Publications

- October 1, 2020: Vol. 7, Number 9

The microgrid revolution: The technology is exhilarating but investors are still trying to figure out whether they can tap into the juice

by Benjamin Cole

With rolling power blackouts defining utility grids across Northern California in the summer of 2020, the potential of microgrids has been thrust anew to the fore, as a way for hospitals, first responders, data centers and other critical businesses — as well as neighborhoods — to keep the power up when the utility goes down.

Globally, microgrids are gaining favor for a similar reason; national or regional grids are often sketchy, especially in less-developed nations. In addition, whether in the United States or around the world, pressures are mounting on conventional grid power-system operators to migrate to green but sometimes erratic renewable energy, such as wind and solar.

Microgrids can mitigate shortcomings of faltering grid systems, which is why more investors are asking, “What is a microgrid?”

THE MICROGRID

A microgrid is a constellation of energy users and producers connected to a common system, often defined within a geographical area, such as a village, college campus, a warehouse district or an airport. A microgrid can connect and disconnect from the larger utility grid as warranted, although rural microgrids tend to be standalone.

One advantage of a microgrid, as opposed to, say, lone buildings with rooftop solar panels, is the diversity of energy producers and consumers within the small grid. In brief, some producers may have extra power to feed into the microgrid, when others need it.

The advent in recent years of lower-cost solar power, battery and fuel-cell technologies is boosting practical prospects for microgrids, as seen by the large number of such systems built or planned in the United States and globally.

In July 2020, for example, research outfit Wood Mackenzie noted it was “tracking 3,389 planned and operational microgrid projects across the U.S.” Although WoodMac reported 546 such systems were installed in 2019, fewer installations will complete in 2020, in large part due to the COVID-19 pandemic.

The numbers of microgrids projected for India is even larger, as might be expected for a less-developed nation of 1.38 billion residents. In late 2019, Tata Power Co., the largest integrated power producer in India, and The Rockefeller Foundation announced plans for a “rollout” of 10,000 microgrids for rural areas of the subcontinent, with many more proposed for the long term.

As less-developed regions of the world strain to become electrified, microgrids are answering the call. The International Energy Agency has projected microgrids will make up 30 percent of future electrification efforts globally. And the World Bank in 2019 advocated the construction of 210,000 microgrids across Africa and Asia, to serve a half-billion people.

So, microgrids have a large and growing role as sustainable power for rural communities, for potential reduction in peak demand loads for stressed utility-scale grid systems, and to secure electricity for must-have power users. But what are the advantages for investors?

INVESTING IN MICROGRIDS

To be sure, microgrids are a growth industry, and experts point to dollars surging into the sector. The total global market for microgrids in 2019 was estimated at $8.1 billion but is expected to near $40 billion by 2028, reports Navigant Research. The research firm forecasts a sixfold increase in installed microgrid capacity in that time frame.

Investors should note the most common microgrid type globally is solar powered, often with battery storage as a backup, and possibly a standby or complementary diesel-powered generator. Some microgrids depend on fuel cells, which convert hydrogen into electricity.

While there is little doubt that microgrids have a big future, finding an investment play is another matter. Many new microgrids, for example, are deploying lithium-ion batteries, for storage and backup. So, should investors buy lithium-battery manufacturers? The problem with that strategy is the manufacturers of lithium batteries supply global markets for a wide range of uses, and even have entirely unrelated product lines. Credible battery-makers include ABB, LG Chem, NEC Corp., Panasonic Corp., Samsung SDI Co., General Electric Co., Hitachi, Siemens AG and Tesla — all big companies with diverse product lines.

Famously, Tesla successfully supplied the utility-scale Hornsdale Power Reserve backup system in South Australia in 2018, but, of course, CEO Elon Musk is even better known for making battery-powered cars.

So, finding the pure play on microgrids can be a challenge, but fuel-cell technology may be a place to hunt.

THE FUEL-CELL MICROGRID

Fuel cells, through a chemical reaction, convert hydrogen into electricity, with emissions of water, heat and carbon dioxide. An interesting aspect of fuel-cell systems in microgrids is the cells can be both a power generator, similar to a diesel motor, and a battery. Moreover, the heat from a fuel cell is clean, and can be used to warm buildings or other facilities.

