Podcast
Grid edge

The market for microgrids

What supply shortages, new policies and a changing view of resilience mean for the microgrid market.

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October 27, 2023
Catalyst podcast by Latitude Media

The electrification gauntlet is this: The more we electrify, the more we ask of the grid. New demands on the grid are coming right as it’s facing some of its biggest challenges, like interconnection delays, transmission congestion and extreme weather.

But there’s a way to take some of the strain off the grid when it doesn’t deliver what you need — build your own! Microgrids, as they’re called, are electrical networks that can function independent of the larger grid.

So how do they scale? And what counts as a microgrid, anyway?

In this episode, Shayle talks to Tim Hade, co-founder and chief development officer at Scale Microgrids. (Scale was a launch sponsor of Latitude Media, which co-produces this show. This interview is independent of that sponsorship and was scheduled prior to Scale becoming a sponsor).

Tim and Shayle talk about the state of the microgrid market. They discuss topics like:

  • Why microgrid switchgear is a major bottleneck right now
  • Whether the Chinese supply chain for microgrid parts will bounce back, or new manufacturing will spring up in Europe and the U.S. to replace it
  • The changing regulatory landscape for microgrids
  • The effort to standardize microgrids to increase adoption

Recommended Resources

  • Canary: Puerto Rico’s first community-led microgrid is ready to launch
  • Canary: A giant solar microgrid is coming to New York City’s JFK airport

Sign up for Latitude Media’s Frontier Forum on January 31, featuring Crux CEO Alfred Johnson, who will break down the budding market for clean energy tax credits. We’ll dissect current transactions and pricing, compare buyer and seller expectations, and look at where the market is headed in 2024.

Transcript

Shayle Kann: I'm Shayle Kann and this is Catalyst.

Tim Hade: If you are converting traditional internal combustion vehicles to electric vehicles and you need your fleet to operate, then you're concerned about resilience because what happens if there's a power outage and all your vehicles are electric?

Shayle Kann: It's the age of microgrids. Wait, what's a microgrid?

I am Shayle Kann. I invest in revolutionary climate technologies at Energy Impact Partners. Welcome. So microgrids is one of these terms that I both love and hate at the same time. It's sort of like virtual power plants and lots of other components of the distributed energy resource world, which is that we've been using it and in my opinion, sometimes abusing it for, I don't know, like 15 plus years. We call lots of things microgrids that really shouldn't be, and we have other names for things that should be, so it's clearly imperfect, but nevertheless, there's definitely something happening in this space. Here are just some of the many drivers that are pushing in favor of the growth of microgrids in the US. Most notably of course, increasing weather events and concerns about grid reliability that are just growing over time, but also rising retail electricity prices falling distributed generation prices.

Probably more importantly, falling prices for energy storage, maybe the birth of new behind the meter, clean dispatchable resources, nuclear, hydrogen, renewable natural gas, whatever it might be, grid interconnection problems, you've heard my tirade on this one before, I'm sure, and good old American inclination towards self-sufficiency. But at the same time, most of those things have been true for a while. They're not entirely new. So is it translating into a market inflection? What do we actually mean when we talk about microgrids? What makes them important and distinct? What goes into one of them? Well, let's dig in. In this case with Tim Hayde, who is the co-founder of Scale Microgrids. It's literally in their name, so he ought to know, and I should note that Scale Microgrids is a launch partner of Latitude Media who co-produces this podcast. This conversation with Tim is totally independent from that.

Also, before we begin, you've heard this before, but I'm hosting an Ask Me Anything episode coming up where I answer any questions that you've got, climate, tech, investment, energy, transition, whatever. Just send us your questions. You could tag us on Twitter or LinkedIn with the #AskCatalyst. That's #AskCatalyst. Or you can leave us a voicemail, the number is (919) 808-5832. Finally, you can email us at catalyst@latitudemedia.com. Please do reach out, these are fun for me and hopefully valuable for you. So send us all your questions. And in the meantime, here's Tim. Tim, welcome.

Tim Hade: Thanks so much for having me, Shayle. I'm fired up and just before we get into things, as I've told you privately, I'm so grateful to you and Steven and the team. I really don't think Scale Microgrids would exist in its current form if it wasn't for all the stuff we've learned from y'all over the years. And so I'm super stoked to be here and hope to have a great conversation.

