In China, high hopes have been placed in the microgrid as renewable energy expenditures continually increase. However, the reality is that the development of the microgrid is struggling because China’s distributed generation is still in its infancy.  

Driving north all the way along Zuo’anmen Street to the Zuo’anmen roundabout, you will see an eight-story building with two rows of solar panels. The Zuo’anmen microgrid demonstration project was built on this building and has been operated for more than a year since last March. Through the microgrid management system, the building provides electricity to 68 households from solar power, energy storage and combined cooling, heating and power (CCHP) systems.

Beijing Electric Power Company, the investor and operator of the project, welcomes a batch of visitors in and out of the building and tirelessly tells of its benefits: the total installed capacity is 200 kilowatts, the saving of coal is nearly 30 tons a year and carbon dioxide emissions reduced almost 90 tons. However, the company paid aheavy price forit. They have to bear high power generation cost day after day, which is double the local standard electricity price. Three electric vehicle (EV) charging stations outside of the building weren’t able to play their roles yet and have already been abandoned. The demo EVs disappeared with no trace and the charging spots have been reduced to a free parking lot.

Currently, there are many similar demonstration projects under construction in China, which forms a microgrid market with an annual production value of nearly 1 billion yuan and fosters a number of microgrid companies. As an emerging market, the microgrid is not yet technically mature, but sank into China’s unique policy shackles, conflicts and interests early.

Microgrid is Big

The variability of renewable resources impacts the grid due to their weather dependent characteristic. The study shows that intermittent power generation can reduce output by up to 70% of daytime solar capacity due to cloudy weather and 100% of wind production on calm days. If the rate of renewable energy penetration increased by over 25%, it would be difficult to operate the power grid smoothly.

The microgrid plays a vital role in reducing the impact of renewable generation on the grid. Microgrid coordinates a variety of distributed generation technologies through control system and energy storage system. Microgrid systems can achieve grid-tied operation and isolated operation modes with fast switching and isolation functions. Usually, the microgrid runs in parallel with the power grid to provide surplus electricity under the grid-tied mode, or to save it into a storage system. If the power grid incurs system failure, the microgrid can be disconnected from the grid and operated in isolation mode to ensure the local power supply. In addition, the microgrid can implement a demand response program to shave peak loads and fill the valleys of the grid.

Jian Zhang, the research director of Hitachi (China) Co., Ltd. Smart City Business Promotion Department, believes that the microgrid generally refers to a system which supplies power in a relatively independent region without connecting to the grid. Microgrids maintain regional electricity balance through a local combination of renewable generation power supply and energy storage. Hitachi participated in Tianjin’s Eco-city business hall microgrid project. Jian Zhang said that their energy storage management system has had no impact on the grid since starting operation in September 2011.

Based on the Chinese Golden-Sun demonstration project, the national 973 & 863 Science and Technology projects as well as the relevant company's R&D programs, microgrid demonstration projects are currently blooming across the country.

The National Energy Administrator (NEA) plans to build 30 microgrid projects during the "12th Five-Year" period. The first project of the Turpan microgrid demonstration project has been approved.  It will be funded and operated by the Longyuan Power Group with installed capacity of 13.4 MW.  NEA will also release the Distributed Generation Regulation and Distributed Generation Grid-tied Regulation in the near future. With the ultimate introduction of these two regulations, distributed generation will be in a great stage of development and the microgrid market will also be promoted faster.

The rapid expansion of Beibian Microgrid Technology Co., Ltd. indicates the market’s growth. This specialized microgrid enterprise has had over 100 million yuan turnover in the past two years. "We are optimistic about the prospect of the microgrid business and forecast to achieve annual sales of 250 million yuan in the following three years and then strive to IPO within 3-5 years." Vice President of Beibian, Kong told SGT Research.

Microgrid Disputes

However, the microgrid market is not as simple as Kong imagined. Currently, controversy over the value of the microgrid still exists in the industry and massive development of the microgrid remains unsteady in China.

General Manager of Longyuan Power Group, Changjun Xie bluntly said, "The project (Turpan microgrid demonstration project) touched the nerve of the State Grid, connecting to the grid would be a big issue in the future."

The microgrid is a sensitive topic in the industry in China. A person from the State Grid exposed that microgrid, on one hand, adds instability to the power network, on the other hand, the distributed generation will reduce utility’s electricity sales and then affects the interests of the State Grid. According to him, the attitude for the development of the microgrid from the State Grid is "strengthening management". Some microgrid businesses are concerned that the State Grid will squeeze the neck of the microgrid in connecting to the grid once their projects are built. They also mentioned that now the State Grid apparently is not supporting microgrid development, but is stealthily in a hurry to exam feasibility. The State Grid wishes to do the microgrid by themselves.

