Extreme weather events are expected to rise as the world experiences the effects of climate change. Last year, wildfires in California led to multi-day power outages affecting millions of customers. Last month, 1.4 million utility customers faced electricity outages of multiple days due to storm Isaias in New York, New Jersey and Connecticut. Two weeks ago, the California Independent System Operator declared a State 3 Emergency due to an extreme heat wave and initiated rolling blackouts affecting more than 250,000 customers. Weather-related power outages, worsened by aging infrastructure, are surging in the United States making it imperative for businesses to seek out resilient energy solutions.
Businesses can potentially lose millions of dollars in sustained outages. For example, groceries stores lose upwards of $30,000 in a one day outage, a luxury hotel in California reported $500,000 of losses due to Public Safety Power Shutoffs (PSPS) in 2019, and critical facilities like hospitals face potential loss of life during sustained outages. Microgrids can supply on-site power and island a facility from the utility grid during an outage, enabling them to keep their lights on and avoid losses. While resilience is identified as a key benefit of microgrids, often little to no value for this benefit is included in the project’s economic analysis.
In this blog we hope to demonstrate two critical concepts: 1) there are multiple practical ways to value resilience, and 2) valuing resilience doesn't just improve project economics by adding a new benefit, it may also fundamentally change project design and increase non-resilience benefits like utility bill savings.
Avoided Outage Costs
There are multiple ways that resilience can be valued, and there is no perfect or one-size-fits all method, which makes it hard for the industry to adopt a standard. A common way to value resilience is to account for avoided outage costs. This includes any loss of perishables or assets, business interruption costs and costs to recover. Facilities can calculate the Value of Lost Load (VoLL), which is usually a $/kWh value multiplied by the load lost during an outage to estimate the total outage costs. Another way to characterize VoLL is as a $/hr value multiplied by anticipated future outage quantities and durations.
However, determining the VoLL can often be a challenge since it needs to consider multiple factors like customer class, nature of the outage and the wider impact of lost load. For example, a grocery store loses its frozen inventory during an outage, but an extended outage at a local water utility can potentially disrupt water supply to the entire county. For customers who do not have their own estimate of outage costs and cannot calculate their VoLL, the Interruption Cost Estimate (ICE) calculator developed by LBNL can be a good starting point. The ICE calculator uses historical outage information through reliability indices SAIFI, SAIDI and CAIDI, and customer surveyed information to estimate the cost of outage.
When considering microgrid investments, accounting for these avoided outage costs in project economics can positively impact system design and improve net economics for the customer. This research from NREL shows that when energy storage is not economical, adding a value of resilience can help make it economical, and in scenarios where it already is economically feasible, the value of resilience may result in a larger optimal system capturing more savings for the customer.
Let’s consider the case of a luxury hotel in Northern California which faced multiple PSPS outages in 2019 and knows their outage costs. Without accounting for the value of resilience, the cost optimal design for the facility results in a 250 kW solar array constrained due to available area. This financed solar energy system with annual Power Purchase Agreement (PPA) costs has Net Year-1 savings of $16,984 and a Net Present Value of $243,610 over 20 years.
Based on the hotel’s previous experience, their estimated cost of outages is $6799/hr. The facility has faced multi-day outages in the past, but acknowledging the uncertainty of future outages, we adopt a conservative annual outage duration projection of 10.5 hours. Incorporating this value of resilience into the economics makes it economical to include 125 kW / 250 kWh of battery storage, a 380 kW dispatchable generator, and advanced switchgear and controls in the system. A quick resilience analysis with NREL’s REopt indicated that on average the system can survive 30-hour outages. Along with the benefit of resilience, upgrading the solar project to a microgrid enables capturing revenues from energy arbitrage and demand charge management for the facility. This improved system more than doubles the utility savings from the solar-only system, with Net Year-1 savings of $30,231 and a Net Present Value of $492,887 over 20 years.
Accounting for the value of resilience doesn’t just flip the economics, but also makes for a better energy solution with increased savings for customers from value streams like energy arbitrage and demand charge management. Additionally, with a larger system more of the customer’s utility costs are offset making them less vulnerable to future utility rate escalations.
Cost of Backup Power
Another way to value resilience for customers who know what their back up strategy would have been without the microgrid, is to include the cost of backup power. For critical facilities like hospitals or remote facilities like military camps, often the backup strategy is purchasing a diesel generator. The cost of the backup power is the value of resilience here as this represents the customer’s willingness to pay for avoiding an outage. Including the avoided cost of backup power in microgrid project economics or just comparing the two energy solutions will result in valuing resilience.
For the same hotel referenced in the previous example, opting for a 500kW diesel generator will provide a similar level of resilience as the solar + storage + dispatchable generator microgrid; in fact, the microgrid might perform slightly better due to its diversity of energy assets. The diesel generator comes with upfront capital costs, operations and maintenance costs for the lifetime of the system and a potential risk of running out of fuel during an extended outage. Conversely, a $0 down sustainable microgrid, appropriately designed, eliminates these downsides and additionally provides energy savings in blue-sky conditions. Using diesel generator costs estimated by NREL, we find that the financed microgrid has a better NPV over 20 years without including additional value of resilience.
Whether it’s using a static VoLL, outage costs per hour or the cost of backup power, accounting for the value of resilience is important to not undermine the benefits of microgrids. Sustainable microgrids are the perfect solution to the ever-increasing need for energy resilience but these investments are often based on a cost-benefit analysis and without the value of resilience factored in, some of these investments are not economically viable. Adopting a mechanism to value their resilience benefit will enable microgrid deployments to scale and eventually lead to a cleaner, more resilient electric grid.