Will a new tariff solve California’s microgrid woes?

Spurred in part by federal climate funding, microgrids are on the rise. As of this month, intelligence firm Wood Mackenzie is tracking more than 4,000 microgrid projects across the United States.

Analyst Elham Akhavan said the 2022 passage of the Inflation Reduction Act led to “tremendous” growth in project announcements. However, hurdles remain. Not all microgrid projects make it online, Akhavan said, pointing to interconnection challenges, community engagement issues, and policy barriers.

In California, a state that has long been considered a leader in energy transition policy, an ongoing debate over a microgrid tariff — a standardized pricing structure for selling electricity back to the main grid — has brought policy to the forefront of the microgrid commercialization conversation.

“I think there’s frustration that microgrids haven't been easier to develop,” said Cliff Rechtschaffen, a former commissioner for the state’s Public Utilities Commission. “There’s a general sense that they have promise, that people want to see more of them, and that they just haven’t come to fruition quickly enough.” 

That delay is in part because of a lack of existing regulatory framework, Rechtschaffen added, but also because microgrids have been more complicated and more expensive than anticipated.

Recent weeks have seen not so much a flurry but a snowstorm of input on the CPUC’s microgrid tariff proceedings, as stakeholders weigh the microgrid’s grid resiliency benefits against broadscale decarbonization. But despite the lively debate, developing a tariff is just one part of microgrid commercialization, Akhavan said; doing so successfully will also require mitigating high costs, supply chain issues, long timelines, and a slew of technical challenges.

Given the many pieces that may need to fall into place for the technology to meet its full potential, some are loath to put too many eggs in the microgrid basket. Rechtschaffen, for instance, said they “may have been a little bit oversold.”

“The verdict is still out,” he said. “But there are other technologies, I think, that can be deployed more quickly, and more effectively.”

Tackling the tariff question

Microgrids still make up a relatively small share of the distributed energy resources that have come online in the last five years, at under 8%. But there’s strong projected growth nationally, Akhavan said.

California is home to around 9% of the 4,000 microgrids Wood Mackenzie is tracking, and around 40% of operational projects in the state are utility microgrids.

Enacted in 2018, Senate Bill 1339 is one of the nation’s “forefront” laws on microgrid development, Akhavan explained. That bill directed the CPUC to develop “standards, protocols, guidelines, methods, rates, and tariffs that serve to support and reduce barriers to microgrid deployment.”

Allie Detrio, who is the chief strategist of Reimagine Power and who was part of the coalition behind the bill in 2018, said that the original impetus for the law was commercializing microgrids and deploying more grid-responsive resources. Despite being at the center of the CPUC’s microgrid program today, resiliency was not the central focus of 1339, she said.

The legislation received little attention at first, in part because it was overshadowed by S.B. 700, which allocated $800 million for energy storage initiatives, Detrio said. But after the 2018 Camp Fire and widespread power shutoffs in 2019, resiliency became a much bigger focus, and microgrids “exploded.”

The CPUC proceeding is now in “Track 5,” which directs the state’s utilities to submit proposals for a multi-customer tariff, modeled on Pacific Gas & Electric’s Community Microgrid Enablement Program. So far, Detrio said, Track 5 has focused only on utility-owned, front-of-meter microgrids.

“In doing that, they basically have forced us to focus on the most complex, most expensive, least valuable, and least meaningful type of microgrids,” she said. “Had the CPUC done exactly what [SB 1339] said to do — create a single customer microgrid tariff — we’d probably have thousands of microgrids deployed across the state.”

Non-utility stakeholders — who have until December 15 to submit tariff proposals — say the CMEP model is far too narrow and destroys most of the microgrid’s commercial value by limiting operations to emergencies.

This “completely precludes these revenue opportunities which are essential to commercialization,” said a tariff proposal filed by the Climate Center, the Center for Biological Diversity, the Green Power Institute, and 350 Bay Area.

PG&E’s CMEP operates alongside the state’s $200 million Microgrid Incentive Program, a competitive grant approved by the CPUC in 2021 that also offers funding and support for front-of-meter microgrids. CMEP offers up to $3 million per microgrid project to fund islanding, including isolation devices, fault protection devices, and a PG&E microgrid controller. Meanwhile, MIP allots up to $15 million per project and can cover other necessary technologies, including DERs.

MIP is set aside for disadvantaged communities, and state utilities released a handbook for would-be applicants in October. According to PG&E principal program manager Molly Hoyt, the utility estimates that projects can take three to five years to develop, from the initial application stage.

Barriers to building

Front-of-meter microgrids are in fact very complicated to set up, said David Carter, principal engineer at the nonprofit lab Schatz Energy Research Center. 