Dr. Yibin Zhang, director of the Smart Grid Research Department at the State Grid Energy Research Institute, commented that, based on China's current development status, the only value of the microgrid is in remote areas which are beyond the reach of large power grids. He continued stating that the microgrid has limited space for future development because its lack of existence necessity in China.

"Microgrid is a certain stage of distributed energy development, which utilizes microgrid technology to coordinate distributed energy sources. The big difference compared with foreign countries of microgrid development is that the majority of Chinese residential buildings is apartment, which has limited space for installing photovoltaic and other distributed generation system. The future energy saving mainly relies on large-scale renewable energy development and utilization. Furthermore, small communities and local residents have less ability to operate and maintain the microgrid system which needs professionals in stead. In the same time, microgrid cost can not compete with the existing power grid.” Dr. Zhang said.

Dr. Zhang believes that microgrid concept has been generalized in China. Most of the typical distribution networks or power supply networks have been regards as the microgrid. Those so-called "microgrids" are actually applying traditional technology on a variety of voltage levels and have no difference with traditional electric power systems.

“Nowadays, some companies develop high-cost distributed generation and energy storage system as a small distributed network but under the name of microgrid. Even without considering the various tariffs such as cross-subsidies, additional funds and the large grid system standby cost, their electricity cost does not have capacity for supporting sustainable development." Zhang said. From Zhang’s opinion, the difficulty of microgrid connecting to the grid is not a rooted in the State Grid. "There are not clear national standards for microgrid technological operation, the tariff and other key policies are also not yet clear. Therefore, the State Grid has no policy basis for the legal compliance of accepting microgrid.” Zhang added.

Chinese Puzzle

Microgrid technology is facing three core problems: rapid isolation from the existing grid, seamlessly switching between grid-tied mode and isolated mode, and microgrid internal stability control. Taking stability control for example, the generation side of the microgrid is intermittent renewable energy, which is uncontrollable. The load side is also uncontrollable due to the smaller number of individual users. So the load changing on the microgrid would have a great impact on the whole load of the grid. In order to solve this problem, energy storage system should be used to balance the power generation side and demand response program with two-way communication system and time-of-use rate initiative should be implemented to control the load side. However, those kinds of techniques are still under development in China.

In addition, the microgrid’s cost is not competitive with the rest of the market. Distributed energy sources and control system are two key components of the cost of microgrid power generation which are still high cost thus increasing the cost of the microgrid. Taking a photovoltaic source for example, the current cost of construction is about 12,000 yuan per kilowatt. Using an electricity price of 1 yuan per unit, if photovoltaic generates electricity 4 hours per day (this would be considered excellent), that equals to 4 yuan per day. So the rate of return on investment (ROI) is nearly 10 years. The control system is also expensive and there is an especially high investment cost for the energy storage system. In general, the lithium battery needs to be able to be charged and discharged 6000 times in order to recover the cost. But this is already significantly over the life of a typical lithium battery. The energy storage system actually only accounts for one-third of the cost of the entire microgrid control system. There are also extra costs for transmission and distribution control systems. One must also include the cost of operations and maintenance also needs to be included in the total cost making the microgrid an expensive proposition.

Last but not least, in the current power system structure, the microgrid is facing a lack of legitimacy in China. Some experts believe that the microgrid operational model contradicts the existing Electric Power Law. Only those with the "power supply license" issued by the department of power management office can be a legitimate power supplier in China.

Currently, microgrid technology is not mature, but more critical to the microgrid development is a lack of uniform standards from national level. Policy uncertainty is the biggest obstacle to the future development of the microgrid. Microgrid connecting, planning and design, construction and operation, equipment manufacturing and other sectors all suffer from a lack related national technical standards and management regulations. More importantly, the microgrid construction and operation model is not yet clear from the government.

The microgrid can improve energy efficiency by using distributed generation, which is conducive to national energy saving and energy security. China should formulate relevant laws and regulations to support microgrid development. Although the microgrid faces short term difficulties to achieve industrialization, the rise in costs of fossil fuels will eventually bring the microgrid economy in line with rest of the grid. Once the technological, economical and regulatory challenges have been resolved, the microgrid will experience explosive growth in China and the future market is expected to reach 100 billion yuan.

About SGT Research

SGT Research is a global market research and advisory firm serving the smart grid industry value chain including electric power infrastructure, renewable energy, clean technologies and capital investment. SGT Research provides strategic consulting services including analysis of market drivers, business models and technology trends for smart grid development. SGT Research also provides market entry services for smart grid firms seeking opportunities in China. With SGT Research’s local and international experience, clients will have added competitive advantages of bringing high-value products and services to the Chinese market faster.