Future Business Model for Cellular Microgrids

Intisar Ali Sajjad, Roberto Napoli and Gianfranco Chicco

Energy Department, Politecnico di Torino, Turin, Italy

malik.sajjad@polito.it

Keywords: Microgrids, Regulations, Business Model, Consumers, Entrepreneurship.

Abstract: Different studies which were carried out in the past revealed that the environment for microgrids is very

complex and uncertain due to regulatory and legal barriers. Across and within the developed countries the

suggestions and views of regulatory authorities and legal bindings about the infrastructure and operation of

microgrids are quite different. According to the present scenario, the viability of microgrids mainly depends

upon how microgrids are framed, who owns them, which are the customers served from them and how

much revenue is generated from them. This paper investigates the potential barriers in current business

models to deploy microgrids and proposes a business model, centric to users, with the concept of consumers

owned microgrid.

1 INTRODUCTION

There are lots of uncertainties in the power system,

especially for electric utility systems. These

uncertainties range from capital costs and financing

to fuel price fluctuations and operational costs. Due

to these trends, it is very difficult to assess and

formulate long term capacity planning. The ultimate

impact is on consumers to compensate the additional

costs through different tariff elements like fuel

adjustment charges, capacity charges, etc. On the

other hand, there are much more uncertainties

associated with the capital costs and financing due to

inflation and changing interest rates. This has

affected the utilities’ ability to obtain bonding for

long term projects. The regulatory framework is also

a key player affecting the day to day operation,

together with the structure of the electricity market.

In some aspects the regulation supports the utility

industry to operate a stable, economic and reliable

system, but in other cases it decreases the attraction

of investors to invest in the system to cater for future

challenges (Schweppe, Tabors and Kirtley, 1981).

The power system business has been restructured

in the last decades. This was done to increase system

efficiency, decrease costs and emissions, and attain

reliability by using new emerging technologies in

the generation, transmission and distribution sectors.

Smart grid has been the unifying concept for the

application of these emerging technologies. These

technologies are based on the revolutionary findings

in the field of power electronics, artificial

intelligence, computer applications, networking

abilities. These technologies have the ability to

change the behavior of the electricity distribution

system into an active one, where each component

has the capability to talk and listen. But the goals

have not been achieved yet. The progress is very

slow and there is lack of investments in the field of

smart grids. The major reason is the structure of the

current business model in power market especially

on the distribution side, more centric on utilities but

less on consumers (Schweppe, Tabors and Kirtley,

1981).

Microgrids are the systems that link different

distributed energy sources into a single small

network and give service to its consumers with all or

partial of their energy demands by increasing energy

efficiency, reliability and reduce emission and

energy costs (Center for Energy and Hyams, 2010).

Fast growth in distributed generation, emerging ICT,

power electronics technologies, efficient storage has

made the dream of microgrids true and

implementable. But one aspect that is not favorable,

are the power market policies, regulations and legal

bindings. These are very important components to

attract investments from public and private sectors.

One of the important reasons for the lag of such

components may be the monopolization of the

market, especially at the distribution level.

King (2006) assessed the different microgrid

business models considering the ownership status.

209

Sajjad M., Napoli R. and Chicco G.

Future Business Model for Cellular Microgrids.

DOI: 10.5220/0005426202090216

In Proceedings of the Fourth International Symposium on Business Modeling and Software Design (BMSD 2014), pages 209-216

ISBN: 978-989-758-032-1

According to these models, the owner is responsible

for all type of services and quality indices to

consumers. The owner may be a utility, a single

landlord, multiple individuals or firms, a single

individual, or a single firm. Center for Energy and

Hyams (2010) used this concept and further

categorized the business models of King (2006)

using physical and virtual microgrids. Center for

Energy and Hyams (2010) also gives more detailed

business models for utility, non-utility, also

considering virtual microgrids depending on the

aggregation level.

The main theme behind the proposed business

model is to split the power system network into

autonomous parts that replicate the small world

concept. This technical splitting should be followed

on the same lines as the splitting of communities.

This concept of small world has been used in

different real world applications including power

systems, transportation system, social networks, and

medical science (Pagani and Aiello, 2013; Bork et

al., 2004; Hidefum, 2013; Eppstein et al., 2013).

Each small world should have operating autonomy

and ownership by the customers with responsibility.

The business model should be structured in such a

way that it will attract private investments and

should leave space for entrepreneurship.

