Electrification has been steadily on the rise, propelled by decarbonization goals worldwide. With nations striving to reduce carbon emissions and transition to cleaner energy sources, electrification has emerged as an increasingly popular solution — businesses are looking to decarbonize, and we have seen critical sectors like transportation going more and more electric. As a result, the demand for electricity has risen and will continue to do so, putting pressure on electrical grids. In fact, at Lux, questions arising from meeting this growing demand have steadily increased over the last year or so. Utilities are facing challenges around the resilience and reliability of their electrical grids. In addition, they must cope with connection requests from newly built houses and communities.
While various solutions like power purchase agreements can be used to secure renewable power to potentially deal with this increased demand, they don’t directly benefit the grid. A potential solution that has seen increased attention recently is the microgrid, which could expedite efforts to hit decarbonization targets and enhance grid performance.
In recent months, Lux has done much more work around microgrids; we just published an innovation digest looking at the microgrid market but also have deeper dives into specific use-cases like community microgrids and microgrids for industrial applications planned in the coming months. In this blog, we will share some results from our work specifically around community microgrids. A community microgrid is a localized energy system that can operate independently or with the main power grid, providing power to a specific community through local generation and storage. Here, we consider a 200-home community in Germany where all houses have solar capacity (4 kWp), and 100 of these houses have battery storage capacity (10 kWh). In addition, there is a communal 50-kWp solar installation alongside a 200-kWh communal battery.
Managing power flows in a microgrid is essential to accurately calculating costs. Electricity generated by the microgrid is prioritized and used first by the houses (or stored for later use). If that is not enough, the required additional amount is purchased from the main grid at retail prices. Similarly, any surplus is sent back to the grid (potentially at a feed-in tariff). The backup generator is used only when there is a necessity to island. We gather load profiles, generation profiles, and relevant cost data to calculate the levelized cost of electricity (LCOE) over 10-y and 20-y periods. In the graph below, we show the LCOE with and without value-added tax exemptions in Germany.
Even without the tax exemptions, the high electricity prices in Germany mean that microgrid investments are likely to pay off quite quickly. For the 10-y period, this tax credit has a sizeable impact on the LCOE, reducing it by roughly 5 cents per kWh. If we look at the 20-y period with no tax exemption, the LCOE is roughly 11 cents per kWh lower than the corresponding 10-y period value. The tax exemption reduces the LCOE by a further three cents. The tax exemption therefore has a notable impact and could be an additional motivating factor toward deploying microgrids. In addition, the tax exemption takes away some of the burden associated with high upfront costs.
This is especially relevant for newly built neighborhoods, which might necessitate long, expensive, and complex upgrades to the main grid. Utilities should leverage microgrids to lower delivery costs to new customers and even use them to help with grid stability since microgrids decentralize generation, ease peak demand, and can provide ancillary services like frequency regulation.