PATHS TO FINANCIAL VIABILITY FOR COMMUNITY RESILIENCE ...€¦ · CHALLENGES TO THE SOLVENCY OF RESILIENCE $0 $200,000. $400,000. $600,000. $800,000. Revenue. Expense. Annual Income

/ ©2017 NAVIGANT CONSULTING, INC. ALL RIGHTS RESERVED1

ELECTRIC POWER RESILIENCE SYMPOSIUM

PATHS TO FINANCIAL VIABILITY FOR COMMUNITY RESILIENCE MICROGRIDS

SEPTEMBER 13, 2019

JONATHAN STRAHLASSOCIATE DIRECTORNAVIGANT

/ ©2017 NAVIGANT CONSULTING, INC. ALL RIGHTS RESERVED3 / ©2017 NAVIGANT CONSULTING, INC. ALL RIGHTS RESERVED3

INTRODUCTION

ACHIEVING THE RESILIENCY MISSION:Optimizing Financially Sustainable Social Benefit Microgrids

OBJECTIVES:

1. Introducing a development framework that goes beyond the business case

2. Making the resiliency design problem more complex – so that it can actually be solved

3. Providing resiliency by focusing on non-resiliency benefits


2. COMMUNITY RESILIENCE NEEDS

ENERGY AND COMMUNITY

Maryland summer derecho (2012)

Texas thunderstorm (2017)

New Jersey Superstorm Sandy

(2012)

(source:http://abc7ny.com/weather/christie-announces-new-sandy-elevation-grants/168236/)




Maryland summer derecho (2012)

New York Superstorm Sandy (2012)

New Jersey Superstorm Sandy

(2012)

(source: https://www.forbes.com/sites/edfenergyexchange/2013/07/19/americas-aging-energy-infrastructure-needs-an-overhaul/#217a87885f37)



COMMUNITY DISASTER RESPONSE

Place of Refuge

((source:http://www.washingtontimes.com/news/2012/oct/29/sandy-socks-east-coast/)




Place of Refuge

Emergency Transport

(source: http://live.nydailynews.com/Event/Tracking_Hurricane_Sandy_2?Page=3)




Place of Refuge

Emergency TransportDisaster Relief

((source: http://www.dailymail.co.uk/news/article-2225348/Superstorm-Sandy-devastation-seen-Obama-flies-visit-New-Jersey-victims.html)




Place of Refuge

Emergency TransportDisaster Relief

EOC Operations

((source: https://www.pinterest.com/pin/320107485985834498/)


3. PROJECT VIABILITY AND SOCIAL BENEFITS

THE BIG QUESTION

“How do you make a microgrid project viable when the primary reason for the

project is to deliver resiliency and carbon reduction—benefits that

produce no commercial revenue?”


“RESILIENCE” DEFINED

resilience

Noun

: the capacity to recover quickly from difficulties; toughness

: the ability of a substance or object to spring back into shape; elasticity.

--Oxford Dictionary

(Source: Navigant Consulting)



“VIABLE” DEFINED

Commercial Viability

Capable of delivering sustainable and secured positive cash flow

viable

Adjective

: capable of working successfully; feasible--Oxford Dictionary

Financial Viability

Capable of delivering an acceptable rate of return with tolerable risk




“COMMERCIAL” DEFINED

commercial

Adjective

: having profit, rather than artistic or other value as a primary aim--Oxford Dictionary


4. BUSINESS CASES AND MODELS

“BUSINESS CASE” DEFINED

busi·ness case

Noun

: a justification for a proposed project or undertaking on the basis of its expected commercial benefit--Oxford Dictionary

The objective of any business case is to

persuade a financier to provide capital today in exchange for promised

commercial gain tomorrow

A successful business case clearly and

credibly defines how and when an investment will deliver a return to the

financier with acceptable risk



5. MODEL GAPS—AND A NEW APPROACH

MICROGRIDS CAN PROVIDE A VARIETY OF HIGH VALUE BENEFITS

Key Microgrid Capability Valued Benefit

Optimized Economic Dispatch Asset Optimization

Optimized Energy “Prosumption” Community Development

Optimized Fuel Carbon Reduction

Independent Self-Supply Resiliency Extension

Local Control and Redundancy Security Enhancement

Economic Load Defection Cost Reduction (Source: Navigant Consulting)



MICROGRIDS CAN PROVIDE A VARIETY OF HIGH VALUE BENEFITS

Key Capability Valued Benefit

Optimized Economic Dispatch Asset Optimization

Optimized Energy “Prosumption” Community Development

Optimized Fuel Carbon Reduction

Independent Self-Supply Resiliency Extension

Local Control and Redundancy Security Enhancement

Economic Grid Defection Cost Reduction

Requires Capital-Intensive Islanding

Capability

Delivers Non-Economic Benefits




THE BIG PROBLEM

“Traditional business model thinking requires all microgrid costs to be

recovered through project commercial revenues, even in cases where costs

do not produce revenue.”