The rest of the paper is organized as follows.

Section 2 gives a brief overview about the

relationship between innovations and

entrepreneurship. Section 3 and 4 discusses about

the current business models and their pitfalls.

Section 5 discusses about the proposed possible

vision for the future business model centric to the

active consumers. This paper is concluded in Section

2 INNOVATIONS AND

ENTREPRENEURSHIP

Entrepreneurship is the basic idea behind the

possible business model of microgrids. Shane (2003)

explains entrepreneurship and gives some

characteristics of an entrepreneur that introduces

innovations and new gears and transforms

innovations into profit and financial goods.

The role of opportunities carries central

importance to establish an enterprise. Opportunities

generate a situation to create means for the

establishment of a profitable enterprise. Different

economist and business experts explain their way to

explore opportunities, with different theories.

In 1934, Schumpeter linked opportunities with

innovations and said that new information is

necessarily important for the existence of enterprise

business. Technological, political, economic,

regulatory changes provide new information to

entrepreneur to recombine resources for more

valuable and fruitful enterprise (Schumpeter, 1934;

Urban and von Hippel, 1988). In contrast with

Schumpeter, the theory presented by Kirzner states

that the opportunities may need only differential

access to existing information. People in a specific

field use the information that they know to

efficiently manage resources, but the decision

making process has always shortcomings. These

shortcomings lead to obtain and recombine

resources for profitable business. Most of the

research is done on Schumpeter’s opportunities due

to its diverse and innovation friendly nature (Urban

and von Hippel, 1988; Schumpeter, 1934).

2.1 Consumer Centric Enterprises

The work on consumer centric enterprises started

about 4 decades ago, and today it is clear that such

firms and enterprises are very successful due to

advances in technology, communication and

computing (von Hippel, 2005).

Enos (1962) reported that the most of the

innovations in the oil refining sector were developed

by user companies. Also Freeman (1968) presented

the results about the chemical production processes

that most licensed processes were developed by user

companies. More than 80% of common and

important scientific instruments and semiconductor

processes were developed by users. Empirical

studies also proved that up to 40% of users of any

services or products are engaged in developing or

modifying products/services (von Hippel, 2005;

Herstatt and von Hippel, 1992; Morrison, Roberts,

von Hippel, 2000; Franke and von Hippel, 2003;

Lüthje, 2004; Franke and Shah, 2003, Luthje,

Herstatt and von Hippel, 2002).

Open source projects are one example of the

above business model, where people develop

products or services for themselves and share it free

of cost or with very low cost to other consumers and

users, e.g., open source and free software, Linux and

Android applications.

2.2 Economics of Innovations

In 1957 Robert Solow presented the economic

growth model based on innovation. He defined

growth as the change in Gross Domestic Product

Fourth International Symposium on Business Modeling and Software Design

210

(GDP) per hour of labor per unit time (Solow, 1957).

Recent prominent advances in literature give the

concept of knowledge spillovers and human capital

(Romer, 1986; Romer, 1990; Lucas, 1988).

3 CURRENT PRACTICES IN THE

DEVELOPMENT OF

MICROGRIDS

Today’s scenario in the distribution system is

centralized to utility and has very small or no

participation of consumers.

A feedback system has been developed through

smart metering, and these meters have been installed

in huge quantities in some countries (Renner et al.,

2011). In the past, the consumers had rarely received

such kind of feedback from the operator or utility.

As a result, they had a little opportunity to adapt

themselves according to the need of the utility. The

same case occurred for a utility to judge what kind

of service (e.g., to improve continuity of supply) the

consumers would really like to buy.

Research has revealed the fact that utilities may

be reluctant to offer consumer centric services and

price structures due to the issue of reduction in

electricity sales. As far as the increasing trend of

smart meters is concerned, this is only being used, in

majority of the cases, to reduce cost related to billing

data collection and remote load management (Kelly,

Meiners and Rouse, 2007).

There are some microgrid projects like San

Diego Gas and Electric’s Beach Cities microgrid,

Perfect power, Danish Cell Controller,

AGTFTC/MCAGCC microgrid, which are

implemented with participation of utilities and the

private sector (GEA, 2012; GEI, 2014; Kelly,

Meiners and Rouse, 2007; Becker, 2013; Russell and

Sagoo, 2013). Some initiatives have also been taken

in developing countries to promote the concept of

smart and micro grids (Warshay, 2013).

