The market for microgrids

A co-production of Latitude I'm Sheo Kahn, and this is Catalyst. If you are converting uh 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. What's a microgrid?

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I'm Sheo Kahn. I invest in revolutionary climate technologies at Energy Impact Partners. Welcome. 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 fifteen plus years. We call lots of things microgrids that really shouldn't 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 are just some of the many drivers that are pushing in favor of the growth of microgrids in the U 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. Uh 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 Hayde, 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. Uh this conversation with Tim is totally independent from that. Also, before we begin, uh 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. Um 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 919-808-5832. Finally, you can email us at catalyst at latitude media.com. Please do reach out. These are fun for me and hopefully valuable for you. So send us all your questions. And in the meantime, here's Tim. Tim, welcome.

Thanks so much for having me, Michelle. I'm fired up. And just before we uh get into things, as I've told you privately, um I'm so grateful to you and Steven and the team. I 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 gonna start with a hard-hitting question for you. Are you ready? Uh what is a microgrid? How do you define a microphone? 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 like add another layer to that. Does it need to have generation? I guess so. If it's gonna 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? Could it like, is it is backup generation any different from a microgrid in your mind?

Yeah, so so um to yeah, to go a 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 uh 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. Um but yeah, right, I think technically like the Department of Energy definition of a microgrid um is an asset that can provide electricity services to the grid during uptime and then island from the grid.

um in the event of a grid disruption. And so yes, generation is a critical aspect of that. We can talk about more more about like the various ways that that companies are doing that in the market today. Um but you have to be able to generate electricity typically behind the meter, um provide electricity services to the grid during normal operating conditions and then island from the grid uh in the event of a grid disruption.

Okay, so just to push on that for one second, let's take a 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 a 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 uh most data centers in the world today, those uh 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 micro grid 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. Um in some areas of the country you can't do that. And so a data center that has just gas generators uh can be a microgrid or might not be a microgrid, depending on where you're at and 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 you're not just waiting to island for the grid to go down. You're s you're interacting with the grid on an ongoing basis. And if those two things are true, then you're 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 it could be a genset that's operating in the 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 uh 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 jet a gas gen set, what might you see typically? Yeah.

So, you know, one of the things I think we're gonna get to today, right, is the entire microgrid market, the entire distributed energy resources market is changing really, really quick. 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.

Uh storage is uh probably the biggest component that's unlocking value in the microgrid and distributed energy space right now. Um so that plays an outsized role in terms of you know economic value, grid participation, things like that. Uh switch gear. So this is probably the thing that's talked about least

Um, but is one of the most important components of a microgrid is the that that is really the nerve center of a microgrid or distributed energy system. And switch gear is really the thing that allows your system to uh produce, store. dispatch uh and utilize energy in the optimal way uh 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 app.

And that dispatchable generation asset can be run off traditional fossil fuels, right? So diesel, natural gas. Do we call it natural gas or freedom gas here? Um Huh we we haven't gotten into the 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 uh so natural gas, um, you know, propane, or it can be, you know, new fuels, uh, you know, more sustainable stuff like biofuels or hydrogen is is increasingly prominent in the space as well. Um and so those are kind of the big four, right? Solar storage, switch gear, and dispatchable generation assets. And some combination of those uh come together to, you know, create uh most microgrids that are being deployed in the market.

Good. I I we'll come back to the combination of those and how every you know, how how how scalable a given design is versus every project being a snowflake, that kind of thing.

Um, you mentioned switch gear, which I agree is the one that gets talked about the least. Let's just spend one minute on switch gear because I think it's important and and we haven't talked about it enough here. Um How big a problem is the supply chain bottleneck for Switch Gear right now? Big problem. It's a big problem. So, you know, look, I think um what the real question in the market is today is not what the present state is, right? Anyone you talk to about

uh switch gear in the commercial industrial and the bush sector, anything like that is gonna 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. Um a lot of the supply chain runs through China for switch gear. That's just the reality of the situation. Um and that supply chain was uh very heavily disrupted by And so, you know, part of the question is is that gonna bounce back?

sort of naturally as we move into, you know, a post COVID world, or is that gonna only bounce back once we establish manufacturing capacity uh in other areas outside of China? And so both of those things are kind of happening right now. Um, you know, the Chinese supply chain is kinda getting back on its feet, still some issues there.

Um, 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.

Um 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 gonna correct itself? Um 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. Um our

goal as an industry, right, is to 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 twenty week lead times on switch gear.

Um 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 uh lead time uh by the end of next year, that's gonna be really critical to sort of driving the market going forward. So that's really the situation around Switzerland.