The Redwood Coast Airport Microgrid in California’s Humboldt County is considered the first of its kind in the state, and includes 2.2 megawatts of solar, 2.3 MW of Tesla battery storage, and 300 kilowatts of behind-the-meter solar. Carter, who worked on the team that served as the project’s contractor, said the site is designed to be fully automated, both for “blue sky” and “islanded” operations, and has proven reliable at providing backup power during earthquakes and several atmospheric rivers.

RCAM was funded by both the California Energy Commission and the Redwood Coast Energy Authority, Humboldt County’s community choice aggregator. (However, Carter said the project has since overspent and is currently finishing out-of-pocket.) Carter stressed that the microgrid project was not developed using CMEP; rather, PG&E’s program is based on RCAM’s development.

“We worked with PG&E to document the entire process that we went through, and to figure out what made sense as far as a community that didn't want to take the risk of trying to operate 12,000-volt electrical lines and maintain that, and meet all the standards that go along with that,” Carter said.

The Schatz Center is currently working on seven microgrid programs under CMEP, Carter said, and he’s aware of others. Meanwhile, PG&E’s Hoyt said her office has had nearly 40 communities reach out about the program, many of whom are just waiting for MIP funding to become available to start the application process.

“The reason why these things take so long is because, honestly, we just don't have the human capacity to figure this stuff out very fast,” Carter said. “First of all, it’s a new and very complicated branch of electrical engineering with public safety implications. And there aren’t a lot of people who know how to do it yet.”

The California State Polytechnic University, Humboldt is working on a microgrid deployment program, which includes building testing facilities and working to “crank out as many graduates as we can that have a decent foundation in this,” Carter said.

“What we’re doing isn’t perfect, and it’s slow,” he added. “But we’re trying to build these replicable examples that can decarbonize our grid and make it more resilient.”

Beyond tariffs

The tariff question is far from California-specific, said University of California, Berkeley energy professor Daniel Kammen. At least in the U.S, Kammen said, “microgrid tariffs don’t exist” in practical terms.

Instead, each microgrid project goes through a “ridiculously long song and dance” to set rates.

California’s large quantity of behind-the-meter solar makes it an ideal testbed for microgrid proliferation, Kammen said. The current regulatory focus on front-of-meter microgrids fails to capitalize on that asset, though, and makes it hard to develop commercially viable projects.

“My reading right now is that California — which has an average demand of under 30,000 MW — has 12,000 to 13,000 MW of solar behind the meter in various parts of the state,” Kammen said. That means, on a good day, California could, in theory, meet half of its average demand with distributed solar.

Despite its spending on microgrid commercialization, when it comes to microgrid policy, California is outstripped by a handful of states, including Hawaii, Texas, and Colorado. That’s according to industry coalition Think Microgrid’s 2023 state scorecard, released in November.

One key reason for California’s lower policy rating, according to Think Microgrid, is the CPUC’s August refusal to hear a proposal from home solar company Sunnova to develop microgrids for new home communities in the state. Sunnova requested to be regulated as a “micro-utility,” and planned to bid energy services into distribution utilities or CAISO markets. 

“By denying Sunnova a hearing to examine the proposal,” the analysis concluded, “the PUC demonstrated its commitment to a microgrid policy strategy that is limited to utility-owned infrastructure.”

Erin Weber Kiel, senior manager of government affairs at Sunnova, said there’s a “key regulatory piece” that’s getting in the way of microgrid commercialization in California, but it’s not the tariff proceedings. More impactful, Kiel said, would be a statutory amendment to Section 218 of the Public Utilities Code, known as the “over-the-fence rule,” which isn’t on the table in the CPUC’s multi-property tariff investigation.

That rule, which essentially prohibits sharing or selling power across property lines, except by regulated utilities, makes it extremely hard for developers like Sunnova to compete, Kiel said. But she sees a “glimmer of hope” in the CPUC proceedings, in the form of an alternative to CMET proposed by a diverse group of industry stakeholders.

“We, the industry, have been frantically working to put something together as a model of what could work,” she added. “We do see this proceeding as a great opportunity for us to showcase our model, and help the CPUC flesh out what this could look like.”

Rechtschaffen, who said his views are his own and not that of the CPUC, said that regardless of whether a tariff “does the trick” for commercialization, he’s not convinced microgrids make sense as a broad scale solution. While critical for resiliency and safety, they aren’t, in his view, the highest-impact tool for the energy transition.

“I’m not sure they bend the curve in the way that we need to effect rapid transformation of our energy system to deal with the climate crisis,” he said.

Clarification: This story was updated on November 8 to reflect the fact that the CPUC pushed back the deadline for interested parties to submit their own proposals for the microgrid tariff policy, from November 9 to December 15.