Shayle Kann: All right, I'm going to start with a hard hitting question for you. Are you ready? What is a microgrid? How do you define a microgrid?

Tim Hade: Yeah, microgrid is a distributed energy resource that can island.

Shayle Kann: That's very succinct. I appreciate that. Okay, so when you say distributed energy resource that can island, let me just add another layer to that. Does it need to have generation? I guess so, if it's going to be able to island-

Tim Hade: Yeah.

Shayle Kann: ... it has to be able to power the thing, that's islanding, right? So it does have to have generation, it does have to be able to island. Does it have to have anything else? Is backup generation any different from a microgrid in your mind?

Tim Hade: To go a level deeper on this, I mean, I think the way we should talk about this in the broader world is we should call microgrids distributed energy resources that can island. But when you actually get into the wonky parts of this, the distinguishing feature of a microgrid is it can island from the grid during periods of macro grid disruptions. That's the thing that matters and separates microgrids from the rest of the distributed energy resource community. But yeah, I think technically the department of energy definition of microgrid is an asset that can provide electricity services to the grid during uptime and then island from the grid in the event of a grid disruption. And so yes, generation is a critical aspect of that. We can talk about more about the various ways that companies are doing that in the market today, but you have to be able to generate electricity typically behind the meter, provide electricity services to the grid during normal operating conditions, and then island from the grid in the event of a grid disruption.

Shayle Kann: So just to push on that for one second, let's take your average data center. Every data center has backup power, uninterruptible power supply, so it can island from the grid. And the whole point is to have resiliency in the event of an outage. Is that in and of itself a microgrid in your mind?

Tim Hade: Yeah, so it depends on what it's doing during normal operating conditions. So most data centers in the world today, those backup power generation devices are diesel generators, right? Increasingly they're becoming natural gas generators, but for most data centers they're diesel generators. And what those diesel generators do is they sit idle pretty much all year and they wait for that grid disruption. And then when that grid disruption happens, they turn on and if everything goes well, the data center continues to function. So that in and of itself is not a microgrid because the diesel generators aren't providing services to the grid during normal operating conditions. Now where it gets tricky is with gas.

So instead of using a diesel generator, if you use a gas generator, in some areas of the country, depending on sort of the regulatory construct, that can be a microgrid because you can turn on those gas engines during periods of needs on the grid to provide additional capacity. In some areas of the country, you can't do that. And so a data center that has just gas generators can be a microgrid or might not be a microgrid depending on where you're at in the market, sort of there you're operating in, if that makes sense.

Shayle Kann: Okay, I get it. So for you, the defining feature is you have to be able to island and on a normal day you're not just waiting to island for the grid to go down, you're interacting with the grid on an ongoing basis. And if those two things are true, then you're a microgrid. Okay. So good enough for our purposes today. We've talked a little bit about it, but I do think we should run through the components because microgrids can be super simple. As you said, it can be a natural gas generator, it could be a gen set that's operating in the market day to day or periodically and then is there for backup power, but it can also be a far more complex beast.

And I think this is what most people are thinking of when they think of microgrids, which is some combination of a variety of different elements that are interacting together to provide power to whatever it is, a campus or large building or something like that. So let's talk about the more complex version and the various components that can go into a microgrid. And then I want to talk about what's actually happening in the market and how much it's one type or the other. But in the version that's more complicated than just a gas gen set, what might you see typically?

Tim Hade: Yeah, so one of the things I think we're going to get to today is the entire microgrid market. The entire distributed energy resources market is changing really, really quickly. But if you think about this from a component standpoint, there's really four components that make up most microgrids that are being built today. Solar is one of those components. So that could be rooftop, ground mount, carport, doesn't really matter as long as it's behind the meter. Storage is probably the biggest component that's unlocking value in the microgrid and distributed energy space right now. So that plays an out-sized role in terms of economic value, grid participation, things like that.

