Microgrid Regulatory Policy in the US

Microgrid Regulatory Policy in the US


Our nation’s electric grid is currently characterized by large centralized generators supplying the majority of demand through a complex network of interconnections.  Prior to the intricate macrogrid of today, at the close of the 19th century small localized generators supplied power for lighting to dozens of surrounding homes.  As the size, quantity and density of these microgrids increased, vertically-integrated regulated monopolies became the de facto institutions to wrestle with the immense cost and complexity of supplying power to millions of American homes.  Although utilities have become comfortable with the status quo of the centralized model, falling costs of renewable energy technologies, supplemented by volatile fossil fuel prices, is opening the door for portions of the grid to return to their localized roots.

A concise method of conceptualizing a microgrid is the analogy of a large container ship.  These vessels make use of large engines and battery storage capacity to power vital systems like HVAC, communications and lighting.  Extending this analogy to an American neighborhood, a terrestrial microgrid is composed of various forms of generation (solar PV, micro-turbines, cogeneration, etc) paired with battery energy storage (standalone & EV) and a grid interconnection, together forming a localized network of generation and loads. 

Microgrid policy in the US


The presence of a grid interconnection, either to feed excess generation into the grid, supplement local generation, or both, exposes microgrids to a potentially challenging regulatory framework.  According to Frederick R. Fucci and Natara Feller at the Columbia Law School Sabin Center for Climate Change Law, “interconnection problems and delays are the single greatest impediment to the successful installation of distributed energy equipment and are holding back the greater development of distributed resources.”  Compounded by the  foggy classification as neither a traditional utility owned generator nor a standard distributed energy resource (DER), microgrids could fall victim to underinvestment and poor adoption rates.  It is worth noting that “Islanded” microgrids do not connect to the macrogrid and thereby are afforded comparatively greater regulatory freedom. 

The first regulatory challenge that arises pertains to the ownership of generation capacity within an interconnected microgrid.  Douglas King of the Carnegie Mellon Department of Engineering and Public Policy proposed five distinct microgrid DER ownership models:

Utility Model: the distribution owns and operates the microgrid

Landlord Model: a single landlord owns and operates the microgrid and sells power to tenants of the network under a lease agreement

Co-op Model:  multiple individuals or firms cooperatively own and manage a micro-grid to serve their own electric and/or heating needs

Customer-Generator Model: a single individual or firm owns and manages the system, serving the electric and/or heating needs of itself and its neighbors

District Heating Model: an independent firm owns and manages the micro-grid and sells power and heat to multiple customers

The ownership classification model in large part determines the legality of a microgrid.  Current regulation is most favorable of the utility and landlord models, however the key to microgrid legality and ultimate success lies in attaining a Qualifying Facility (QF) classification under the Public Utilities Regulatory Policy Act (PURPA).  Aimed at increasing the share of renewable energy in the nation’s fuel mix, QF classification is granted to small power production facilities under 80 MW that meet certain technology requirements.  Additionally, PURPA mandates utilities purchase excess power from QFs at the utility's avoided cost (roughly equal to wholesale market value of electricity).  Although QFs avoid the legally challenging classification as a “public utility,” several issues still arise.  First, the maximum number of customers a microgrid can supply varies greatly by state with Iowa on the lower bound of 5 and Minnesota on the upper bound of 25.  Second, the relative location of generation and loads within a microgrid is currently limited to 1 mile for QF.  It is not hard to imagine a rural neighborhood with a solar array on each home surpassing the 1 mile boundary.

Furthermore, the legal framework is dependent upon the voltage of the grid interconnection.  For example, a transmission level voltage microgrid interconnection suggests the possibility of produced power ultimately participating in interstate wholesale commerce.  In this instance FERC has historically claimed federal jurisdiction under the guise of the Federal Power Act. 

Another regulatory factor that must be considered in establishing a microgrid is the impedance upon the service territory or franchise rights of local distribution utilities.  Due to the monopolistic nature of the transmission and distribution industry, it is common for a single or handful of utilities to be granted exclusive rights to customers in a given pre-defined service territory.  By supplying power directly to neighbors, local utilities have argued microgrids must be considered public utilities, a virtual death sentence to the success of permitting an interconnected microgrid project.

Finally, state utility tariff structure and net metering regulation vary significantly by state.  Although net metering is required by law in nearly every state, the terms of such arrangements lack congruency.  Perhaps more troubling is the fact that in several states utilities are afforded the freedom to voluntarily develop their own tariff structure with DER customers. On the extreme, states that lack a standardized net metering tariff structure expose microgrid and DER customers to the possibility of refusal of service from the local utility.

One of the obvious takeaways from the above discussion is that the current regulatory framework pertaining to microgrids is both complex and heterogeneous in nature across the 50 states.  This reality acts as a roadblock to the proliferation of microgrids that promise to bolster both the reliability and resiliency of the grid. It is worth noting, however, that recent FERC proposals have been made to increase the efficiency of the permitting process and decrease the soft costs associated with interconnected microgrid projects.  Lastly, the future is bright.  A 2014 GTM Research publication forecast microgrid capacity to nearly double to 1800 MW by 2017.  Although the bulk of current installed capacity is constituted by gas and diesel generators, falling costs and increasing efficiencies of both solar and battery storage hold promise for a renewable dominated future of microgrids.



Columbia Law School Sabin Center for Climate Change Law

Microgrid Economics and Feasibility. Online video lecture. Mahesh P. Bhave

Photovoltaic Systems - Second Edition. James P. Dunlop

The regulatory environment for interconnected electric power micro-grids: insights from state regulatory officials. Douglas E. King



8 years 4 months ago
Written by
Conor Walsh
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Finance and Regulation
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