Catalyst with Shayle Kann - The market for microgrids

Episode Date: October 26, 2023

We want your climatetech questions for Shayle’s Ask Me Anything episode! Email questions to us at [e-mail]. You can also tag us on Twitter or LinkedIn with the hashtag #AskCatalyst. Or you can leave us a voicemail at 919-808-5832. The electrification gauntlet is this: The more we electrify, the more we ask of the grid. New demands on the grid are coming right as it’s facing some of its biggest challenges, like interconnection delays, transmission congestion, and extreme weather. But there’s a way to take some of the strain off the grid when it doesn’t deliver what you need – Build your own! Microgrids, as they’re called, are electrical networks that can function independent of the larger grid. So how do they scale? And what counts as a microgrid, anyway? In this episode, Shayle talks to Tim Hade, co-founder and chief development officer at Scale Microgrids. (Scale was a launch sponsor of Latitude Media, which co-produces this show. This interview is independent of that sponsorship and was scheduled prior to Scale becoming a sponsor).  Tim and Shayle talk about the state of the microgrid market. They discuss topics like: Why microgrid switchgear is a major bottleneck right now Whether the Chinese supply chain for microgrid parts will bounce back, or new manufacturing will spring up in Europe and the U.S. to replace it The effort to standardize microgrids to increase adoption Recommended Resources: Canary: Puerto Rico’s first community-led microgrid is ready to launch Canary: A giant solar microgrid is coming to New York City’s JFK airport Sign up for Latitude Media’s Frontier Forum on January 29, featuring Crux CEO Alfred Johnson, who will break down the budding market for clean energy tax credits. We’ll dissect current transactions and pricing, compare buyer and seller expectations, and look at where the market is headed in 2024.

A co-production of latitude media and Canary Media. I'm Shel Khan, and this is Catalyst. If you are converting traditional internal combustion vehicles to electric vehicles, and you need your fleet to operate, then you are concerned about resilience because what happens if there's a power outage and all your vehicles are electric? Ah, it's the age of microgrids. Wait, what's a microgrid? When utilities need flexible capacity they can count on, they turn to Energy Hub.

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So microgrids is one of these terms that I both love and hate at the same time. It's sort of like virtual power plants and lots of other components of the distributed energy resource world, which is that we've been using it and, in my opinion, sometimes abusing it for, I don't know, like 15 plus years. We call lots of things microgrids that really shouldn't be. be, and we have other names for things that should be. So it's clearly imperfect. But nevertheless, there's definitely something happening in this space. Here, just some of the many drivers that are pushing in favor of the growth of microgrids in the U.S. Most notably, of course, increasing weather

events and concerns about grid reliability that are just growing over time, but also rising retail electricity prices, falling distributed generation prices, probably more importantly, falling prices for energy storage, maybe the birth of new behind the meter, clean dispatchable resources, nuclear, hydrogen, renewable natural gas, whatever it might be, grid interconnection problems. You've heard my tirade on this one before, I'm sure. And good old American inclination towards self-sufficiency. But at the same time, most of those things have been true for a while. They're not entirely new.

So is it translating into a market inflection? what do we actually mean when we talk about microgrids? What makes them important and distinct? Like what goes into one of them? Well, let's dig in. In this case with Tim Haid, who is the co-founder of Scale Microgrids. It's literally in their name, so he ought to know.

And I should note that Scale Microgrids is a launch partner of Latitude Media who co-produces this podcast. This conversation with Tim is totally independent from that. Also, before we begin, you've heard this before, but I'm hosting an Ask Me Anything episode coming up where I answer any questions that you've got, climate tech, investment, energy transition, whatever, just send us your questions.

You can tag us on Twitter or LinkedIn with the hashtag Ask Catalyst. That's hashtag Ask Catalyst. Or you can leave us a voicemail. The number is 911 808-5832. Finally, you can email us at Catalyst at Latitudemedia.com. Please do reach out. These are fun for me and hopefully value. for you. So send us all your questions. And in the meantime, here's Tim. Tim, welcome.

Thanks so much for having, Michelle. I'm fired up. And just before we get into things, as I've told you privately, I'm so grateful to you and Stephen and the team. I really don't think scale microgrids would exist in its current form. If it wasn't for all the stuff, we've learned from y'all over the years. And so I'm super stoked to be here and hope to have a great conversation. All right. I'm going to start with a hard-hitting question for you. Are you ready? what is a microgrid? How do you define a microgrid? Yeah, microgrid is a distributed energy resource that can island.

