Distributed Systems Putting Power in Hands of Users: Q&A

By Richard Stubbe, Bloomberg New Energy Finance editor. This article first appeared on the Bloomberg Terminal

Distributed energy systems are part of the world’s ongoing energy shift, along with digitalization and decarbonization. They allow their owners and operators to put power into the grid, from microgrids or rooftop solar systems, as well as consuming it.

The systems enable the users to improve efficiency in several ways — by controlling their own generation, by putting power into the grid, and by shaving their demand at times of peak demand, when power gets more expensive.

Lidija Sekaric joined Siemens AG in 2017 as director of strategy and marketing for distributed energy systems. Before coming to Siemens, she was a group manager with the U.S. Energy Department’s SunShot Initiative, intended to improve the integration of solar power into the nation’s electric grid.

Sekaric answered questions from Bloomberg NEF in a telephone interview in late June.

Q: What are distributed energy systems, and what’s new with them?

A: It is power generation close to consumption. It started by having corporations or homeowners or others purchase and own systems. Now there are relationships with third parties where the end user is using the power but the system can be owned by somebody else and maintained or financed by another party.

They’re small power plants, usually integrated on-site, sometimes connected to the grid, sometimes not. Sometimes they form an islanded microgrid.

Q: What are the benefits for the end user?

A: No. 1 is cost reduction in energy consumption. That has probably enabled the market growth the most — the steady cost reduction in the components, installation and interconnection.

An entity wanting to deploy one of these systems might have a recent blackout in mind. But when they actually start looking at these components, it all comes down to, “Am I also going to be saving money?”

The control over the system is very interesting as well. Users can configure their own systems and optimize energy use and dispatchability.

Q: Can you give an example?

A: Our microgrid software can control all of these generation sources, it can predict how much sun you’ll have tomorrow, it can predict how much you’ll be using based on previous patterns. It has evolved from something that will say, “If this happens, then the system shall react in a certain way,” to assessing the system condition that can have an infinite number of inputs.

We don’t have to preprogram any of that. It can do it in real time. These systems are taking advantage of a highly connected fast digital system.

Q: So users can plug in goals and the system responds accordingly?

A: Exactly. You would call it a boundary condition. The user can say I’d like to save money and I’d like to reduce CO2 and then the system takes in inputs like how much the sun is shining, how much the wind is blowing, what pricing is available. Some conditions can be programmed and some determined on the go. This is where machine learning and the algorithms are making these systems favorable economically, saving money for everybody.

Q: How much are the savings? Who are typical users?

A: The savings and returns can be anywhere from 10 percent to 50 percent. We’re optimizing how the current assets are used. On top of that, you can put in a more efficient asset.

Our customers include university campuses, hospitals, city governments, industry and manufacturing, commercial entities, military bases. Everybody has a different economic situation and motivation and a different type of power need and resource accessibility.

We implemented a microgrid on the Galapagos Islands. They have to have the power on, no matter what. They can’t rely on solar all the time, but the bulk of their production comes from solar and battery. They have some backup, which is diesel, but trucking in fuel to the island is expensive, and they want to minimize any potential spill because of the fragile ecosystem.

Q: BNEF’s forecast is that storage will keep getting cheaper. How big a role is that going to play in decentralized systems?

A: It’s already playing a role. At the moment we don’t have very large and long-certainty markets in the U.S. for these systems to participate. They’re participating more at bulk level, at utility-scale level. But this cost reduction is becoming really, really important.

Q: The other components are getting cheaper, too, right?

A: Yes, everything is getting cheaper. In the solar space and in the battery space, everything that you see is installed up front. You’re not looking at the uncertainty of fuel prices. It used to be very expensive because you had to put all that money up front. It’s going down because there’s a learning curve of larger-scale production that has driven down both solar and battery pricing.

Q: What are the advantages of batteries?

A: There’s the reduction of operational costs and backup technology that can help customers manage without the grid for a week, for instance. Storage can help you shave some of the high-cost peaks and help with the backup.

Q: Is that the most common use of storage?

A: There’s peak-shaving for entities that have higher-demand pricing built into their rate schedule. There’s a tax credit if the batteries are charged by solar systems. If that price keeps going down, the use cases will open up.

Q: What will they include?

A: In some cases, it’s reliability. In some, it’s self-sufficiency. In some, it’s carbon-free power production. Islanded microgrids need sufficient self-generation for several reasons, and storage is coming into play.

Q: Consumers and businesses are increasingly unwilling to tolerate even a blip in the power supply. How do the systems deal with that?

A: We work only with businesses, but I would say that’s largely correct. After some large outages in the past couple of decades, FERC imposed much stricter reliability standards for delivering power. We’ve had a couple of decades of getting used to incredibly reliable power.

More extreme weather events have spurred an effort to build out the network to resist that.

An industrial consumer doesn’t want to have an interruption to a critical process that might result in yield reduction or spoilage of a product. A hospital depends on the power to stay on during surgery and patient care. There’s real human and economic impact. Now we have options to mitigate what were serious problems. The digitalization and electrification of everything has also created a dependence on electricity availability.

Q: What’s the next breakthrough here?

A: We’re not looking for the next hot technology to implement right away. Distributed systems have bankability. They’re easy to finance. We’re selling a reliable on-site energy system.

We’re all looking forward to the development of the energy market. In some cases, systems sit idle when they can be used. If there’s a resource that a local grid operator can take advantage of, they don’t have to build new resources. As market designs finalize and develop, they are going to open up more uses. Having markets that can support that will be interesting. We’re all looking for reliability, cost reduction and carbon reduction.

Q: Who has the most work to do to make this happen — bankers, regulators, someone else?

A: The heaviest lift is on the regulatory side. We have every kind of capital in the market right now. As long as there is long-term certainty that will allow these systems to participate in the market, the financing will be there to help spread that risk.
It really is about how we design electricity markets to take advantage of a growing resource. There will be both centralized power and distributed energy systems. We’re projecting that 50 percent of all solar in the U.S. is going to be distributed solar.

That’s the beginning of a virtuous cycle. The more you deploy, the cheaper it gets, the more use you can get out of it. That’s all good for everybody, from ratepayers to bankers to regulators to those who think about maximizing the social benefits.

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