Less Risk, More Arbitrage Income for Microgrid Operators and Owners?

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Often, microgrid operators have the choice of either purchasing a fixed supply contract or playing in the market, but not both, said James McGinniss, CEO and co-founder, David Energy, a competitive retail electricity supplier.

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Building served by David Energy in New York City

“Microgrid customers are often faced with a bad choice: They can take an indexed contract in order to capitalize on arbitrage as a value stream, and thus take energy market risk (be exposed to price spikes), or they can take a fixed contract that eliminates risk but also their ability to capitalize on arbitrage,” he said.

His company is now focusing on providing different variations of fixed supply contracts that allow microgrid operators to earn income by participating in the market, especially demand response programs. He expects the offerings to help reduce risk and allow microgrids operators and owners to earn money providing demand response and other services.

David Energy can provide variable or fixed products. “What matters is that we will structure the deal however a customer likes. What we’re offering that is different in the market is a willingness to structure future arbitrage potential into a fixed product. We’ll take the performance risk on an asset in commodity markets. Or, the customers can stay on a variable rate if they want to take that risk, and use our algorithms to manage their assets and achieve further savings.”

The business model is based on software as a service, providing demand side management, demand response and other options and being paid for it.

How the model works

David Energy provides a package, called Micor, that includes technology-agnostic software that allows for the control of numerous assets while participating in the market.

“When you have solar, a battery and backup generator, you have to find a software company to do demand charge management with the battery,” he said. David Energy generally controls the assets for the customer, but sometimes customers control the assets, if for example they want to be in charge of temperatures in buildings. In that case, David Energy sends real time recommendations to the customer through its dashboard.

Many microgrid projects involve developers and customers pulling together a demand response provider, software for the battery and a retailer for energy supply. His goal is to provide an all-in-one service.

“We’re an energy retailer and we have our own software controls,” he said. “We can step in and provide a fixed supply contract that takes into account the arbitrage potential of a battery.”

David Energy structures its contracts in response to a customer’s risk tolerance. An indexed rate changes as market rates change and therefore includes some risk. Fixed contracts carry fewer risks.

Customers can choose to purchase a certain portion of their total electricity under a fixed contract. The rest of the electricity purchase could be exposed to more risk, playing in the market.

“A middle ground is being able to hedge a certain amount and leave some exposure to risk. You can have some of a customers’ consumption hedged out and some of it not. We can combine the two or go one way or the other.”

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Three to five-year microgrid contracts

Right now, the company has no microgrid customers, but works with commercial and industrial energy customers on energy management and demand response.

David Energy is just beginning to focus on microgrids, offering three to five year contracts.

“We look at the full value stack. We might have an arbitrage opportunity in the morning and demand response in the afternoon. We look at every potential revenue stream and choose the most optimal schedule that will get the most value.”

Traditionally, electricity has come from large, centralized fossil fuel plants, and retail electricity providers purchase electricity from these plants in markets for their customers, the company explained. The retail providers move the power on utility owned lines and send customers bills. But now, distributed energy resources (DER) — including solar, battery storage and backup generators — allow customers to respond to grid events and sell power to the grid. With DERs, it’s not necessary to ship energy over long distances over expensive wires. The result is lower carbon emissions, lower costs and more resilience. David Energy capitalizes on these new trends.

The company aggregates behind the meter assets for Consolidated Edison, the New York Independent System Operator and other organizations that offer demand response programs. In this role, David Energy provides demand response services for its customers directly.

If prices are spiking in wholesale markets, the company can collectively offer its behind the meter assets to help keep prices for its customers down, McGinniss said.

First among competitive retail suppiers?

David Energy aims to become the first retail electricity provider that can offer a fixed supply rate contract created specifically for microgrid customers.

“Others definitely offer fixed. But what’s important here is that, when they do, the microgrid assets are generally cut off from arbitrage opportunities. Not all retailers have the sophistication to structure a fixed price around charging and discharging a battery in real time. If customers want these savings, they have to take an indexed rate,” McGinniss said.

“Because the ability to dispatch load is so valuable to other customers…this rate can be aggressively low. They can achieve more savings than they would just taking an indexed supply rate and arbitraging on their own,” he said.

The company’s hope is to ultimately boost microgrid deployment with these offerings.

“If I can help increase a company’s savings profile, then I can close more deals. That’s our goal at the end of the day,” said McGinniss.

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