That's very succinct. I appreciate that. Okay, so when you say distributed energy resource that can island, let me just add another layer to that. Does it need to have generation? I guess so. If it's going to be able to island, it has to be able to power the thing that's islanding, right?

So it does have to have generation. It does have to be able to island. Does it have to have anything else? Is backup generation any different from a microgrid in your mind? Yeah. So, yeah, to go level deeper on this, right? I mean, I think the way we should talk about this in the broader world is we should call microgrids distributed energy resources that can island, right?

But when you actually get into like the wonky parts of this, the distinguishing feature of a microgrid is it can island from the grid during periods of macro grid disruptions. That's like the thing that matters and separates. microgrids from the rest of the distributed energy resource community. But yeah, right, I think technically, like the Department of Energy definition of a microgrid is an asset that can provide electricity services to the grid during uptime and then island from the grid in the event of a grid disruption. And so, yes, generation is a critical aspect of that.

We can talk about more about the various ways that companies are doing that in the market today. But you have to be able to generate electricity, typically behind the meter, provide electricity services to the grid during normal operating conditions, and then island from the grid in the event of a grid disruption. Okay, so just to push on that for one second, let's take your average data center, right? Every data center has backup power, uninterruptible power supply. So it can island from the grid, and the whole point is to have resiliency in the event of an outage. Is that in and of itself, a microgrid in your mind?

Yeah, so it depends on what it's doing during normal operating conditions, right? So most data centers in the world today, those backup power generation devices are diesel generators, right? Increasingly, they're becoming natural gas generators, but for most data centers, they're diesel generators. And what those diesel generators do is they sit idle pretty much all year, and they wait for that grid disruption, and then when that grid disruption happens, they turn on, and if everything goes well, the data center continues to function. So that in and of itself is not a microgrid because the diesel generators aren't providing services to the grid during normal operating conditions. Now, where it gets tricky

is with gas, right? So instead of using a diesel generator, if you use a gas generator, in some areas of the country, depending on sort of the regulatory construct, that can be a microgrid, because you can turn on those gas engines during periods of needs on the grid to provide additional capacity. In some areas of the country, you can't do that. And so, a data center that has just gas generators can be a microgrid or might not be a microgrid depending on where you're at in the market sort of that you're operating in, if that makes sense. Okay, I get it. So for you, the defining feature is you have to be able to island and on a normal day, you're not just waiting to island for the grid to go down. You're interacting with the grid

on an ongoing basis. And if those two things are true, then you're a microgrid. Okay. So good enough for our purposes today. We've talked a little bit about it, but I do think we should run through the components, because microgrids can be super simple. as you said, it can be a natural gas generator. It could be a gen set that's operating in the market day to day or periodically and then is there for backup power. But can also be a far more complex beast. And I think this is what most people are thinking of when they think of microgrids, which is like some combination of, you know, a variety of different elements that are interacting together to provide power to whatever it is, a campus or a large building or something

like that. So let's talk about the more complex version and like the various components that can go into a microgrid. And then I want to talk about what's actually happening in the market and how much it's one type or the other. But in the version that's more complicated than just a gas gen set, what might you see typically? Yeah. So, you know, one of the things I think we're going to get to today, right, is the entire microgrid market, the entire distributed energy resources market is changing really, really quickly. But if you think about this from a component standpoint, there's really four components that make up most microgrids that are being built today. Solar is one of those components. So that could be rooftop, ground mount, carport, doesn't really matter as long as it's behind

the meter. Storage is probably the biggest component that's unlocking value in the microgrid and distributed energy space right now. So that plays an outsized role in terms of economic value, grid participation, things like that. Switch gear. So this is probably the thing that's talked about least, but is one of the most important components of a microgrid is that that is really the nerve center of a microgrid or distributed energy system. And switchgear is really the thing that allows your system to produce, store, dispatch, and utilize energy

in the optimal way when you have sort of multiple inputs, right? And so the switch gear is really important. And then that fourth piece that exists for most microgrids today is a dispatchable generation asset. And that dispatchable generation asset, can be run off traditional fossil fuels, right? So diesel and natural gas. Do we call it natural gas or freedom gas here? We haven't gotten into that. We haven't dipped into the freedom gas world here. You can call it natural gas. Fossil gas, freedom gas, whatever it's called, right? So it's,

