Strong Partners for Local Energy
Posted 9 June 2015 11:04 PM by Marc van Gerven
Strategies for solar to explore the huge, mostly untapped remote microgrid market
The time has come for solar to address the huge off-grid power market. From utility-scale to commercial diesel hybrid backup solutions, to remote microgrids, solar power can now serve almost everyone everywhere. However, there are still challenges to be faced and questions to be answered. In short, for a solar energy provider to be successful and profitable in the off-grid market, you must have strong relationships with the right partners to service end-customers and achieve scale.
When I started my career in energy around 20 years ago at Chevron as a geothermal developer, the solar sector was very small and, to a large extent, an off-grid play. In the following decade, solar deployment took place increasingly on-grid. When I moved into solar in 2005, 95% of new solar installations were grid-connected photovoltaics (PV). At the time, government incentives had created great demand for solar in OECD countries.
As government incentives continued over the last 10 years a common strategy used in the solar industry was to build up massive scale in the on-grid segment, resulting in dramatically decreased cost that would eventually make solar competitive for off-grid applications. That strategy has proven successful. In many parts of the world, solar is already able to compete with both on- and off-grid fossil fuel-based power generation.
The tipping point for using solar in hybrid systems, with or without financial incentives, has been reached and surpassed. Today, it costs between 30 and 70 cents/kWh to supply off-grid power to remote industrial sites, islanded grids or commercial and industrial facilities that run 24/7 on diesel generators or gas turbines. And solar’s suitability for these applications can only get better. Oil prices will increase in the mid-term, while solar prices continue to trend down.
The Needs & Opportunities
While the electrification rate in developing countries is improving, there are still about 1.3 billion people on this planet who lack access to electricity. This is unacceptable in the 21st century. With the cost of solar power decreasing every day, these people - who currently spend around $18 billion on lighting and charging services alone per year - are now able to embrace our technology to satisfy their power needs and gain access to the same economic growth opportunities that are available to citizens of developed nations.
There are already around 20 million households using small, stand-alone solar systems for rural, off-grid electrification. But, we believe that in the end, most households and certainly businesses of all kind prefer to be connected to a grid. In the past, this meant being connected to a large, centralized, state-managed grid. Today, microgrids of various sizes will increasingly be used to deliver electricity to rural and remote power consumers. A recent study from Navigant forecasts the microgrid segment to grow at an average annual growth rate of 29% - from 683MW in 2013 to 4.1GW in 2020 - in its base case. The aggressive, best case scenario estimates an 8GW volume in 2020, equal to a growth rate of 41%. That would translate into revenues of $20 billion or $36 billion for power providers; which is not bad when you consider that global solar revenue was around $83 billion last year according to IHS estimates.
And then there is the existing diesel generator market: the International Renewable Energy Agency (IRENA) estimates that around 1,000GW of diesel generators are currently in operation, while renewable-diesel hybrid microgrids account for just 2 to 3% of the total capacity. “Thus, there is a huge global development potential for incorporating renewables into mini-grid systems,” concludes IRENA. I couldn't agree more.
The challenges of the micgrogrid market are well-known. You can fill shelves with studies analyzing the obstacles on the road to success in remote microgrids. First of all, there is an overall lack of awareness of solar´s capabilities and cost. Fossil fuel subsidies can make it hard to compete. In many regions, regulatory barriers protect local power interests. There are insufficient technical standards in the industry. Finally, and perhaps most challenging are missing financing options. The less developed the country, the more these challenges are amplified.
Although you can now read more frequently about commercially-viable microgrid solar projects, most have one thing in common: they are one-off deals. Here we have a utility microgrid on a Danish island, then is an industrial solar/natural gas/battery hybrid micro-grid supplying a factory in California. You see a remote village grid powered by a hybrid renewables/storage system in an African country, a solar backup system on a warehouse in India, and a solar-diesel genset used in a mine in Australia. A major solar company can try to develop and scale the global off-grid market this way, but it would take a long time.
We have gone down this path as well. For example, we announced a first megawatt-size system deal with leading mining company Rio Tinto to reduce diesel consumption at a bauxite mine in Australia last year. But that´s only part of the equation.
When we at First Solar thought about how to really open and rapidly scale this business opportunity, we found only one good solution: team up with the right partners.
Scaling marketing and distribution: We have many years of experience developing, constructing, operating & maintaining utility-scale solar systems, delivering the power produced to electricity off-takers via power purchase agreements (PPAs). If you have a strong balance sheet, financing utility-scale projects is usually not a problem because there is so much value in the PPA itself. But for small microgrid systems up to a couple of megawatts in size, financing and transaction cost are often so high that a PPA doesn't work or a large number of projects need to be aggregated. These small microgrid solutions have to be sold to the customer – shifting power purchasing from an operational to a capital expense. As these investments are in the million(s) dollar range and typically have three to five year payback times, solar producers need a competent and trusted partner with a large and effective sales and maintenance network.
In Caterpillar - the largest manufacturer of construction and mining equipment as well as diesel generators - we found exactly the partner we were looking for. In the second half of this year, Caterpillar will begin exclusively selling and supporting an integrated solution for microgrid applications, featuring Cat-branded solar panels, through its worldwide Cat dealer network. First Solar will design and manufacture a pre-engineered turnkey package for use in remote microgrid applications, such as small communities and mine sites. The package will feature Cat-branded solar panels manufactured by First Solar and will include balance of system components. Caterpillar has a large number of diesel gensets already in the field, and this alliance will enable us to capture new clients as well as transform existing fossil fuel systems into solar-hybrid products.
Enabling the last mile to energy access: Power generation equipment is only one component of many needed to deliver electricity to remote locations. Technology platforms to enable financing, design and management of microgrids are also critical. First Solar has invested in and teamed up with Powerhive, which offers solar-based microgrid solutions that include smart meters, control platforms and mobile-based payment options for electricity customers. The Berkley, California-headquartered company offers its tools and services for successful implementation of rural electrification projects to developers, utilities and governments around the globe. For the past 2 years, Powerhive has operated pilot projects with a total capacity of 80kW, serving 1,500 people across four villages in Kenya. And recently it became the first private company to be granted a utility concession to generate, distribute and sell electricity to the public in Kenya. They are now targeting to provide power to 200,000 people in the country.
So, what´s missing? In my opinion, as an industry we should be looking more and more at solar-enabled microgrids as an attractive energy infrastructure solution. In remote, off-grid locations, producing energy near or at the point of consumption is a win-win for regulators, utilities and customers. Utilities and regulators benefit from the ability to add modern, clean energy generation without costly and time-consuming grid expansion, and reduced operating cost due to transmission losses. Electricity users pay less for power due to reductions in fossil fuel consumption and healthier local generation.
Our mission at First Solar is to enable a world powered by clean, affordable renewable energy. We’ll continue to achieve our goals and overcome obstacles to success in the large, diverse microgrid power market through our critical partnerships.