On the Microgrid Executive MBA Training discussion board…
- The clustering of microgrids creates a new set of considerations for executives.
- It is worth investigating from a microgrid economics standpoint what other drivers (besides low price or cost to the consumer) may appeal to customers in developed countries.
- “Product markets” within the electricity business are slowly emerging. This would mean very different things for residential or commercial microgrids.
- For underdeveloped countries currently operating without transmission and distribution infrastructure, microgrids could be compelling offerings.
HOW TO MAKE THE FINANCIAL CASE FOR MICROGRIDS? For discussion.
I am pretty certain we will have three instances of microgrids with their economic analysis by the end of the class (and I will keep extending the end date till we do). Let us assume that the price of electricity in our business models will be ~ $ 0.25/kWh. Now that is attractive pricing for California and more, and for un-electrified parts of the world.
QUESTION: The capital required for our business cases will not exceed $5 million. This is small. It may not interest investors. Why? Investors’ cost of due diligence alone will be $0.3 million or more, say, for the International Finance Corporation: consultants’ fees for technical evaluation, background assessment of sponsors, financial evaluation, strategic evaluation, legal structuring and partnerships, sales and marketing plan assessment. They need a proposal for at least a $50-100 million project.
How will you grow the microgrid business?
Aggregate/cluster a number of projects and package as one deal.
Hi Student 1, in general you are right.
However, consider that a “residential HOA (Homeowners Association)” will have different peak, between 7 pm and 9 pm, and therefore economics, than an office building with a peak between, say, 12 noon and 4 pm. Can the two be combined to obtain superior economics? Can resources be shared while doing so?
Ergo, the exercise for this class has two instances, both of 1 MW (Megawatt) – India Institute of Management Kozhikode campus as proxy for a business building, and the HOA of 120 homes as residential. For a given market, how many microgrids of “residential” type and how many of “business” type?
No one has “solved” this problem of a clustering of microgrids. We are at the frontiers. I would love to be a Ph.D. student right now addressing this, in engineering or operations research, even public policy and business strategy.
As a practical matter, an entrepreneur would choose a “market” of say 500,000 people, divide the geography into microgrid prospects, add up the economics, and approach the financial institutions. And we can do this in markets where there is no grid, and in markets where there is the grid.
In an unregulated market, with open market entry, we don’t need any “franchise” – that concept is dead or dying. The new business pays the existing distribution asset owners a “fee” for the use of that infrastructure, and this access ought to be a “right” of the entrepreneurial firm, not a favor done by the asset owner.
Before we can answer the question “how do we grow a microgrid business” I think we still need to answer one or both of the following questions: 1) “What customer need are we fulfilling?” and/or 2) “What are we selling?”
As I think about my own monthly “bills” and what it costs here in the US, my electricity is much smaller than my internet/entertainment/communication costs. I’m paying 2 to 3 times the amount for these three services that I pay for electricity (and not particularly happy with the costs required to maintain and use multiple communication channels – landline [yep still got those although it’s now voice over Internet protocol (VOIP)] and cellular).
If there was a bundled service consisting of internet/entertainment/communication/electricity (at least in the US) and made it simple would this be of interest to residential consumers? Or would a service that took ownership and control of appliances (heating, cooling, lighting, etc) from generation to behind the “meter” be appealing to consumers?
While understanding the economics of a microgrid is important given the example of products like the iPhone and iPad, I’m not entirely convinced, at least for developed countries, that low price (cost to the consumer) is always the driver we think it is.
I’m still wrestling with what a sustainable business model would be versus a project by project driven model, which seems to be what exist at the moment globally.
Hi Student 2, regarding your comment:
- “If there was a bundled service consisting of internet / entertainment/ communication/ electricity (at least in the US) and made it simple would this be of interest to residential consumers?”
This is not far fetched, though minuscule now – see Chattanooga, TN municipal utility, EPB, the US’s fastest Internet service provider, giving the incumbent ISPs tough competition.
- Or would a service that took ownership and control of appliances (heating, cooling, lighting, etc) from generation to behind the “meter” be appealing to consumers?
This too is inevitable – timing unknown – fracturing of the monolithic electricity business, into numerous “product-markets” including home lighting, traffic signals, street lighting, …. to home and office energy management. “Microgrids” in their own right, for sure, but also as a proxy for all such.
Student 2’s questions in response to “how will you grow the microgrid business?” provide excellent food for thought. I agreed with Student 2’s thinking, especially not to overemphasize the sale pitch on utility bill savings.
If I was to develop business for micro grid, I would consider the following targets in the developing countries such as the USA:
- Areas having electric capacity constraints that need grid upgrade in transmission/distribution and or generation. Microgrid seems to offer a compelling alternatives in terms of lower capital investment, low environmental/land impacts, etc. If the technology mixes of the microgrid have more renewable elements, then there might be additional advantage of running cost, etc. Potential customers could be the local electric utilities.
- Area without any distribution infrastructure yet – Microgrid would be an obvious choice for consideration. Potential customer could be the local electric utilities.
- Customer premises that have high reliability requirements for their operations, e.g. data center, emergency response center, law enforcement, hospital, military installation, airport, etc. These customers would value the resiliency and reliability of micro grid to compliment electric service from the macro grid. Potential customers could be either the end-customers or the local electric utilities. For underdeveloped countries that do not have transmission and distribution infrastructure yet, then microgrid would be compelling offering.
About Instructor Mahesh Bhave:
Bhave is a Visiting Professor of Strategy at Indian Institute of Management in Kozhikode, India. He has worked in product management, strategy, and business development positions at Hughes, Sprint, and Citizens in the United States. He is the founder of a rich media communications startup in San Diego, CA, is LEED AP certified, and is an engineer from IIT, New Delhi. He holds a Ph.D. from Syracuse University.
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