so natural gas, you know, propane, or it can be, you know, new fuels, you know, more sustainable stuff like biofuels or hydrogen is increasingly prominent in the space as well. And so those are kind of the big four, right? Solar storage, switch gear, and dispatchable generation assets, and some combination of those come together to create most microgrids that are being deployed in the market today. Good. I will come back to the combination of those and how every, you know, how scalable a given design is versus every project being a snowflake, that kind of thing. You mentioned Switchgear, which I agree is the one that gets talked about the least. Let's just spend one minute on Switchgear because I think it's important, and we haven't talked about it

enough here. How big a problem is the supply chain bottleneck for switchgear right now? It's a big problem. It's a big problem. So, you know, look, I think what the real question in the market is today is not what the present state is, right? Anyone you talk to about switch gear in the commercial industrial and the bush sector or anything like that is going to tell you it's a problem today. The real question is how quickly is it going to get corrected? And there's sort of two theories of the case. A lot of the supply chain runs through China for switchgear. That's just the reality of the situation. And that supply chain was very heavily disrupted by COVID. And so, you know, part of the question is, is that going to bounce back sort of naturally as we move into, you know, a post-COVID world?

Or is that going to only bounce back once we establish manufacturing capacity in other areas outside of China? And so both of those. things are kind of happening right now. You know, the Chinese supply chain is kind of getting back on its feet. Still some issues there. But we're also opening up new manufacturing facilities in Western Europe and the United States and places like that, largely on the back of the IRA and some of the legislation that's been passed over the past few years. And so, you know, really what you're trying to figure out if you're in this market today is how fast is that problem going to correct itself? And, you know, you talk to different experts. Some tell you the middle of next year. Some tell you it's a three

to five-year problem. Our goal is an industry, right, is to sort of make that happen as quickly as possible. So if we could sort of fix this and get things back to where they were, which is typically like 20-week lead times on Switchgear, that was kind of what the market was before COVID. Today, it's more like 60 to 70 weeks. If we can get back to that 20-week lead time by the end of next year, that's going to be really critical to sort of driving the market going forward. So that's really the situation around Switchgear. All right. We're not going to spend too much time on Switchgear, now, but I'm glad that you brought that one up because that's been a topic I've been meeting. Switch gear transformers, all the electrical good equipment that's like the, you know, we had this,

like, crazy supply chain shortage of all sorts of things, you know, in the kind of latter part of COVID. And then it'll basically alleviated for, I think, effectively everything except stuff like Switchgear and Transformers, which has plagued the industry and we don't talk about it enough. So appreciate you team that up. No, it's crazy. I appreciate you asking about it, right? Because exactly, right?

Like we've seen supply chains correct themselves on the solar side of things, on the battery side of things, on the generator side of things. And switchgear is just stagnant, right? And so you talk to any project developer, any financing entity in the distributed energy space right now, they're going to tell you that's the problem. And again, it's just a question of what can we do and how fast can we correct that. So it's a really important point. 100%. Okay, let's get back to the microgrid market. What do you have in your head, is there like a typical customer archetype that?

that's like the perfect customer for a microgrid or there are a couple of archetypes. I think a lot of people would think of something like a university campus or something like that. But my sense is that that's actually, those are more snowflakey, and there's probably other categories that are more scalable. But what do you guys typically see if you're defining the archetype of a typical customer? Yeah, so I don't know. Maybe this is the part where we can get interesting, right? So I can tell you what typical microgrid customers are today, right? But I think what's more interesting is what microgrid customers are going to look like in the future, right?

And I think ultimately what this comes down to is how do we define the value of resilience as society, right? So right now today, there's a certain percentage of commercial and industrial customers that have a high value of resilience. And those are the archetype of microgrid customers. when you go out into the market, you try to find a good customer to work with from a micro-good standpoint, the first question you're asking is how much do you value resilience? And even within sectors, there's no sort of standardized way to do that, right? There's no commonly accepted methodology for calculating the value of resilience. And so some people buy into it and some people don't.

And that's essentially the game right now. But as a society, my argument is basically that we're massively undervaluing resilience. And, you know, in traditional energy economics, we call resilience a private value. So we say that, you know, when we go to sort of, you know, integrated resource planning and stuff like that, right, we think about reliability as a metric, we think about affordability, we think about sustainability. But then we say, hey, resilience is a private value, right? If the grid fails, it's a private value.