Switchgear, so this is probably the thing that's talked about least, but is one of the most important components of a microgrid is that is really the nerve center of a microgrid or distributed energy system. And switchgear is really the thing that allows your system to produce, store, dispatch and utilize energy in the optimal way when you have sort of multiple inputs. And so the switchgear is really important. And then that fourth piece that exists for most microgrids today is a dispatchable generation asset, and that dispatchable generation asset can be run off traditional fossil fuels. So diesel, natural gas, do we call it natural gas or freedom gas here?

Shayle Kann: We haven't dipped into the freedom gas world here. You can call it natural gas.

Tim Hade: Fossil gas, freedom gas, whatever it's called. So natural gas, propane or it can be new fuels, more sustainable stuff like biofuels or hydrogen is increasingly prominent in the space as well. And so those are kind of the big four, solar, storage, switchgear, and dispatchable generation assets and some combination of those come together to create most microgrids that are being deployed in the market today.

Shayle Kann: Good. We will come back to the combination of those and how scalable a given design is versus every project being a snowflake, that kind of thing. You mentioned switchgear, which I agree is the one that gets talked about the least. Let's just spend one minute on switchgear. I think it's important, and we haven't talked about it enough here, how big a problem is the supply chain bottleneck for switchgear right now?

Tim Hade: It's a big problem. It's a big problem. So look, I think what the real question in the market is today is not what the present state is. Anyone you talk to about switchgear in the commercial industrial and the bush sector or anything like that is going to tell you it's a problem today. The real question is how quickly is it going to get corrected? And there's sort of two theories of the case. A lot of the supply chain runs through China for switchgear. That's just the reality of the situation. And that supply chain was very heavily disrupted by COVID. And so part of the question is, is that going to bounce back naturally as we move into a post COVID world or is that going to only bounce back once we establish manufacturing capacity in other areas outside of China? And so both of those things are kind of happening right now.

The Chinese supply chain is kind of getting back on its feet, still some issues there, but we're also opening up new manufacturing facilities in Western Europe and the United States and places like that, largely on the back of the IRA and some of the legislation that's been passed over the past few years. And so really what you're trying to figure out if you're in this market today is how fast is that problem going to correct itself? And you talk to different experts, some tell you the middle of next year, some tell you it's a three to five year problem. Our goal as an industry is to make that happen as quickly as possible. So if we could fix this and get things back to where they were, which is typically like 20 week lead times on switchgear, that was what the market was before COVID. Today it's more like 60 to 70 weeks. If we can get back to that 20 week lead time by the end of next year, that's going to be really critical to sort of driving the market going forward. So that's really the situation around switchgear.

Shayle Kann: All right, we're not going to spend too much time on switchgear right now, but I'm glad that you brought that one up because that's been a topic I've been meaning... Switchgear, transformers, all the electrical good equipment that's like... We had this crazy supply chain shortage of all sorts of things in the latter part of COVID. And then it basically alleviated for I think effectively everything except stuff like switchgear and transformers, which has plagued the industry and we don't talk about it enough. So appreciate you teeing that up.

Tim Hade: No, it's crazy. I appreciate you asking about it, because exactly, we've seen supply chains correct themselves on the solar side of things, on the battery side of things, on the generator side of things and switchgear's just stagnant. And so you talk to any project developer, any financing entity in the distributed energy space right now, they're going to tell you that's the problem. And again, it's just a question of what can we do and how fast can we correct that? So it's a really important point.

Shayle Kann: A hundred percent. Okay, let's get back to the microgrid market. Do you have in your head, is there a typical customer archetype that's the perfect customer for a microgrid or there are a couple of archetypes? I think a lot of people would think of something like a university campus or something like that, but my sense is that that's actually those are more snowflakey and there's probably other categories that are more scalable. But what do you guys typically see if you're defining the archetype of a typical customer?

Tim Hade: Yeah, so I don't know, maybe this is the part where we can get interesting. So I can tell you what typical microgrid customers are today, but I think what's more interesting is what microgrid customers are going to look like in the future. And I think ultimately what this comes down to is how do we define the value of resilience as society. Right now today there's a certain percentage of commercial and industrial customers that have a high value of resilience and those are the archetype of microgrid customers. So when you go out into the market, you try to find a good customer to work with from a microgrid standpoint, the first question you're asking is how much do you value resilience? And even within sectors, there's no sort of standardized way to do that. There's no commonly accepted methodology for calculating the value of resilience. And so some people buy into it and some people don't.