4 PITTFALLS OF EXISTING

BUSINESS MODELS

There are many participants, including utilities and

consumers, in the construction of a microgrid. So, all

parties are the potential candidates for the receipt of

benefits obtained from microgrid services, e.g., peak

load reduction. The main problem here is the

definition of mechanisms for proportionate

investments from participants. Also there is no

adequate market on the distribution level to support

microgrids (in broader sense, smart grids) to

monetize benefits, and this leads to investments

stranding especially from the private sector.

There are no appropriate existing regulations to

compensate microgrids is case of participation in

grid stability. Potential benefits of microgrid are

negated in current regulatory framework, e.g.,

distributed generation is not allowed to manipulate

peak loads (Becker, 2013). Furthermore, most of the

focus in the design of microgrids in on electricity,

but microgrids should be considered more widely in

a multi-energy perspective.

There are many smart grid and microgrid

projects implemented worldwide (as the ones

summarized in Section 3), but the development is

very slow. One of the main reasons for slow

development is the lack of private sector interest in

investments. This lack of interest is due to:

 Utility’s “Big Brother” role, indicating how and

when the consumers will use their appliances and

processes.

 Inappropriate feed-in and net metering tariffs.

Consumer’s energy purchase options are very

limited.

 No or very low consumer’s involvement in

adopting innovations and their promotion.

 Current business model doesn’t allow consumers

to participate in energy business and its services.

 Very little control of consumers over electricity

bills.

5 FUTURE PERSPECTIVE OF

BUSINESS MODEL

Potential questions of interest for the

implementation of smart grid are where the money

will come from and in how much time. How can the

process be accelerated? Shall the consumers be

involved primarily? If yes, then how? This section

describes a possible future of distribution system

with extended applications of computational and

communication capabilities and technologies with

consumer centric business model as an enterprise.

5.1 A Possible Future: Consumer

Centric Enterprises

Entrepreneurship is the theory behind the concept of

“cellular” microgrids, where each microgrid

operator will be an independent enterprise and

Future Business Model for Cellular Microgrids

211

manage its microgrid operation and services with the

help of consumer’s owned firms. These services

may be related to installation and maintenance

services of microgrid distribution system, in

buildings, houses, offices, etc. Micro financing firms

will provide loans with very low interest rate to

adopt innovations within microgrid premises,

especially for homes and offices. Consumers will

also contribute to energy needs of the microgrid

through net metering and feed in tariffs. So, each

unit of microgrid has an operator, providing services

and micro-financing enterprises, and active

consumers. All these will work together for the

welfare of themselves and other participants. This

complete setup is considered as a cellular microgrid

unit. Each unit will support other adjacent units for

more reliable, environmental friendly and cost

effective operation of overall system. This will not

only support the local distribution network, but will

also be able to provide ancillary services to the grid.

The pyramid shift from supplier-centric to

consumer-centric is the key for competition and

private sector investments. Some good analogies for

this kind of change are mainframe computers to

laptop computers, and conventional telephone sets to

smart phones. Section 2 indicated an overall picture

of enterprise business, its requirements, theories

about its model and economics related to it.

Consumers will invest in emerging technologies

related to communication and control to upgrade the

electric grid due to their widespread adaptation. It

will also lead towards commercialization of

microgrids; and societies, communities, institutions

and the commercial sector will be able to share their

microgrid systems having local generations. These

developments will lead towards new era of

economic development in the field of power and

energy.

5.2 The Starting Point

At present we are living in a period where each

nation is fighting for the survival of its economy and

social interests. Population is growing rapidly and

everyone is looking for more energy resources to

fulfill present and future needs. Furthermore,

environmental issues need serious attention. A new

economic equilibrium is needed for the existence in

the war of ‘survival of fittest’.

All these indicators give a hope for new business

models because we are in the classical condition

where a model of technological innovations can start

a new stable economic wave with a creation of new

paradigms in the economic market and in the

society. An appropriate economic model of smart

grids can be a triggering point leading towards a

revolution for economic balance and social benefits,

that is, the evolution of present into future.

5.3 Cellular Microgrids –Structure and

Business Model

Fred C. Schweppe and his research group proposed

the concept of Homeostatic Control in early 80’s.

Homeostatic control was founded on the following

principles, presented by Schweppe, Tabors and

Kirtley (1981):

 Consumer’s independence;

 Two way communication and feedback between

Utility and consumers.