And every time an academic model comes out that tells me that resilience is a private model, I offer to take those people to Puerto Rico, where I was right after Hurricane Maria, and tell me that resilience is a private value. And so the reality of the situation is that people, and this is customers in all sorts of different demographics, need to be taking resilience more seriously. And the reason for that is our grid is fragile, right? And so for anyone who wants to learn more about this, there's a bunch of stuff that's been written. My favorite book on the topic is a book called Lights Out that was written by Ted Cople.

And basically, like, there are a lot of different scenarios that could occur where people could lose power for weeks or months in the United States of America. And we've seen those situations almost arise in recent times, right? Texas during Uri, almost lost power for probably multiple weeks. And there were, I think, 30 minutes away from that happening. So this is real stuff. And so a catastrophic grid failure is going to happen. and when that catastrophic grid failure happens, the question is going to be,

why didn't we think about resilience more? And if you actually think about resilience, then the target market of, you know, sort of microgrid applications expands a lot, right? So maybe we pause there. I'm excited to hear your feedback on this. So let's get into this. Yeah, I mean, there's like a,

there's like a societal thing that you're describing there around, you know, we should be taking resilience, we should be elevating resilience to a more important place and how we think about electricity delivery in this country in general. And I think I agree with you there. You know, there's probably some degree to which there's only so much you can do there. Right. Like you're not going to put a microgrid at literally every building in America.

Maybe you want to, obviously. But like, there's a cost to that. We're going to get to the economics of this. But to me, it is always going to come down to the value of resilience is different for different customers. It is higher for a hospital than it is for a nail salon, right? Or whatever. I'm just coming up with numbers. So, I mean, back to sort of the original question, I take your point that, like, there's, what you're describing is a scenario where in today's market is the early adopters. And the early adopters are the ones who have some combination

of clear, either economic or existential reason to need resiliency, or have, you. Or have, have kind of like woken up to the risk that you're describing or like early on in their understanding of the existential risk of a catastrophic failure on the grid or whatever it might be. And so maybe that expands over time in the way that you're describing and maybe it becomes more clear over time as we have more events and so on and so forth. But back to my original question, who is that first group? All right. I'm going to respond to this because I think this is like the heart of the issue.

So first of all, I'm not crazy. I don't want to put a microgrid in every facility in the United States. I want to put it in about half of the facilities in the United States. And let's just talk about like what's happening in the market, right? So right now today, pretty much about half of that capacity is going to come from distributed energy resources, right? So 50% is going to come from utility scale stuff. 50% is going to come from distributed energy resources.

I don't know, plus or minus 10% here or there. But that's essentially what is setting up to happen, right? And my question is if we're going to build hundreds of gigawatts of distributed energy resources over the next few decades anyway, why will they not be islandable, right? And so that, that I think is the key point here. It's not that everyone should, you know, go out and buy distributed energy resources because of the resilience factor.

It's that everyone's going out and buying distributed energy resources anyway, and they're just not paying the incremental 10 or 15% that they need in order to make those assets islandable in the event of a grid disruption. And that's like the stupidity of the current market and sort of the inefficiency, right? And so if we're going to do distributed energy resources anyway, we should make those distributed energy resources islandable. I think that's sort of the crux of the argument.

I think that makes sense at the high level, but actually you just got to what my next question was going to be, which is an economic question. Because if you just look at the, if you look at forecasts of distributed energy resource adoption that we're going to see, as you're describing, right, a lot of that is going to be behind the meter solar and load control, right, in the form of smart thermostats

and stuff like that. Those things in and of themselves, you can island them, but they don't a microgrid make if you just island them, right? As you described before, like if you're going to do solar, you probably want some dispatchable generation,

you want some storage and stuff like that. So just walk me through the economics of how you think about a microgrid. And this gets too to the question that we were sort of getting to before, which is like how much do various customers value that resiliency. And do you think about it that way?

Like, here's the value of you're behind the meter generation, and here's the value it would deliver if you were just operating it in the market and saving money on your bill and whatever. And then here's the incremental cost of giving yourself a fully islandable microgrid that'll operate in the event of an outage, and that incremental cost is the value of the resiliency.

So, like, how big is that incremental cost? And again, who today, who is happy to pay that? All right. So this is an awesome question and extremely complicated. I'm going to try to unpack it and interrupt me if I'm heading off track. All right. So look, I think the, if we just get back to your original question, right, like the people that are adopting microgrids today are people who value resilience more than the grid provides, right? And so, you know, that can range, you know, on the smaller side of things in the CNI space. And, you know, on the smaller side of things in the CNI space, you're seeing, you know, grocery stores as a driver of the market. In mid-sized commercial, right, warehouses and distribution centers. So if you think about, you know, the shift in e-commerce that's taken place post-COVID, right? Everyone orders their thing on an online platform. They expect it to show up on Thursday.