All right, we're not gonna spend too much time on switchgear right now, but I'm glad that you brought that one up because that's been a topic I've been meaning. It's switchgear, 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 it basically alleviated for I think effectively everything except

stuff like switch gear and transformers, which has plagued the industry and we don't talk about it enough. So appreciate you teeing that up. No, it's crazy. I appreciate you asking about it, right? Because exactly, right? Like we've seen 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 switch gears just

stagnant right and so uh you talk to any project developer any financing entity in the distributed energy space right now uh they're gonna 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. Um, what do you have in your head? Is there like a typical customer archetype? that's like the perfect customer for a microgrid or there are a couple of archetypes. Like I you know, 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

more snowflaky, and there's probably other categories that are more scalable. But like 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 couldn't tell you what typical microgrid customers are today, right? But I think what's more interesting is what microgrid customers are gonna 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 responsibility. And those are the archetype of micro-grid customers. So when you go out into the market, you try to find a good customer to work with from a micro-grid standpoint, the first question you're asking is how much do you value your

And even within sectors, there's no sort of standardized way to do that, right? There's no commonly accepted m 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. But as a society, my argument is basically that we're massively undervaluing resilience. And uh, 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 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 battle. 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 fragmented.

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 The Lights Out that was written by Ted Cop. And um 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.

um almost lost power for probably multiple weeks. And they 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 cra catastrophic grid failure happens, the question's going to be why didn't we think about more resilience?

And if you actually think about resilience, then the target market of, you know, sort of microgrid applications expands a lot. Right. So w maybe we pause there. I'm 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

Uh, we should be elevating resilience to a more important place in how we think about electricity delivery in in this country in general. And I think I agree with you there. You know, there's There's probably some degree to which there's only so much you can do there, right? Like you're not gonna put a microgrid at literally every building in America. You maybe you want to, obviously, but like there's a cost to that. And we're gonna get to the economics of this. But

To me, it it it uh is always gonna 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 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 wherein 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 kind of like woken up to the risk that you're describing, or like early on in their understanding of the existential risk of 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 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?

All right, I'm gonna 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 gonna come from distributed energy.

Right? So 50% is gonna come from utility scale stuff, 50% is gonna come from distributed energy resources, I don't know, plus or minus 10% here or there. But that's essentially what 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 IL? Right?

And so that that I think is is is the key point here. It's not that 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 ten or fifteen percent 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 gonna 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 gonna be, which is an economic question.'Cause if you just look at the if you look at forecasts of distributed energy resource adoption

that we're gonna see as you're as you're describing, right? A lot of that is gonna be behind the meter solar, uh, and load control, right, in the form of smart thermostats and stuff like that. those things in and of themselves, you know, you 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. Stuff like that.

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 and do you think about it that way? Like here's the value of your behind the meter generation and here's the value it would deliver.

if you were just you 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 of an outage. And 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.

So, this is an awesome question and extremely complicated. I'm gonna try to unpack it and interrupt me if I'm heading off track. All right. So Look, I think the i i 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 provider.

Right. And so, you know, that can range uh, you know, on the smaller side of things in the CNI space, uh, you're seeing, you know, grocery stores as a driving driver of the market. in mid-sized commercial, right? Warehouses and distribution centers. So if you think about, you know, the shift in uh 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 they had a power outage. Increasingly, right, uh 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 uh 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?

Um and then there's like, you know, data centers are probably the biggest driver of microgrids right now. That's trad that's like particularly kind of a gas generation or dispatchable generation play because of some of the uh just like energy economics and realities of the energy density of data.

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

Uh 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 changed the rules. And they changed 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 less like an aggress uh a less aggressive way. But I think that's basically the reality that all state, you know, regulatory uh environments are gonna face over the next few decades, right? 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

Uh, better value proposition. So generally speaking, I don't know, let's talk about like maybe a twenty-five to thirty percent premium. to uh, you know, 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 twenty five to thirty percent premium

to install the switch gear, you need to be able to island. Um 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 To deal with

Um, you know, there's been some good things they've done at the federal level, right? So the IRA included uh what's called the microgrid investment tax credit, which uh 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 has is trying to extend that. My understanding is uh currently we don't have a speaker of the house, so it's a little bit problematic. Um I that's not really my my uh my environment, so I can't get into that. Your understanding is correct. But uh but uh you know that the there's th th those are the types of things where the free market, right? The market alone.

is not giving people any incentive to spend that additional twenty-five to thirty 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. Are you tired of overpaying for big name PR firms but not really knowing what they're delivering? Is your comms team wasting time reviewing lengthy messaging briefs and decks?

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The California example is a really good way to lay it out, which is basically so what was happening in California was we were, 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.

Uh, 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 economic of solar only 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. The solar might have been economic'cause you had net metering. And then a lot of people were starting to add the storage because we've had outages, proactive power shut offs 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 to I think the point that you're making is 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 percent. 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.

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 islandable for a long time is the generation component to that. And you don't see this as much obviously with 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. Um, but it is a whole other element to add. Yeah. I mean look, I think, you know, now we're now we're starting to get into the stuff that keeps me up at night, right? I mean, um, look, I think if you think about um 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. uh plus solar and storage uh or diesel or propane, but some sort of fossil based asset to run that diesel generator or that that dispatchable generator. Like that's just the way it is.