The new model with cellular microgrids is actually

based on these principles, evolving a new business

model centric to consumers from the present model

based on the utilities or system operators. The

present smart grid structure is top down, where

smart grid enables the smart cities and smart cities

enable smart homes. It needs to be reversed by

keeping in view the above principles. First we

should made citizen smart to develop smart homes

using smart innovations in technologies, then the

combination of such homes will give birth to smart

cities through cellular microgrids and ultimately

smart grid. Such a smart home or smart city will be

linked to the willingness of the city to struggle for

personalized living style of its own, aimed to reach

high level of sustainability and high quality of life

for citizens. Figure 1 shows this paradigm for

bottom up approach.

Figure 1: Bottom-up Evolution.

Smart cities will be composed of smart grids and

each smart grid will have smart buildings. These

microgrids will behave like cells in entire power

system structure because they can communicate and

interchange energy with each other and also with the

grid. That’s why the name proposed here is cellular

microgrids.

The proposed framework is consistent with

currently evolving concepts and paradigms, such as:

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a) Smart Homes: The future vision of smart homes

is that they will be equipped with state of the art

technologies related to computation, communication

and information technology. Such technologies will

be able to respond to the needs of consumers

(occupants) with high level of intelligence to

promote their comfort, enhance convenience,

security and entertainment capabilities. Through the

proper management of such technologies it is

possible to accommodate most of the procedures and

control actions. The application of such technologies

is also strongly dependent on the social attributes of

occupants. For example elderly people need more

comfort and young people prefer entertainment. Cost

saving is also dependent on daily life events. If there

is a special event e.g. birthday party then cost saving

will be the secondary issue.

b) Plug and Play: the Plug and Play concept is not

new and can be implemented in smart homes in

future. We can get inspiration from success stories

of personal computers and laptops. If we want to

connect any hardware in our PC then we just need a

driver to use it. Hardware of different brands can be

used on single workstation due to their compatibility

with a specific operating system. The same concept

can be implemented here for smart homes. There

should be an operating system for the power system

hardware (smart appliances, protection equipment,

intelligent devices, PV modules, storage devices

etc.) to accommodate different manufacturer’s

products. Each manufacturer will provide the driver

for its smart products. Smart home residents just

need to insert equipment; the operating system will

recognize the type of equipment automatically and

will be ready to use it after the installation of its

driver. Within this general scheme, the consumers

can manage their needs and respond to demand

response programs (e.g., spot pricing) through the

intelligent system set up with the user-defined rules

for demand response management.

c) Smart Generation: On the same pattern as

described for smart homes, the local generation can

also be made smart. It needs fewer efforts because

already generation plants have some level of

smartness in control and operation.

d) Structure of Self Managing Cells: Each unit of

smart homes and generation can manage itself in

response to internal or external signals. We call

these units as cells, same concept as in human body.

The structure of the biological cells is very complex

but we can get some analogies for our proposed

network. Each cell can communicate to other cell

and can share energy on demand through the central

control of all cells. We call this central control as

aggregator.

e) Smart Microgrid: If we have smart homes in

place, then those smart homes can be combined with

each other and also with smart local generating units

through a smart master control center that will take

care of the needs of the individual cells. Such a

system is analogous to the organism in living things.

We call this organism in power system as microgrid,

because microgrids have the same properties as

biological organisms. Microgrids can respond to

incentives, grow in size and development.

Microgrids can operate in a stable way in the island

mode, provided that the characteristics of the

equipment connected are suitable to keep acceptable

quality of supply and withstand disturbances.

f) Aggregator: The aggregator is a central

controlling unit in a microgrid. It is proposed that

the aggregator must be a third party other than the

utility. In other words cellular microgrid should be

privately owned entities so that the influence of

utilities on consumers can be nullified.

5.4 Energy Pricing Mechanism

(Schweppe’s Optimal Spot Pricing

Theorem)

The conventional social welfare objective function

needs to be modified for personal optimization. Pre-

determined price rates (Time of Use) do not reflect

social welfare for individuals but may be useful for

utilities adding pre-determined cost margins to

impact on their profit.

Schweppe had presented an electricity pricing

mechanism in early 80’s. It is an optimal spot

pricing mechanism. Detail about this theorem is

presented by Caramanis, Bohn and Schweppe

(1982). Here the application of spot pricing is

discussed with respect to the new and evolving

concept of cellular microgrids.