That means the warehouse that's actually shipping that good cares a lot about resilience because they don't want it to show up on Tuesday because, you know, they had a power outage. increasingly, right, fleet vehicle operators are really looking at this because they can't get the capacity. So that's like sort of a whole other subset of this. But if you are converting traditional internal combustion vehicles to electric vehicles and you need your fleet to operate, then you are concerned about resilience because what happens if there's a power outage and all your vehicles are electric? And then there's like, you know, data centers are probably the biggest driver of microgrids right now. that's like particularly kind of a gas generation or dispatchable generation play because of some of the,

just like energy economics and realities of the energy density of data centers, right? So those are like kind of the usual players. I guess, you know, the second part of what you were saying is this is where I think storage is really interesting and really important, right? So if I thought what you said is right, which is the primary driver of the distributed energy resources market was going to be solar and controls, then I wouldn't have the same thesis I have. But I actually don't think that's the future of distributed energy resources, right? Because the economic value of distributed energy resources is dictated by the market in which it participates, right? And so if you look at California as a great example, right, there are basically

no solar-only projects being built in California right now. Why? Because they change the rules. And they change the rules, so you essentially have to have a battery in order to optimize economic value. And I think, you know, hopefully it happens in a less aggressive way. But I think that's basically the reality that all state, you know, regulatory environments are going to face over the next few decades, right? As solar alone is problematic, solar plus storage solves a lot of problems. And so once you have solar and storage, then islanding becomes a much better value proposition. So generally speaking, I don't know, let's talk about like maybe a 25 to 30% premium to a non-islandable solar storage system to be able to have the either if you're in a residential setting, the electric panel, or if you're in a commercial industrial mush setting, the switch gear, it's like a 25 to 30% premium to install the switch gear. to be able to island.

And the question is, right, is how do you think about that value in the context of, you know, society and what, you know, public utility commissions are trying to do? You know, there's been some good things they've done at the federal level, right? So the IRA included what's called the microgrid investment tax credit, which allowed the switch gear that is islandable to receive a 30% tax credit to sort of help bridge that gap. Unfortunately, that was only appropriated for two. years and we still don't have the final rules. So we essentially have one year to use the microgrid ITC. Representative Jimmy Panetta from California is trying to extend that. My understanding is currently

we don't have a speaker of the house, so it's a little bit problematic. That's not really my environment, so I can't get into that. Your understanding is correct. But those are the types of things where the free market, right, the market. alone is not giving people any incentive to spend that additional 25 to 30 percent to make their solar storage systems islandable. And the question is, like, why not? And I don't think there's a good answer. Virtual power plants are becoming a reliable way for utilities to manage capacity. But enrolling devices is just the start. What really matters is confidence, knowing those resources will perform when dispatched and being able to prove it from the control room

to the living room. Energy Hub's platform handles the full picture, from near real-time forecasting, locational dispatch, and the kind of rigorous verification that holds up when regulators, grid operators, or leadership ask, did it deliver? Easy enrollment creates momentum, proven performance

builds trust. That's why more than 170 utilities rely on Energy Hub to manage over 2.5 million devices delivering 3.4 gigawatts of flexible capacity. See what that looks like at energyhub.com. We're living through a profound economic shift, and energy sits at the center of all of it.

Trillions of dollars are flowing into power plants, transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital, as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to critical capital on Spotify, Apple, or wherever you get your podcasts. I think you hit on something actually pretty interesting, and the California example is a really good way to lay it out, which is basically, so what was happening in California,

was we're, you know, all the conditions were right, we were installing a lot of behind the meter solar. And in fact, we were installing a lot of solar in general, including front of the meter stuff as well. And so California got somewhat oversaturated with solar over the past few years, and we see the duck curve, and everybody's familiar with this stuff.