And that's essentially the game right now. But as a society, my argument is basically that we're massively undervaluing resilience and in traditional energy economics we call resilience a private value. So we say that when we go to integrated resource planning and stuff like that, we think about reliability as a metric, we think about affordability, we think about sustainability, but then we say, Hey, resilience is a private value. If the grid fails, it's a private value. And every time an academic model comes out that tells me that resilience is a private model, I offer to take those people to Puerto Rico where I was right after Hurricane Maria and tell me that resilience is a private value. And so the reality of the situation is that people, and this is customers in all sorts of different demographics, need to be taking resilience more seriously. And the reason for that is our grid is fragile.

And so for anyone who wants to learn more about this, there's a bunch of stuff that's been written. My favorite book on the topic is a book called the Lights Out that was written by Ted Koppel. And basically there are a lot of different scenarios that could occur where people could lose power for weeks or months in the United States of America. And we've seen those situations almost arise in recent times, right? Texas during Yuri almost lost power for probably multiple weeks and they were I think 30 minutes away from that happening. So this is real stuff. And so a catastrophic grid failure is going to happen, and when that catastrophic grid failure happens, the question's going to be why didn't we think about resilience more? And if you actually think about resilience, then the target market of sort of microgrid applications expands a lot. So maybe we pause there. I'm excited to hear your feedback on this. So let's get into this.

Shayle Kann: Yeah, I mean there's a societal thing that you're describing there around we should be elevating resilience to a more important place in how we think about electricity delivery in this country in general. And I think I agree with you there. There's only so much you can do there. You're not going to put a microgrid at literally every building in America. Maybe you want to obviously, but there's a cost to that and we're going to get to the economics of this. But to me it is always going to come down to the value of resilience is different for different customers. It is higher for a hospital than it is for a nail salon or whatever.

I'm just coming up with numbers. So I mean back to the original question, I take your point that what you're describing is a scenario wherein today's market is the early adopters. And the early adopters is the ones who have some combination of clear either economic or existential reason to need resiliency or have woken up to the risk that you're describing or early on in their understanding of the existential risk of a catastrophic failure on the grid or whatever it might be. And so maybe that expands over time in the way that you're describing and maybe becomes more clear over time as we have more events and so on and so forth. But back to my original question, who is that first group?

Tim Hade: All right, I'm going to respond to this. I think this is the heart of the issue. So first of all, I'm not crazy. I don't want to put a microgrid in every facility in the United States. I want to put it in about half of the facilities in the United States and let's just talk about what's happening in the market. So right now, today, pretty much about half of that capacity is going to come from distributed energy resources. So 50% is going to come from utility scale stuff, 50% is going to come from distributed energy resources. I don't know, plus or minus 10% here or there. But that's essentially what is setting up to happen. And my question is if we're going to build hundreds of gigawatts of distributed energy resources over the next few decades anyway, why will they not be islandable?

And so that I think is the key point here. It's not that everyone should go out and buy distributed energy resources because of the resilience factor. It's that everyone's going out and buying distributed energy resources anyway and they're just not paying the incremental 10 or 15% that they need in order to make those assets islandable in the event of a grid disruption. And that's the stupidity of the current market and the inefficiency. And so if we're going to do distributed energy resources anyway, we should make those distributed energy resources islandable. I think that's the crux of the argument.

Shayle Kann: I think that makes sense at the high level. But actually you just got to what my next question was going to be, which is an economic question. Because if you look at forecasts of distributed energy resource adoption that we're going to see as you're describing, a lot of that is going to be behind the meter solar and load control in the form of smart thermostats and stuff like that. Those things in and of themselves, you can island them, but they don't... A microgrid make, if you just island them, as you described before, if you're going to do solar, you probably want some dispatchable generation, you want some storage and stuff like that. So just walk me through the economics of how you think about a microgrid.