Right. And so look, I think um 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 uh gas generators, which is a technology we use a lot of. Um is what we're trying to do is we're trying to minimize the capacity.

Right. So we can have a gas generator that can operate in the event that the solar storage system doesn't function or the bat you know, the battery essentially doesn't have enough electr electrons in it to continue to operate the facility.

So we kick on the dispatchable generator and that sort of takes the facility uh through that period. Um 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 uh 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, uh, it's a bad thing.

Right. And so, you know, there's a there's uh a a big argument about this, right? And I think ultimately, you know, my question, right, is okay, if we're not gonna 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 into all this stuff, right? So we're looking into things like, you know, iron air batteries and nickel hydrogen batteries. And uh, you know, hydrogen as uh uh consumption uh can uh consumable fuel, right? Um, 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. Right. And so that's kinda you know, how 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 is up have opted to put in a dispatchable generator that runs on fossil gas.

Um, and um 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 you know, 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 are typically or could typically be in a in a larger scale microgrid, you know, behind the meter solar, dispatchable generation, switch gear, storage. One of the things that has always been a question about this market, and 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 product.

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 you've been at this for quite a while. How much, you know, today is every project 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 it's a journey, not a destination. Um and so look, I think uh, you know, uh a driving philosophy of our business is we want to make it simpler for people to acquire micro. Right. That's kind of what, you know, every activity that we do as a business revolves around making this simpler and easy, easier for our customers. Um

And I think it's a work in progress, right? Like we've made a lot of strides. Um I think some people who are familiar with our company know that we kind of solve the financing challenge alongside energy impact partner, partner Steven Katowitz. When he was at Warburg Pincus, 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 uh we're making a lot of progress on that front. You know, look on the technology side, I think

Um, the biggest pain point right now comes back to switch gear, right? Which is integrating a new switch gear 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, you know, 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, s is a standard switch gear add-on to an existing switch gear uh that allows you to sort of create a micro microgrid capable facility uh a lot quicker and in a lot more standardized way uh than traditionally been uh

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 uh you know partners with our customers and try to help them understand the costs and benefits of different options and uh, you know, try to make it as easy for them as possible uh to 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 um that sort of help us do that. But um 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 microgrid as an air conditioning.

Um, I don't know, we're probably like a decade away from that. And so, you know, 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 just stepping back beyond that, what 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 so look, I mean um

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. 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 happened.

And people are walking around in this like 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 gonna say to ourselves, like, this was pretty stupid. And then after that event, hopefully like things are gonna 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 a lot more microgrids built. 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 ten percent of those are gonna be microgrids, are gonna be island island mode capable based on current trajectories. Right. So two hundred megawatts of or two hundred gigawatts rather of distributed energy resources, less than ten percent of those are gonna be microgrids. It should be a lot closer to like fifty, sixty, seventy percent.

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.

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 megabs. Right? But almost all the microgrids are built above two megawatts. And the reason for that is not technology costs, it's all software.

Right. And so the reason everyone in the microgrid industry is trying to standardize is because we're trying to alleviate soft cost. 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 microgrid 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. uh 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, uh aren't advantageous to distributed energy as an asset class. And that's one of the things I worry about.

uh because it kind of skews the playing field and makes it more likely that utility scale uh resources are gonna be built. And again, I'm not opposed to utility scale resources. I th I'm like a all of the above person, right? and I want more utility scale resources, but I do want a level playing

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 an interesting one to bring up. It's also a topic I've had a lot of requests for people to have me cover the tr like sort of new the way that 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 gonna 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 um look, I I 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. Um, and so, you know, look, I think where you have seen it help is in non profits and government institutions, right, who now have eligibility for direct pay.

Um and that's really opened 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 they are 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 um again, like if that's gonna happen and when that's gonna happen, I don't know. But I do think that like no matter what how this plays out, the way the system works today. Um, tax credits disproportionately favor bigger utility-scale assets. And the question we have to ask ourselves is: 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.

Um and my view is it's more the latter than that.

All right. That uh that is a good note to end on. Um, Tim, this was this is a lot of fun. There's there's more to talk about in microgrid world. So I think we should do it again. We could 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 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 microgrids spike in the wake of events like Sandy or like hurricanes in Texas? You know, how much how much does the immediacy of these reliability events really drive demand. Uh, but anyway, these are 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 anytime y'all want. But like I said in the beginning, I'm so grateful for everything y'all do. Um it really helps us a lot. We've learned a lot about a lot from y'all. And uh, you know, best best of luck with everything and tell Kanto I say what's up, all right. Sounds good. Tim Hayde 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 head over to Canary Media dot 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 and 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 Shale Khan, and this is Catalyst.