The regulatory response to that for the behind-the-meter stuff has been what you were alluding to, which is changes to the net energy metering rules. And the changes to the net energy metering rules, as you said, effectively made it such that the economics of solar, really work now if you add storage to it. So what's interesting that happened in California

is that we were already installing a fair amount of solar plus storage where the value proposition there was not economic, right? It was at least to add the storage. Solar might have been economic because you had net metering. And then a lot of people were starting to add the storage because we've had outages, proactive power shutoffs from wildfires and stuff like that. So it was not an economic decision for quite a while to add batteries,

but people were doing it anyway. then, thanks to the regulatory construct changing, we made it economic. In fact, sort of economically necessary that if you were going to add solar, you would also add storage. And that is, I think the point that you're making is pretty interesting, which is once you're at that point, where economically actually you do want storage anyway, then the incremental cost to turn that whole behind-the-meter system into a microgrid that can island is not that big, 20, 30%. In the previous world, if you were just doing solar, that incremental cost would be big. And so the big change here, and this could be applied to residential and commercial, it could be applied in other markets as well, is that, like, storage becoming economic, full stop.

Exactly. Very well said. Really unlocks microgrids because it makes that incremental cost of resiliency pretty low. Yeah. That's super interesting. I hadn't really thought about it in those terms. Now, obviously, the other factor here, if you're trying to be, like, truly islandable and now in a long time is the generation component to that. And you don't see this as much, obviously, with residential,

but certainly in the world that you're playing in, right, like some form of dispatchable generation is usually a part of the mix. And now that, depending on the market, can also be economic on its own, but it is a whole other element to add. Yeah, I mean, look, I think, you know, now we're starting to get into the stuff that keeps me up at night, right? I mean, look, I think if you think about an economically viable way

to provide commercial and industrial facilities with the type of resilience that most of them are looking for, you're using fossil gas or natural gas or freedom gas plus solar and storage or diesel or propane, but some sort of fossil-based asset

to run that dispatchable generator, like that's just the way it is, right? And so, look, I think some people I talk to say that's okay, right? And really, you know, the way we think about it on projects where we do use gas generators, which is a technology we use a lot of, is what we're trying to do is we're trying to minimize the capacity factor, right?

So we can have a gas generator that can operate in the event that the solar storage system doesn't function or the battery essentially doesn't have enough electrons in it to continue to operate the facility. So we kick on the dispatchable generator, and that sort of takes the facility through that period. And we're just trying to minimize the amount that we use that, right? So that's like one way to think about it. I think there are a lot of other people in, you know, sort of this industry who look at it slightly different way, which is that like if you're installing more, you know, fossil capacity, it's a bad thing, right? And so, you know, there's a big argument about this, right?

And I think ultimately, you know, my question, right, is, okay, if we're not going to use, you know, fossil-based dispatchable generators to solve at least a portion of this problem, like my customers want 24-7 resilience. And so you have to give me another way to do that, right? There has to be something on the market that exists that can provide that service in a zero or much lower carbon way. And so we're looking in all this stuff, right? So we're looking into things like, you know, iron air batteries and nickel hydrogen batteries and, you know, hydrogen as consumable fuel, right? but nothing even like comes remotely close to being economically viable right now for us right and so maybe that's like the 10 year horizon but it's not today and so you know I think that's a

question that a lot of people struggle with right is is very low carbon is a very low carbon solution that provides a lot of resilience better than a no carbon solution that doesn't provide as much resilience I think our general approach as a business is we know how to do both and we let our customer decide what they want to do right and so that's kind of you know how we've let people make the decision in the past. We say, like, here's the cost-benefit analysis of each. You pick what you want to do. And historically, most of our customers have opted to put in a dispatchable generator

that runs on fossil gas. And that's okay, right? I think increasingly we're starting to see people say, like, no, we don't want that. We'll just go with a solar storage system. Let's island that. Let's maybe upsize the battery a little bit, so we have a little bit more duration in the event of an outage, but we'll live with the repercussions in the event that we have an outage and there's four cloudy days in a row or whatever. Right. So we've talked about those four elements

that could typically be in a larger scale microgrid, you know, behind the meter solar, dispatchable generation, switchgear, storage. One of the things that has always been a question about this market, this is true of a lot of things in CNI world in general, but it's particularly true of microgrids is the degree to which they are standardized versus completely unique to every single project, both the configuration of the system, the components of the system, the economics,

and how they operate in the market, the contract structures. How much, you've been at this for quite a while, how much, you know, today is every project, the unique snowflake versus, you know,

how much have you been able to standardize things as you've, as the market has evolved and as you guys have grown? Yeah, I mean, I think we're getting there, right? It's a journey, not a destination.

