A new company, 5D Energy, will pitch no-money-down solar, storage and backup power for small and medium-size C&I customers.
The past decade has seen an evolution in the microgrid market aimed at bringing the benefits of emergency backup generation — and in some cases, the clean-energy value of solar and batteries — to a class of customers that can’t afford the complex, site-specific engineered systems of the past.
“Modular microgrids,” built around standard technology platforms like fossil-fueled generators, combined-heat-and-power systems or battery-backed solar systems, and offering customers low-cost, long-term contracts for the energy and resiliency they provide, have been an important step in expanding the potential market.
Now leading microgrid developer Schneider Electric and “sustainable energy” private equity investor Huck Capital are expanding this concept, with an “energy-as-a-service” provider of microgrids for small and medium-sized commercial and industrial (C&I) buildings.
The new company, 5D Energy, which has received lead investment from Inclusive Capital Partners' Spring Fund, promises to offer no-money-down solar, battery and on-site generation systems of up to 5 megawatts. (The partners plan to roll out the name of the service in the next four to six weeks.) Customers will pay them off via long-term power-purchase agreements for energy that’s cheaper than what they can get from their utility or the competitive energy market.
To make that work, Schneider Electric will provide prefabricated “energy control centers" — the power conversion and control devices going into buildings, in other words — to ease installation and interconnection complexities. It will also manage commissioning and ongoing operations via its EcoStruxure cloud computing platform.
To realize the return on investment demanded by private equity investors, the new company will analyze and optimize the value of existing C&I energy tariffs and rebate structures and seek out additional revenue from demand response programs, wholesale energy market capacity or ancillary services, and managing customers’ demand charges or coincident peak charges.
“We’ve worked very hard to develop sophisticated modeling tools to optimize the investments,” Mark Feasel, Schneider Electric’s president of smart grid, said in a Monday interview. “You’ve got to automatically understand if this thing will pencil.”
That’s particularly true for the small and medium-sized C&I market, where customers lack the in-house expertise to manage the interplay of grid interconnection and self-supply regulations, on-site solar and backup power values, and market revenue opportunities that will make or break each project. It’s also an imperative for a company that will be aggregating the energy flexibility of multiple sites to seek out revenue opportunities that might escape individual microgrids.
Schneider Electric is already operating large-scale microgrids via a similar energy-as-a-service model with private equity investor Carlyle Group, including showcase projects such as New York City’s JFK Airport. It's worked in a similar fashion with utilities including Duke Energy and NextEra.
But “to really change the energy landscape, it’s not just about the 10 biggest... energy infrastructure projects,” Feasel said. “You have to be able to attack the everyday buildings.”
A growing role for private equity in microgrids
Schneider Electric and Huck Capital’s new venture is the latest in a string of private-equity-backed microgrid offerings, according to Isaac Maze-Rothstein, Wood Mackenzie microgrid analyst. At the grand scale, Axium Infrastructure and Engie North America co-own the massive heating, cooling and self-powering system for Ohio State University’s Columbus, Ohio campus under a 50-year operating agreement.
On the modular scale, natural-gas-generator-based microgrid operator Enchanted Rock has tapped Basalt Infrastructure Partners to form Texas Microgrid LLC, and generator, solar and battery microgrid system developer Scale Microgrid Solutions, which also works with Schneider, has secured an equity commitment of up to $300 million from Warburg Pincus.
“Private equity is looking for above-market returns — let’s say above 8 percent, anywhere up to above 15 percent,” Maze-Rothstein said. For large-scale projects, “there’s some operational risk, but the project is so big you can justify the due diligence.”
Assuring adequate returns on smaller-scale, modular projects requires more confidence in the technology involved, as well as the vendor’s capability to manage the system to provide revenues that can pencil out against the long-term energy contract prices being offered, Maze-Rothstein said.
In this light, providing resilience against costly power outages caused by increasingly frequent extreme weather events is just a starting point. Long-term profitability relies on combining the value of self-generated power, whether from solar PV or on-site generators, with the flexibility to maximize the value of that power for the complex tariffs and demand charges that make up a sizable portion of C&I customers’ energy costs, as well as whatever market opportunities can be captured outside the building’s walls.
While most modular microgrids are built around fossil-fueled generators, the value of solar for C&I customers is expanding rapidly. Wood Mackenzie's analysis indicates that about 70 percent of the U.S. C&I market could cost-effectively install solar today, compared to the roughly 4.5 percent of the market that has already done so and the estimated 8 percent that will do so by 2025.
The key barriers to adoption remain the complexity of C&I solar installations and the availability of financing to achieve them. Bundling backup power into solar offerings could well boost the value for customers in wildfire- and blackout-prone California or the hurricane-threatened Eastern and Gulf Coast markets, Maze-Rothstein said.
Huck Capital and Inclusive Capital Partners bring a decided clean energy focus to their work with Schneider Electric. "We have a specific carbon goal of 1 gigaton of avoided carbon," Huck Capital CEO Steve McBee said in an interview.
As the former head of NRG Home, the solar, electric vehicle and retail energy side of the utility company before it shifted away from its distributed energy ambitions, McBee worked with residential and small-commercial customers eager for "more reliability and availability of their power but also more certainty on price." While NRG may have backed away from the distributed energy market, "Schneider has developed a set of systems and processes that allow them to move through the value chain," from identifying customers to managing microgrids through their effective lifespan.
"If you care about holding the line at 2 degrees" of global temperature rise by reducing carbon emissions under the terms of the Paris climate agreement, "which we certainly do, that’s not all going to happen in the Series A. It's going to have to come from these large industrial providers."
While the companies haven’t disclosed how much money they’ve put into their efforts, they have set a target of 5 megatons of carbon-dioxide emissions reductions from their pipeline of projects, at an average reduction of about 10,000 metric tons per project.
Doing the math indicates ambitions to develop 500 microgrids — a big target, but well within the scope of potential C&I solar projects in the United States. Whether there are that many projects that can offer the return on investment being sought is an open question.
About Schneider Electric
Schneider Electric is leading the Digital Transformation of Energy Management and Automation in Homes, Buildings, Data Centers, Infrastructure and Industries. With global presence in over 100 countries, Schneider is the undisputable leader in Power Management - Medium Voltage, Low Voltage and Secure Power, and in Automation Systems. We provide integrated efficiency solutions, combining energy, automation and software. In our global Ecosystem, we collaborate with the largest Partner, Integrator and Developer Community on our Open Platform to deliver real-time control and operational efficiency. We believe that great people and partners make Schneider a great company and that our commitment to Innovation, Diversity and Sustainability ensures that Life Is On everywhere, for everyone and at every moment.
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