For the enterprise-based business model of

cellular microgrids, spot pricing is proposed with

price update from few hours to 5 minutes depending

upon the available technology and system

economics. The structure of the proposed model is

shown in Figure 2. The optimal interval of updating

prices is that welfare gains are equal with the

additional costs due to the metering and

communication resources implementation. Theory

about spot pricing mechanism provides rules for the

optimal decisions in the short run and also for long

run actions. These actions can be taken as

Future Business Model for Cellular Microgrids

213

investments. The global social welfare function is

the difference between the cost related to electricity

usage and cost of generation plus investment in the

overall microgrid infrastructure. Welfare depends on

many factors like safety, cost, entertainment, green

style. Figurative description of personal welfare

function is shown in Figure 3.

BulkElectricEnergy

System

Information

Consultant

EnergyBroker

BulkGeneration

Storage

Microgrid1

Microgrid2

Microgrid‘m’

Local

Generation/

Storage

Prosumer

‘n’

Prosumer

AGGREGATOR

MarketplaceController

InformationFlow

EnergyFlow

Figure 2: Information and Energy Flow in Smart Grid.

5.5 Net Metering

The concept of net metering/feed in tariffs is already

implemented in some of the countries like Italy,

Belgium, Canada, Greece, and Japan (REN21,

2013). It should be applied on aggregation level at

the point of common coupling (PCC) to incentivize

consumers and to promote local generation. The

concept used in this business model is the net

metering on the aggregation level at the intake of

microgrid, and on a lower level for group of

consumers, e.g., apartments and offices in a

building, group of houses. Aggregator and building

energy managers will manage internal billing

mechanisms with individual cells.

5.6 Participant’s Privacy

Caramanis, Bohn and Schweppe (1982) concluded

that very few information of consumers are required

to central control for decision making under spot

pricing than time of use. Information is only related

to losses, line flows and voltage overload conditions

at each metering point without sharing the individual

cost and profit functions. This metering point will be

the PCC in case of net metering.

5.7 Business Opportunities inside a

Microgrid

New business opportunities inside a microgrid,

headed by the aggregator or independent of it, will

be produced to support maintenance, installation

services, micro financing to purchase state of the art

appliances and instruments to make homes, offices,

buildings and system smarter.

5.8 Social Impact

Long-term investments in the system will lead

towards long-term welfare of the inhabitants

residing in the area of a cellular microgrid. This

welfare will be in the form of job opportunities in a

local market place. This aspect has always been

neglected and is very important for future

investments and also to strengthen national social

goals by reducing inflation.

Personal

Welfare

Health

Safety

Appliances

Entertainm ent GreenStyle

Maintenance

Environment

Costs

Figure 3: Personal Welfare parameters.

5.9 Regulatory Issues

Current policies and regulations are not generally

favorable to user-centric business models. The

Governments and the regulating bodies should be

aware of the impacts of upcoming legislations that

can directly or indirectly affect the business and

innovations.

5.10 Is this model Evolutionary?

This model is evolutionary and can be evolved using

the following initiatives:

 Net metering and feed in tariffs must be

permitted and allowed for individuals and groups

of consumers.

 Micro financing should be encouraged and

regulatory bindings on micro financing should be

relaxed for the energy business.

 Electricity bills should be totally understandable

to consumers.

 Local online maintenance and installation

Fourth International Symposium on Business Modeling and Software Design

214

services should be strengthened under the

aggregator supervision.

 Local skilled entities should be preferred for

hiring for aggregation and other services.

 Legislation must support private sector

involvement in energy business on distribution

level to support, manage, own and operate a

suitable size of consumers.

 Renewable energy based generation must be

encouraged at the local level by incentives.

 Spot pricing mechanism must be incorporated

with suitable price update time and should be

decreased with innovations available.

 Distribution networks should be made more

reliable by connecting consumers in meshed

form, upgrading the present protection systems.

 Consumer’s awareness should be enhanced

through print and electronic media, and any other

mean to adopt smartness.

6 CONCLUSIONS

A consumer-centric business model can be

implemented using cellular microgrid structures with

consumer’s involvement. Small enterprises will

strengthen the business structure by enhancing

consumers comfort in the competitive environment.

This business will also generate local job

opportunities. There are regulatory issues in the

implementation of such a structure, so local

investment should be allowed with all kinds of feed

in tariffs. Some recommendations are given in

previous section to make this model more evolving.

An economic study will be carried out in future

work to strengthen the point of view on the cellular

business model for microgrids.

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