To become a “battery,” a fuel cell uses a microgrid’s excess power generation, as might happen under a midday sun on a windy day, to produce hydrogen from water through electrolysis, also a clean process. The hydrogen is banked and tanked, and then fed into the fuel cell to be converted back into electricity when needed.

FuelCell Energy is a manufacturer of fuel-cell power systems, and if bottom fishing is an investor’s recreation, this company may be worth angling for. FuelCell shares commanded more than $6,000 each in 2000, then steadily plummeted to penny-stock status by 2019. Since then, however, the shares have staged a modest comeback toward $3, and even earned a “buy” signal from Zack’s Investment Research in June.

FuelCell Energy makes systems for both utility-scale grids and microgrids. As with solar systems and batteries, costs are declining in fuel-cell manufacturing due to greater knowhow and economies of scale. Fuel-cell technology “breakthroughs are giving way to persistent cost declines, product improvements and business model innovations,” reports Navigant Research.

FuelCell Energy has a market cap near $640 million, although the company has not been profitable in at least a dozen years. But if fuel cells earn a place in the booming microgrid market, the low share prices may offer an enticing entry point.

Bloom Energy Corp., which went public in 2018, is another maker of fuel-cell systems and also has not fared particularly well on Wall Street. The company’s shares trade below its IPO price, plagued in part by downward restatement of 2018–2019 earnings in early 2020, attributed to an accounting error. Bloom Energy fuel cells typically operate on hydrogen converted from natural gas or biogas, the latter derived from landfills or sewage treatment plants.

Eyebrows were raised in 2019 when Charlotte, N.C.-based Duke Energy Corp., a major utility, disclosed it would buy 30 fuel-cell installations from Bloom Energy to serve hospitals, data centers and other critical customers.

Bloom Energy commands a $2.18 billion market cap on Wall Street and has had weighty Silicon Valley venture capital money behind it, but has not made money in the 18 years since it was founded. Still, if microgrids backed by fuel cells become a common business model, this company will be well poised.

Both FuelCell Energy and Bloom Energy are covered on Wall Street and have small analyst communities that investors might want to follow.

For investors wanting a play in the micro-grids space, fuel-cell makers may be the way to get wired in.

BEWARE THE RISKS

As with so many alternative-energy purveyors, the promise of microgrids must be tested in markets, and greener energy is only sustainable if it is profitable.

Microgrid investors should be aware of landmines ahead, as outlined by the Washington, D.C.–based Brookings Institution in 2019: “Capital requirements [for microgrids] are high and revenues per customer tend to be low, so most private projects require low-cost capital with loan durations of 10 to 15 years. Government policy does not always favor microgrids; for one thing, the same conditions that make communities attractive for microgrid expansion also make them attractive for the centralized grid, and government planners are typically not obliged to plan around private off-grid developers.”

Thus, private developers of microgrids “risk stranding assets when centralized grids encroach,” the Brookings report continues. “Nor is public ownership a panacea; community-owned and public microgrids often have similar issues concerning maintenance and long-run sustainability.”

Power from microgrids also is generally expensive when compared with grid power, even utility electricity from sustainable sources. Electricity from utility-scale solar power ran near 7 cents per kilowatt-hour in 2019, for example, while onshore wind power could be even less, reported the International Renewable Energy Agency.

On a per-kilowatt-hour basis, microgrid power usually costs many multiples of grid power, even 10 times as much in some configurations.

THE PATH TO PROFITS

Investors interested in microgrids should become versed in and keep an eye on the space, which promises to expand dramatically in years ahead. Innovation is another name for Wall Street, and if there is a way to connect individual investors to the financing or profits of microgrids, Wall Street will find it.

Dedicated “microgrid junkies” may find the sort of niche investments, perhaps in microcaps, that return broad profits. If components of microgrids continue to relatively drop in price, more access points may open, allowing individual investors pathways to profits. The hour for microgrids has arrived, even if the timing for investors is uncertain.

 

Benjamin Cole (7continents7@gmail.com) is a freelance writer based in Thailand.

 

 

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