And this gets to the question that we were sort of getting to before, which is how much do various customers value that resiliency? And do you think about it that way? Here's the value of your behind the meter generation and here's the value it would deliver if you were just operating it in the market and saving money on your bill and whatever. And then here's the incremental cost of giving yourself a fully islandable microgrid that'll operate in the event of an outage. And that incremental cost is the value of the resiliency. So how big is that incremental cost? And again, today, who is happy to pay that?

Tim Hade: All right, so this is an awesome question and extremely complicated. I'm going to try to unpack it and interrupt me if I'm heading off track. All right. So look, I think if we just get back to your original question, the people that are adopting microgrids today are people who value resilience more than the grid provides. On the smaller side of things, in the CNI space, you're seeing grocery stores as a driver of the market in mid-size commercial warehouses and distribution centers. So if you think about the shift in e-commerce that's taken place post COVID, everyone orders their thing on an online platform, they expect it to show up on Thursday. That means the warehouse that's actually shipping that good caress a lot about resilience 'cause they don't want it to show up on Tuesday because they had a power outage. Increasingly, fleet vehicle operators are really looking at this because they can't get the capacity.

So that's sort of a whole other subset of this, but if you are converting traditional internal combustion vehicles to electric vehicles and you need your fleet to operate, then you're concerned about resilience because what happens if there's a power outage and all your vehicles are electric? Data centers are probably the biggest driver of microgrids right now that's particularly kind of a gas generation or dispatchable generation play because of some of the just energy economics and realities of the energy density of data centers. So those are kind of the usual players. I guess the second part of what you were saying is this is where I think storage is really interesting and really important. So if I thought what you said is right, which is the primary driver of the distributed energy resources market was going to be solar and controls, then I wouldn't have the same thesis I have, but I actually don't think that's the future of distributed energy resources, right?

Because the economic value of distributed energy resources is dictated by the market in which it participates. And so if you look at California as a great example, there are basically no solar only projects being built in California right now. Why? Because they changed the rules. And they changed the rules, so you essentially have to have a battery in order to optimize economic value. And I think hopefully it happens in less like an aggress, a less aggressive way, but I think that's basically the reality that all state regulatory environments are going to face over the next few decades, is solar alone is problematic. Solar plus storage solves a lot of problems. And so once you have solar and storage, then islanding becomes a much better value proposition. So generally speaking, I don't know, let's talk about maybe a 25 to 30% premium to non-islandable solar storage system to be able to have either if you're in a residential setting, the electric panel or if you're in a commercial industrial mush setting, the switchgear, it's like a 25 to 30% premium to install the switch gear you need to be able to island.

And the question is how do you think about that value in the context of society and what public utility commissions are trying to do? There's been some good things they've done at the federal level. So the IRA included what's called the microgrid investment tax credit, which allowed the switchgear that is islandable to receive a 30% tax credit to sort of help bridge that gap. Unfortunately, that was only appropriated for two years and we still don't have the final rules. So we essentially have one year to use the microgrid ITC. Representative Jimmy Panetta from California is trying to extend that. My understanding is currently we don't have a speaker of the house, so it's a little bit problematic. That's not really my environment, so we can't get into that.

Shayle Kann: Your understanding is correct.

Tim Hade: But those are the types of things where the free market, the market alone is not giving people any incentive to spend that additional 25 to 30% to make their solar storage systems islandable. And the question is why not? And I don't think there's a good answer.

Shayle Kann: I think you hit on something actually pretty interesting. And the California example is a really good way to lay it out, so what was happening in California was all the conditions were right, we were installing a lot of behind the meter solar and in fact we were installing a lot of solar in general, including front of the meter stuff as well. And so California got somewhat oversaturated with solar over the past few years and we see the duck curve and everybody's familiar with this stuff. The regulatory response to that for the behind the meter stuff has been what you were alluding to, which is changes to the net energy metering rules and the changes to the net energy metering rules, as you said, effectively made it such that the economics of solar only really work now if you add storage to it.

So what's interesting that happened in California is that we were already installing a fair amount of solar plus storage where the value proposition there was not economic, right? It was at least to add the storage. The solar might've been economic because you had net metering and then a lot of people were starting to add the storage because we've had outages, proactive power shutoffs from wildfires and stuff like that. So it was not an economic decision for quite a while to add batteries, but people were doing it anyway. Then thanks to the regulatory construct changing, we made it economic, in fact, sort of economically necessary, that if you were going to add solar, you would also add storage.

