An update on smart micro grids

8 minute read
03 October 2023

Author(s):

We are increasingly advising clients on the deployment of smart micro grids – installers and operators of smart micro grids, those considering connecting to smart micro grids and developers wishing to incorporate smart micro grids into their developments.

In this update, we consider smart micro grids from the perspective of a developer considering whether to incorporate a smart micro grid as part of a future development.



What is a smart micro grid?

A smart micro grid is essentially a small private wire network which has generation sources embedded within it (frequently solar PV and a battery energy storage system (BESS)). The generation assets (by which we refer to both solar PV and the BESS) do not feed directly into particular units, rather the output goes into the micro grid, which each unit will draw a supply from. This is an important distinction to most micro grids to date, where solar panels on the roof directly supply the unit on which they are situated.

Issues to consider for developers considering procuring a smart micro grid

Timing

What are the comparative timing implications on the project by proceeding with a connection to the local distribution network operator's (DNO's) or an independent distribution network operator's (IDNO's) distribution network for imports and exports?

DNO networks in many parts of the country are constrained and as such, costly network reinforcement is often required, which can take several years to progress from offer to connection stage.

Smart micro grids can speed up connection times – by embedding generation within a private wire network, a lower import capacity is required to the DNO's network, which can result in quicker connections – we have experienced this making the difference between a development going or not going ahead.

Economic

What are the economic differences between connecting directly into the DNO's network and procuring a smart micro grid? A connection for to the DNO's network will of course still be required, but for a smaller capacity, which will therefore cost less. We would ordinarily expect the developer to be responsible for the costs of procuring the grid connection to the DNO's network.

Environmental

Concerns about greenwashing – where companies make unfounded environmental claims about their actions – have come to the fore recently. Greenwashing can often happen when a business buys 'brown' electricity but then greenwashes it by purchasing Renewable Electricity Guarantees of Origin for example.

By having physical renewable generation assets to point to, connected to the smart micro grid, developers can create indisputable environmental benefits. This will be attractive to both investors and potential occupants/purchasers of the units.

Regulatory

Developers need to be confident that the structure that a smart grid operator proposes to deploy is compatible with electricity regulation in Great Britain.

Smart micro grids involve the smart grid operator generating, distributing and supplying electricity. To undertake any of those activities without the benefit of a licence or an exemption is a criminal offence. Smart grid operators will typically rely on licence exemptions, rather than holding licences but the structure should be carefully analysed.

Resilience

Developers will want reassurance on the resilience of the proposed smart micro grid. Developers should seek to oblige the smart grid provider to commission the network to the standards which DNOs are held to.

Developers will also wish to ascertain what temporary energy solutions will be made available in the event of a loss of power from the main micro grid.

Performance KPIs should also be considered.

Operator failure

Developers will need to consider a contingency plan in case the smart micro grid operator fails – whether by insolvency or because the developer has terminated the concession. The developer (or the management company to which the developer has transferred its responsibilities to in respect of the grid) will need to have a plan in place. There is no supplier of last resort equivalent for license exempt smart micro grids. We would expect the developer/the management company to procure a replacement provider in such circumstances. An alternative would be to request that an IDNO adopts the network (but that approach would impact on the embedded generation).

Linked to this, developers will wish to consider the covenant strength of the proposed smart micro grid operator and whether credit support should be requested (and if so, for how long).

Duration

The typical smart micro grid model involves a developer granting a concession to a smart grid operator. The smart grid operator incurs capital expenditure in developing the smart grid, but will recover that investment, together with its return by charging connectees for the supply of electricity (and retaining the green benefits). The concession agreement will therefore need to be of a certain duration – typically over 30 years.

Space

Developers will need to agree at the outset with the smart grid provider what space is available at the development for the operator's equipment. This will clearly be significantly more than a substation that would be put in place if connecting to the DNOs/IDNOs distribution system.

Electricity supply contracts

Developers may wish to agree a template supply contract with the smart grid operator for use at the development – because overly onerous terms may affect the marketability of units at the development.

Additionally, developers will wish to cap the price that the smart grid operator can charge occupants at the development. Although occupants will be free to appoint their own electricity supplier (which should not result in exit charges to the occupant), in practice it will often not be economically viable for an occupant to do so as a result of the use of system charges that the smart grid operator will charge to incoming suppliers. It is therefore essential that a sensible price cap is agreed – typically linked to a basket of wholesale electricity prices or a forward price curve.

Connection agreement

It is essential that the connection agreement with the DNO is in the developer's name for the security of the private network in the future, should the smart grid operator fail or be replaced.

Termination/expiry

At the end of the concession, we would expect all of the smart micro grid equipment to transfer to the developer/the management company. There may be a compensation payment due to the smart grid operator on early termination in certain circumstances to pay a fair market value for the equipment which is to transfer.

Purchase of solar panels

We would expect occupants of units (in their role as landlords under airspace leases) to have the right to purchase the solar panels from the smart grid operator. The payment due would be calculated in accordance with a pre-agreed table set out in the airspace lease. This may be an attractive option to potential occupiers.

Summary

Whilst the deployment of a smart micro grid carries more risks for connectees than a direct connection to the DNO's/IDNO's distribution system, it also carries tangible benefits. If it would be helpful to discuss this note, either in general or in respect of a specific smart micro grid proposal, please do get in touch with James Stanier.


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