And so, look, I think a driving philosophy of our business is we want to make it simpler for people to acquire microgrids. That's kind of what every activity that we do as a business revolves around making this simpler and easier for our customers. And I think it's a work in progress, right? Like, we've made a lot of strides. I think some people who are familiar with our company know that we kind of solve the finance challenge alongside energy impact partner, partner Stephen Cantowitz. When he was at Warburg-Pinkus, we solved that by raising essentially a private equity fund to allow us to invest in our own projects. And so that took a lot of the friction out of the financing process. We have an amazing commercial

team inside scale that does nothing but think about how can we make contracts, both bankable, but easier for our customers to understand. And right now, our standard energy service agreement that we sign with customers is seven pages long. So we're making a lot of progress on that front. You know, look, on the technology side, I think the biggest pain point right now comes back to switchgear, right? Which is integrating a new switchgear into an existing facility has always been more of an art than a science. And so in our case, we're working with Schneider Electric, which is one of our favorite technology partners to try to solve that problem and try to standardize. They have a product they came out with called microgrid flex that we're really, really excited about because it essentially,

to the extent that you can is a standard switchgear add-on to an existing switchgear that allows you to sort of create a microgrid capable facility a lot quicker and in a lot more standardized way than traditionally been possible. But look, I think the reality is like there's still a lot of customization that goes into each and every project. And so, you know, that's kind of how we think about it, right? is our job is to be, you know, partners with our customers and try to help them understand the costs and benefits of different options and, you know, try to make it as easy for them as

possible to get one of these projects done. And, you know, doing that sometimes requires coloring outside the lines a little bit. And so, you know, luckily we have a lot of really, really smart people that work here that sort of help us do that. But yeah, you know, I think that's the goal of everyone in the industry is to try to make it as easy to buy a micro, grid as an air conditioning. I don't know. We're probably like a decade away from that. And so right now it's just about trying to make it as standardized as you possibly can and then, you know, do what you have to do to get the projects done. All right. So you mentioned switch gear is the biggest complexity. But stepping back beyond that, what do you think, like this is your opportunity

to get on your soapbox. Like what's holding this market back today? I mean, you sort of talked before about like the world hasn't come to appreciate yet the importance of resilience and the existential systemic risks to the grid and all that kind of stuff. I mean, maybe that aside, from a more like practical market perspective today, what holds back the microgrid market? Yeah. So look, I mean, just to clarify, right, like, I don't want to set that aside. So, like, one of the things I want to make sure everyone hears, right, is that like, so I don't

know, maybe to take a step back, right, like, I come from the military, right? So that was my background. And one of the things I learned how to do in the military was threat assessments. This was like a big thing in the post-9-11 military, right? And so when I look at our grid from a threat assessment standpoint, it freaks me out. Like it really, really, really freaks me out. And so again, this is like a when, not if thing. There is going to be a major event in the United States where people lose electricity for weeks or months.

Keep in mind right now what we're doing is we're electrifying everything, which means that if we lose electricity for weeks and months, it's not just an economic, disaster, it's a humanitarian disaster. And when that happens, and people are walking around in this post-apocalyptic world, but by the way, like this happened in Hurricane Sandy. I lived in New Jersey. It was like pretty much a post-apocalyptic world. And everyone's pointing at solar panels on roofs that aren't generating electricity and don't work, right? We're all going to say to ourselves, like, this was pretty stupid. And then after that event, hopefully, like, things are going to happen a lot faster. And so look, I think the biggest thing holding microgrids back is that we as a society,

right, whether that's through our institutions or just generally, we take electricity for granted, and we're not putting enough emphasis on the value of resilience. And if we start to do that, then there are going to be a lot more microgrids built. Right. So again, we're going to deploy, I think, like, the latest DOE estimate, right, is we're going to deploy something like 200 gigawatts of distributed energy resources over the next decade. right? Less than 10% of those are going to be microgrids are going to be island island mode capable based on current trajectories right so 200 megawatts or 200 gigawatts rather of distributed energy resources less than 10% of those are going to be microgrids it should

be a lot closer to like 50 60 70% and I think ultimately to like to get to that number really the question is how do we as a society think about resilience but look then there's like some more practical things, right? And I think the thing I'll emphasize, right, is if you want to talk about, like, one specific area that's holding microgrids back, the way we incentivize electricity systems in the United States through the Inflation Reduction Act is through tax credits, right? And just fundamentally, the transaction costs associated with monetizing tax equity disproportionately hurt smaller distributed energy projects. And so if you're a company like ours, right, you think about the commercial and industrial microgrid space,