I think the point that you're making is pretty interesting, which is once you're at that point where economically actually you do want storage anyway, then the incremental cost to turn that whole behind the meter system into a microgrid that can island is not that big 20, 30% In the previous world, if you were just doing solar, that incremental cost would be big. And so the big change here, and this could be applied to residential and commercial, it could be applied to other markets as well, is that storage becoming economic, full stop?

Tim Hade: Exactly. Very well said.

Shayle Kann: Really unlocks microgrids because it makes that incremental cost of resiliency pretty low.

Tim Hade: Yeah.

Shayle Kann: That's super interesting. I hadn't really thought about it in those terms. Now obviously the other factor here, if you're trying to be truly islandable and islandable for a long time is the generation component to that. And you don't see this as much obviously with residential, but certainly in the world that you're playing in, some form of dispatchable generation is usually a part of the mix. And now that depending on the market can also be economic on its own, but it is a whole other element to add.

Tim Hade: Yeah, I mean, look, I think now we're starting to get into stuff that keeps me up at night. I mean, look, I think if you think about an economically viable way to provide commercial and industrial facilities with the type of resilience that most of them are looking for, you're using fossil gas or natural gas or freedom gas plus solar and storage or diesel or propane, but some sort of fossil based asset to run that diesel or that dispatchable generator. That's just the way it is. And so look, I think some people I talk to say that's okay. And really the way we think about it on projects where we do use gas generators, which is a technology we use a lot of, is what we're trying to do is we're trying to minimize the capacity factor. So we can have a gas generator that can operate in the event that the solar storage system doesn't function or the battery essentially doesn't have enough electrons in it to continue to operate the facility.

So we kick on the dispatchable generator and that sort of takes the facility through that period and we're just trying to minimize the amount that we use that. So that's one way to think about it. I think there are a lot of other people in this industry who look at it slightly different way, which is that like if you're installing more fossil capacity, it's a bad thing. So there's a big argument about this, and I think ultimately my question is, okay, if we're not going to use fossil based dispatchable generators to solve at least a portion of this problem... My customers want 24/7 resilience and so you have to give me another way to do that. There has to be something on the market that exists that can provide that service in a zero or much lower carbon way. And so we're looking into all this stuff, so we're looking into things like iron air batteries and nickel hydrogen batteries and hydrogen as consumable fuel, but nothing even comes remotely closed to being economically viable right now for us.

And so maybe that's the 10-year horizon, but it's not today. And so I think that's a question that a lot of people struggle with is a very low carbon solution that provides a lot of resilience better than a no carbon solution that doesn't provide as much resilience? I think our general approach as a business is we know how to do both and we let our customer decide what they want to do. And so that's how we've let people make the decision in the past we say, "Here's the cost benefit analysis of each, you pick what you want to do." And historically, most of our customers have opted to put in a dispatchable generator that runs on fossil gas, and that's okay. I think increasingly we're starting to see people say like, "No, we don't want that. We'll just go with the solar storage system. Let's island that. Let's maybe up-size the battery a little bit so we have a little bit more duration in the event of an outage." But we will live with the repercussions in the event that we have an outage and there's four cloudy days in a row or whatever.

Shayle Kann: Right. So we've talked about the four elements that are typically or could typically be in a larger scale microgrid, behind the meter solar, dispatchable generation, switchgear, storage. One of the things that has always been a question about this market, this is true of a lot of things in CNI world in general, but it's particularly true of microgrids, is the degree to which they are standardized versus completely unique to every single project. Both the configuration of the system, the components of the system, the economics and how they operate in the market, the contract structures. You've been at this for quite a while, how much today is every project a unique snowflake versus how much have you been able to standardize things as the market has evolved and as you guys have grown?

