Could backup power go the way of the cloud?
By: SGN Staff
By Steven Minnihan
In an effort to improve reliability and reduce costs, commercial customers are migrating their computing backup requirements towards centralized computing networks, dubbed "The Cloud.” This movement allows commercial customers to outsource their information technology (IT) needs to third-party computer networks with higher capacity and superior technologies. The Cloud hinges on the principle that a large-scale facility offers superior cost and value than a series of small, distributed facilities. This same principle applies to energy generation and energy storage, as centralized energy production and storage systems generally carry lower levelized costs and superior energy efficiencies than small-scale distributed systems.
This begs the question - could energy backup systems and uninterruptible power supply (UPS) systems someday be aggregated by third-party players? The majority of commercial, industrial, and institutional electricity customers have their own UPS and backup systems located on-site for use in the event of grid failure. Throughout the developed world, where grid reliability exceeds 95%, these UPS and backup systems sit dormant for the majority of the year. They constitute a large depreciating asset on the balance sheet, but they are a necessary cost as the penalty for electrical outages are significant. As a result, urban regions have a high density of small, disaggregate, costly, underutilized, and depreciating generation capacity.
Conversely, a third-party backup service operator could supplant this disaggregate, customer-owned backup model by operating a private, centralized backup facility offering backup-as-a-service. Essentially, the third party would be providing a privately owned microgrid, redundant to the centralized utility distribution grid. This model would be more cost effective, lowering the capital cost per unit of capacity ($/kW) and improving the fuel consumption of such a backup system, while potentially offering a mixture of other services such as peak power shaving for demand charge reduction. While this model has not been widely demonstrated in the developed world, it is actually common in markets such as India and Pakistan, where retail customers subscribe to private back-up grids at considerable prices.
Of course, numerous hurdles exist for this model. Presently, there are few regions that allow for easy business-to-business (B2B) electricity trading. Furthermore, a customer limits its control over electrical failure when it outsources its backup power production, losing the ability to oversee and mandate maintenance and testing. However, as electricity market structures and grid architectures slowly evolve over the coming decade, such a model would create an opportunity for distributed generation and energy storage technologies to perform additional services at competitive costs.
Steven Minnihan is a Senior Analyst for the Grid Storage Intelligence service at Lux Research, which provides strategic advice and on-going intelligence for emerging technologies. For more information, visit the Lux Research site.