95-ish percent of commercial and industrial loads are below two megawatts, right? But almost all the microgrids are built above two megawatts, and the reason for that is not technology costs, it's all soft cost, right? And so the reason everyone in the microgrid industry is trying to standardize is because we're trying to alleviate soft costs so we can go build projects for the 95% of people that don't have more than two megawatts of load, right? most of the people that are leading in the micro-grid industry are trying to solve that problem in some way, shape, or form. The way we get incentivized is we get a 30% ITC, but it's disproportionately harder for us to monetize that

than it is for a utility scale developer to monetize their tax credit, just because it's on a much, much, much smaller base. And so the way that these things are incentivized through the ITC as it currently is structured aren't advantageous to distributed energy as an asset class. And that's one of the things I worry about because it kind of skews the playing field and makes it more likely that utility scale resources are going to be built. And again, I'm not opposed to utility scale resources. I'm like all of the above person, right? And I want more utility scale resources, but I do want a level playing field. And I think the way the current tax equity markets work, like, that's not really happening. And based on like new banking regulations, I think it's kind of going in the wrong direction. So that's like one of the things we're really worried about.

That's interesting one to bring up. It's also a topic. I've had a lot of requests for people to have me cover the, like, sort of new, the way that tax credits are going to work in the new regime and particularly transferability. Does that, I mean, it's early days, right? But is your sense that that's going to alleviate that problem a little bit? So, I mean, we have a guy who works at scale. He's our chief investment officer. His name's Julian Torres. And he spends, like, most of his time thinking about this. And if you want to have a conversation about this, he's the perfect guy to talk to. And I probably won't listen to that episode because it bores the shit out of me. But look, I think what I could tell you is that transferability hasn't helped yet, right? And I think a lot of this stuff is still playing out, right? Treasury's been overburdened, trying to implement all the IRA stuff. A lot of the rules aren't clear yet. A lot of the programs are still coming online.

So it's probably like too early to say. But it definitely hasn't helped yet. And so, you know, look, I think where you have seen it help is in nonprofits and government institutions, right, who now have eligibility for direct pay. And that's really open things up, right? Where now all of a sudden that, you know, these entities that traditionally couldn't monetize the tax credit without a third-party partner and even when they had a third-party partner, it was like very complicated to do so, can just essentially get that incentive in the form of a check from the IRS, at least theoretically, I haven't seen anyone actually do it yet, but theoretically that's the way

it works. So I think like that, those markets are opening up as a result of direct pay. But yeah, like transferability, we haven't really seen have any impact on the market yet. And again, like, if that's going to happen and when that's going to happen, I don't know. But I do think that, like, no matter how this plays out, the way the system works today, tax credits disproportionately favor bigger utility scale assets. And the question we have to ask ourselves is, like, is that what we want to be doing? Like, is that the intent of Congress to say that, like, we want more utility scale assets than we want distributed energy resources, or is the intent of Congress, like they didn't really think about this when they passed the legislation, and this is

one of the unintended consequences, and we should think about that. And my view is it's more the latter than the former. All right. That is good note to end on. Tim, this is a lot of fun. There's more to talk about in my career world. So I think we should do it again. We can dig in a little bit more on, I don't know, some of these individual components, of particularly I'm interested in sort of like how these economics all play out for customers. And, you know, when we see like another thing that we didn't really get the chance to talk about is, do we see demand for microgrid spike in the wake of events like Sandy or like hurricanes in Texas? You know, how much does the immediacy of these reliability events really drive demand?

But anyway, these are topics for another day. In the meantime, really appreciate you coming on. Yeah, thanks so much for having me, man. and I'm happy to come back any time you all want. But like I said in the beginning, I'm so grateful for everything y'all do. It really helps us a lot. We've learned a lot about a lot from you all.

And best of luck with everything. And tell Kanto, I say, what's up, all right? Sounds good. Tim Hade is the co-founder and chief development officer of scale microgrids. This show is a co-production of Latitude Media and Canary Media. You can add over to canarymedia.com for links to today's topics. Latitude is supported by Prelude Ventures, A venture capital firm that partners with entrepreneurs to address climate change across a range of sectors,

including advanced energy, food and ag, transportation and logistics, advanced materials in manufacturing, and advanced computing. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquand, theme song by Sean Marquand. I'm Shail Khan, and this is Catalyst.