CHALLENGES TO THE SOLVENCY OF RESILIENCE

$0

$200,000

$400,000

$600,000

$800,000

Revenue Expense

Annual Income Statement“Typical” 2.5 MW Community Microgrid Key Assumptions

• 2.5 MW – PV + NG Turbine• PV Capacity Factor: 25%• Islanded Op Duration: 2 weeks• Value of Electricity: $0.15/kWh• Value of Natural Gas: $4/MMBtu• Capital Cost: $2MM/ MW • Debt Finance: 100%• Note Term: 20 years• Interest Rate: 5.2%

(Source: Navigant)



COUNTER-INTUITION: MAKE THE PROBLEM BIGGER

(Source: http://www.governing.com/columns/mgmt-insights/reframe-broaden-problems.html)

“Whenever I run into a problem I can’t solve, I always make it bigger. I can never solve it by trying to make it smaller, but if I make it big enough, I can begin to see the outlines of a solution.”

- General Dwight D. Eisenhower



“MISSION CASE” DEFINED

mis·sion case

Noun

: a justification for a proposed project or undertaking on the basis of its expected social benefit--Navigant

The objective of any mission case is to

persuade a donor to provide capital today in exchange for promised

social gain tomorrow

A successful missioncase clearly and

credibly defines how and when an investment

will deliver impacts to beneficiaries with acceptable risk




COMMUNITY MICROGRID INTEGRATED MODEL ELEMENTS

The twelve integrated community microgrid business & mission model elements link together to convert capital and subsidy into revenues and impacts.

Team Creating Value

Delivering Value

Value Proposition

Customer

Investor Capital

Costs Revenue

Donor Capital

Beneficiary

ImpactsDonor Subsidy




THE BIG QUESTION TAKE 2

“How do you secure sufficient financial capital to build and sustain a community

microgrid when, by design, the project will not generate sufficient net income to return principal within a commercially

acceptable profit level and/or timeframe?”


INTRODUCTION

Making the Case for Mission Driven Microgrids: The Three Ss

Surplus

Subsidy

Socialization


6. STRATEGIES FOR ADDRESSING PROFIT SHORTFALL

BUILDING VIABILITY: EXPAND THE PIE

Create a Surplus

Expand project scale and functionality in a way that increases net income.

Example: add asset optimization for economic dispatch and electric vehicle charging for a fee

Team Creating Value

Delivering Value

Customer

Investor Capital

Costs Revenue

Donor Capital

Beneficiary

ImpactsDonor Subsidy

Value Proposition




BUILDING VIABILITY: MONETIZE SOCIAL BENEFITS

Create a Subsidy

Monetize public benefits to create a new revenue stream

Example: collect a fee from community government in exchange for providing a place-of-refuge power supply service level agreement.

Team Creating Value

Delivering Value

Customer

Investor Capital

Costs Revenue

Donor Capital

Beneficiary

Impacts

Value Proposition

Donor Subsidy




BUILDING VIABILITY: LEVERAGE SOCIAL BALANCE SHEETS

Leverage Socialization

Reduce investor capital and associated return requirement through public capital substitution

Example: utilize community’s available bonding capacity and credit rating to source public capital

Team Creating Value

Delivering Value

Customer

Investor Capital

Costs Revenue

Beneficiary

Impacts

Value Proposition

Donor Subsidy

Donor Capital




BUILDING VIABILITY: MONETIZING LOW PROBABILITY HIGH CONSEQUENCE EVENTS


If we know the likelihood of earthquakes, and we can forecast the benefits of electric resilience, we can establish probability distributions to reflect risks and uncertainties through Monte Carlo simulation.

The frequency distribution curve represents the likelihood of occurrence for each unique outcome.

The expected case represents the geometric mean, and the worst and best cases reflect the 5th and 95th percentile values, respectively.



BUILDING VIABILITY: MONETIZING LOW PROBABILITY HIGH CONSEQUENCE EVENTS

-400 -200 0 200 400 600

Like

lihoo

d of

Occ

urre

nce

NPV (2019 $M)

Frequency Distribution of NPV

Cumulative probability = 6%

After monetizing benefits of resilience:• Economic activity preserved• Lives saved• Avoided electricity system

costs

We can use NPV analysis to make an investment decision today given an uncertain future.


AN ANSWER

Takeaways:• Communities relate to energy in three ways: resiliency, carbon

reduction and economic development• Microgrids provide energy surety and support carbon reduction

and economic development• Microgrid social benefits are difficult to monetize• Traditional business case thinking undervalues the mission of

communities and the social benefits they—and their stakeholders—have a willingness to pay to acquire

• An integrated business and mission model can help microgrid project developers identify and understand hidden levers to viability

• Mission-driven investments likely require surplus, subsidy, and/or socialization in order to achieve financial viability

(source http://www.jonesborochamber.com/economic-development)


CONCLUSION

(source: http://www.energycentral.com/news/iran-warns-people-over-power-outage)

Mission Driven Microgrids: How to Make the Case with Surplus, Subsidy, and Socialization

/ ©2017 NAVIGANT CONSULTING, INC. ALL RIGHTS RESERVED32

CONTACTSJONATHAN STRAHLAssociate Director(206) [email protected]

KENNETH HORNEDirector(781) [email protected]

Documents

PATHS TO FINANCIAL VIABILITY FOR COMMUNITY RESILIENCE ...€¦ · CHALLENGES TO THE SOLVENCY OF RESILIENCE $0 $200,000. $400,000. $600,000. $800,000. Revenue. Expense. Annual Income