Microgrid Initial Costs Can Make Investors Weary

Although the benefits of microgrids are quite clear, finding the appropriate resources to fund them can be a bit of a challenge due to both the upfront deployment costs and the ongoing maintenance expenses. 

One of the most frequently cited costs for a microgrid deployment is $2-$4million per megawatt installed. One megawatt can power up to 550 homes, and while that may seem like a fairly reasonable investment (less than $7,500 per home) the actual cost can be highly variable due to the availability of components from various vendors. Additionally, the location of the microgrid can make a huge impact on the cost, since it’s much more expensive to import solar panels in smaller quantities to developing nations than it is to bulk import them to a large country like the United States. 

Despite the fact that microgrids have proven track records of success and are becoming less expensive to deploy and maintain, investors often require a lot of encouragement before providing funding. Here are three of the main reasons they may be hesitant to invest.

Unstable Regulation

The success of microgrids for investors often depends on consistent and favorable regulations, such as fixed tariff per kilowatt hour produced, a removal of VAT and duty taxes for physical components, and agreed-upon off-taker amounts by large consumers. In some risky markets, changing and cyclical regulator landscapes can make investors weary.

Need For Aligned Capital

While fast-growing tech startups are often the darling of an investor’s portfolio, microgrids are an entirely different beast. As infrastructure projects the returns on a microgrid investment can be low if the proposed area has a low – albeit critical – demand for electricity. In order to make up for the returns that interest investors, grants and subsidies are often required to make up the financial difference, and this type of capital is incredibly scarce.

Premium On Smart Technologies

While new technologies work to make smart grids more efficient both operationally and financially over the long-term, investors are often hesitant to invest in anything “premium.” Additionally, microgrid technology is constantly evolving and the regulatory landscape is always shifting, which makes investors skittish.

However, there are definitely some attractive features of microgrids for investors. According to Navigant Research, the global microgrid market is expected to be about $31million by 2027, with the biggest potential in the market to be increasing the reliability and support infrastructure of the existing grid. When taking the existing grid into consideration, this makes North America the strongest microgrid market. However, as Africa, India, and other developing regions continue building out their energy infrastructure it’s likely that they will leapfrog the fossil fuel grids in exchange for clean, local, independent energy.

Methods of Microgrid Funding

Presently, some microgrids have opted for a traditional funding method under which the developer, owner, or power provider applies for and is awarded a loan from a bank for the cost of the initial expenditure. However, this model is actually becoming less prevalent as government-sponsored incentives to install solar arrays and other renewable energy sources become more available to defer costs.

In the United States in particular, there are a variety of alternative funding forms that are growing in popularity, such as Power Purchase Agreements (PPA), Commercial Property Assessed Clean Energy (C-PACE), and Energy-as-a-Service (EaaS) agreements.

Energy-as-a-Service (EaaS)

EaaS agreements are bespoke offerings that are designed to meet the inconsistent nature of microgrid scope and size. These flexible agreements do carry a level of risk, however that’s held by either the financiers or the owners, rather than the customer. They offer payment to the microgrid company by customers based on usage throughout a set period, which can then be used to pay back the loans. EaaS agreements – which also include PPAs – are projected to be the leading model over the next decade and currently account for 25% of current project funding sources.

Taking Advantage of Tax Incentives

In 2022, the United States enacted the Inflation Reduction Act (IRA). This broad legislation affects many areas, including promoting clean energy by expanding tax credits for its development. The “Investment Tax Credit” included as part of IRA can reduce a microgrid’s tax penalty by up to 70%, and it’s thought that over time the IRA will help to reduce emissions by as much as 42%. The IRA also extends tax credits for a variety of clean energy technologies, and could potentially cut the cost of developing a microgrid by up to 50%.

Emphasize The Benefits Of Starting Small

As urban areas expand, the energy required to power them often increases as well. A prime example of this is Nigeria, where the population is projected to double from 210 million to 400 million by 2050. The traditional approach to addressing this issue has been to construct larger central generators. However, this approach has become increasingly complex due to evolving regulations and stricter emission reduction targets, which have made investors hesitant as they are uncertain about recovering their investments in such an uncertain environment. 

Microgrids, which consist of multiple smaller energy-generating systems that supplement the main utility distribution system, offer a solution to these challenges. These distributed projects can be implemented in stages, gradually increasing energy capacity, thereby avoiding the challenges associated with building a single large power station.

Promote the Resiliency of Microgrids

Adverse weather conditions can lead to power outages that affect large geographic regions, leaving homes and businesses without electricity. Traditional electricity grids, which are designed to supply energy to entire countries and even continents, are often vulnerable to such disruptions. For example, in the United States, one of the main grids connects 145 million customers through more than 160,000 miles of high-voltage energy lines. In 2017, the National Academy of Sciences described the American energy grid as ‘vulnerable’ and called for the development of alternative systems.

Microgrids offer a more robust, localized, and easier-to-maintain alternative. Under the right regulatory conditions, microgrids can be disconnected from the main grid and provide energy during emergencies by a process called “islanding.” However, microgrids can also be useful in non-emergency situations.

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