Morgan, president and CEO of DEN, EaaS makes sense in the DERs space because it helps customers achieve larger goals of resilience, sustainability, security, and cost efficiency without having to focus on return on investment. “In summary, what we’re trying to do is make life simple,” she said. “Take capital and take experience for evolving infrastructure projects, working with best-in-class partners, accelerating growth, and delivering flexible optionality—not just in terms of technology and sources of energy but how we structure the financial package. So, we don’t have to worry about project financing anymore,” she said.

“We’re basically equity investors; we’ll come in, we’ll acquire the asset, we’ll own the asset, we’ll operate the asset management, and we’ll provide our customers with long-term contracts at predictable prices,” she said.

A Potential Game Changer

DEN’s key function is to “enable dynamism” across microgrid infrastructure and “innovate around contractual structures,” Morgan said. Within a landscape characterized by rapidly evolving electricity markets and the fast growth of DERs, companies are put off by the vast and flexible capital needed to integrate DER technology. “So, we need a holistic solution,” she said. “Our energy solution would require no capex outlay from the end user,” she explained. “The assets are owned and operated by DEN with an operating contract to deliver agreed performance to customers.” DEN, for example, offers a phased approach to scaling up technology, collaborating with end users to reap the benefits of rapid trial projects.

“The power behind this engine is pretty incredible,” Morgan added. “Carlyle has committed $500 million to the platform. There is no cap on that. As everyone recognizes, a lot of these projects tend to be smaller; however, in aggregate when you look at fleet opportunities, they get quite large, quite fast.”

For Feasel, DEN is potentially a financial game changer, because it allows companies to explore the benefits of DERs without upfront capital. “We’re entering a new energy landscape that is load-centered. And we think about utilities in some ways being built from the load out. That requires technical complexity … but just as important is that it requires a business model evolution, because this capital has to come from somewhere to implement the distributed generation, to integrate the storage, to bring the load control together,” he noted.

—Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)

Corrected (Jan. 26, 2018): An original version of this article suggested that Schneider Electric helped launch Dynamic Energy Networks (DEN). DEN launched in November. The company that owns and operates of microgrid and distributed energy resources and serves to connect customers with energy projects and investors also gained strategic alliances with Schneider and The Carlyle Group that month.

The original version also said Schneider is readying to wrap up a project in Wisconsin with Ameren this year. The Wisconsin project is being built at the Gordon Bubolz Nature Preserve with electrical contractor Faith Technologies. The first-of-its-kind microgrid will serve as a microgrid education and demonstration facility. Schneider’s EcoStruxure Microgrid Advisor manages DERs for an existing Ameren utility-scale microgrid in Illinois.