Tim Hade: Yeah, I mean I think we're getting there, right? It's a journey, not a destination. And so look, I think a driving philosophy of our business is we want to make it simpler for people to acquire microgrids. That's what every activity that we do as a business revolves around making this simpler and easier for our customers. I think it's a work in progress. We've made a lot of strides. I think some people who are familiar with our company know that we kind of solved the financing challenge alongside energy impact partner Steven Kantowitz. When he was at Warburg Pincus we solved that by raising essentially a private equity fund to allow us to invest in our own projects. And so that took a lot of the friction out of the financing process. We have an amazing commercial team inside Scale that does nothing but think about how can we make contracts both bankable but easier for our customers to understand.

And right now our standard energy service agreement that we sign with customers is seven pages long. So we're making a lot of progress on that front. Look, on the technology side, I think the biggest pain point right now comes back to switchgear, which is integrating a new switchgear into an existing facility has always been more of an art than a science. And so in our case, we're working with Schneider Electric, which is one of our favorite technology partners to try to solve that problem and try to standardize. They have a product they came out with called Microgrid Flex that we're really, really excited about because it essentially, to the extent that you can is a standard switchgear add-on to an existing switchgear that allows you to create a microgrid capable facility a lot quicker and in a lot more standardized way than traditionally been possible.

But look, I think the reality is there's still a lot of customization that goes into each and every project. And so that's kind of how we think about it, is our job is to be partners with our customers and try to help them understand the cost and benefits of different options and try to make it as easy for them as possible to get one of these projects done. And doing that sometimes requires coloring outside the lines a little bit. And so luckily we have a lot of really, really smart people that work here that sort of help us do that. But yeah, I think that's the goal of everyone in the industry is try to make it as easy to buy a microgrid as an air conditioning. I don't know, we're probably like a decade away from that. And so right now it's just about trying to make it as standardized as you possibly can and then do what you have to do to get the projects done.

Shayle Kann: All right. So you mentioned switchgear is the biggest complexity, but stepping back beyond that, what do you think... This is your opportunity to get on your soapbox. What's holding this market back today? I mean, you sort of talked before about the world hasn't come to appreciate yet the importance of resilience and the existential systemic risks to the grid and all that kind of stuff. I mean, maybe that aside from a more practical market perspective today, what holds back the microgrid market?

Tim Hade: Yeah, so I mean just to clarify, I don't want to set that aside. So one of the things I want to make sure everyone hears is that... So I don't know, maybe to take a step back, I come from the military, so that was my background. And one of the things I learned how to do in the military was threat assessments. This was a big thing in the post 9/11 military. And so when I look at our grid from a threat assessment standpoint, it freaks me out. It really, really, really freaks me out. And so again, this is like a when not if thing. There is going to be a major event in the United States where people lose electricity for weeks or months. Keep in mind right now what we're doing is we're electrifying everything, which means that if we lose electricity for weeks and months, it's not just an economic disaster, it's a humanitarian disaster.

And when that happens and people are walking around in this post-apocalyptic world... But by the way this happened in Hurricane Sandy, I lived in New Jersey, it was pretty much a post-apocalyptic world, and everyone's pointing at solar panels on roofs that aren't generating electricity and don't work, right? We're all going to say to ourselves, this was pretty stupid. And then after that event, hopefully things are going to happen a lot faster. And so look, I think the biggest thing holding microgrids back is that we as a society, whether that's through our institutions or just generally, we take electricity for granted and we're not putting enough emphasis on the value of resilience. And if we start to do that, then there are going to be a lot more microgrids built. I think the latest DOE estimate is we're going to deploy something like 200 gigawatts of distributed energy resources over the next decade.

Less than 10% of those are going to be microgrids or going to be island mode capable based on current trajectories. So 200 megawatts or 200 gigawatts rather of distributed energy resources, less than 10% of those are going to be microgrids. It should be a lot closer to 50, 60, 70%. And I think ultimately to get to that number, really the question is how do we as a society think about resilience? But look, then there's some more practical things, and I think the thing I'll emphasize is if you want to talk about one specific area that's holding microgrids back, the way we incentivize electricity systems in the United States through the Inflation Reduction Act is through tax credits. And just fundamentally, the transaction costs associated with monetizing tax equity disproportionately hurt smaller distributed energy projects. And so if you're a company like ours, you think about the commercial and industrial microgrid space, 95-ish percent of commercial and industrial loads are below two megawatts, but almost all the microgrids are built above two megawatts.

And the reason for that is not technology cost, it's all soft cost. And so the reason everyone in the microgrid industry is trying to standardize is because we're trying to alleviate soft costs so we can go build projects for the 95% of people that don't have more than two megawatts of load, most of the people that are leading in the micro grid industry are trying to solve that problem in some way, shape or form. The way we get incentivized is we get a 30% ITC, but it's disproportionately harder for us to monetize that than it is for a utility scale developer to monetize their tax credit just because it's on a much, much, much smaller base.

And so the way that these things are incentivized through the ITC as it currently is structured aren't advantageous to distributed energy as an asset class. And that's one of the things I worry about because it kind of skews the playing field and makes it more likely that utility scale resources are going to be built. And again, I'm not opposed to utility scale resources, I am like all of the above person and I want more utility scale resources, but I do want a level playing field. And I think the way the current tax equity markets work, that's not really happening and based on new banking regulations, I think it's kind of going in the wrong direction. So that's one of the things we're really worried about.

Shayle Kann: That's interesting one to bring up. I've had a lot of requests for people to have me cover the way that tax credits are going to work in the new regime and particularly transferability. I mean, it's early days, right? But is your sense that that's going to alleviate that problem a little bit?

Tim Hade: So I mean, we have a guy who works at Scale, he is our chief investment officer, his name's Julian Torres, and he spends most of his time thinking about this. And if you want to have a conversation about this, he's the perfect guy to talk to. And I probably won't listen to that episode because it bores the shit out of me. But look, I think what I could tell you is that transferability hasn't helped yet, and I think a lot of this stuff is still playing out. Treasury's been overburdened trying to implement all the IRA stuff. A lot of the rules aren't clear yet. A lot of the programs are still coming online, so it's probably too early to say, but it definitely hasn't helped yet. And so look, I think where you have seen it help is in nonprofits and government institutions who now have eligibility for direct pay.

And that's really opened things up. Where now all of a sudden these entities that traditionally couldn't monetize the tax credit without a third party partner, and even when they had a third party partner, it was very complicated to do so, can just essentially get that incentive in the form of a check from the IRS at least theoretically. I haven't seen anyone actually do it yet, but theoretically that's the way it works. So I think those markets are opening up as a result of direct pay. But yeah, transferability, we haven't really seen have any impact on the market yet. And again, if that's going to happen and when that's going to happen, I don't know.

But I do think that no matter how this plays out, the way the system works today, tax credits disproportionately favor bigger utility scale assets. And the question we have to ask ourselves is that what we want to be doing? Is that the intent of Congress to say that we want more utility scale assets than we want distributed energy resources. Or as the intent of Congress, they didn't really think about this when they passed the legislation and this is one of the unintended consequences and we should think about that. And my view is it's more the latter than the former.

Shayle Kann: All right, that is a good note to end on, Tim, this is a lot of fun. There's more to talk about in microgrid world, so I think we should do it again. We could dig in a little bit more on, I don't know, some of these individual components of particularly I'm interested in how these economics all play out for customers and when we see... Another thing that we didn't really get the chance to talk about is do we see demand for microgrids spike in the wake of events like Sandy or hurricanes in Texas? How much does the immediacy of these reliability events really drive demand? But anyway, these are topics for another day. In the meantime, really appreciate you coming on.

Tim Hade: Thanks so much for having me, man. And I'm happy to come back anytime y'all want, but like I said in the beginning, I'm so grateful for everything y'all do. It really helps us a lot. We've learned a lot about a lot from y'all, and best of luck with everything and tell Canto I say what's up, all right?

Shayle Kann: Sounds good. Tim Hade is the co-founder and chief development officer of Scale Microgrids. This show is a co-production of Latitude Media and Canary Media. You can head over to canarymedia.com for links to today's topics. Latitude is supported by Prelude Ventures, a venture capital firm that partners with entrepreneurs to address climate change across a range of sectors, including advanced energy, food and ag, transportation and logistics, advanced materials and manufacturing and advanced computing. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquand. Theme song by Sean Marquand. I'm Shayle Kann and this is Catalyst.

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supply chains
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energy transition
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