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Powering up the neighborhood grid: A strategic entry plan for the microgrid business

Executive summary

Microgrids, the small technological complexes that can supplement or replace a central power grid, have been very much on the radar of many industrial suppliers and manufacturers for the past few years. After hearing that these neighborhood-sized grids might become the next big thing to serve concentrated geographic areas such as industrial parks, hospitals, military bases, university campuses, or retail malls, many utility and supplier companies have had microgrids on their strategic agenda. However, industry players have found that eager customers aren’t materializing as quickly as some recent studies have suggested they would. For the supplier companies getting into this space, it has been a major challenge to break past the early demo or proof-of-concept projects.

Yet many executives in the industrial manufacturing sector, as well as those who head utility companies that seek to benefit from selling and servicing microgrids, recognize that this segment of the power industry has strong growth potential. Competitors are testing the markets for this early-stage technology but no clear leaders have emerged, so there is still an opportunity to build early market share. It is also a business fraught with uncertainties. There are risks involved in developing and managing costly and highly technical microgrids that third-party industrial suppliers need to assess. As with most early-stage technologies, it is difficult to separate hype from material (and near-term) prospects.

Even without certainty on the market prospects, however, a well-crafted scenario-based strategy will increase the likelihood of making prudent investments in this line of business. In this report, based on our work with many industrial supply companies as well as their utility customers, we examine some of the underlying drivers affecting adoption and share our perspectives on what strategic choices suppliers should consider to increase their chances of greater market adoption and, thereby, profitability.

There are three key strategic factors that should be in place: standardization, the ability to offer a microgrid as a total solution, and alignment among the manufacturer, the customer, the utility company, and the regulators and other authorities. When these three strategic elements are combined with an effective design in sync with the needs of the market, companies can reduce high entry costs and uncertainties and reap the benefits of their flexibility.


When it comes to microgrid market participation, it is necessary to have a clear path to profitability. Though the emerging technologies of the alternative energy field are promising, investors have been overly optimistic about them in the past, and have lost some gambles. Rooftop solar, fuel cells, energy storage, electric vehicles, and customer data analytics all have generated attention and excitement, but the companies offering them haven’t always had (or built) the capabilities needed to ensure mainstream adoption and a sustainable business model. This has created healthy skepticism as to whether the technology is grounded in technical and business realities. The skepticism reflects the importance of the strategies we recommend.

Some companies, when they take a sober look at the investment involved, will be hard-pressed to make a case for microgrids right now. They will be persuaded to try them only if the economics become more solidly beneficial. However, many others see that the negative perceptions are likely to change. Over time, it will become clearer which locales or segments are good potential sites and which are not, and utility and regulator confidence will rise. The pace of adoption will vary as a result, across regions and utility jurisdictions. Suppliers can work through the high levels of geographic variability and place bets strategically to balance investments, risks, and overexposure. Their broad experience will help hone their judgment.

Utilities, suppliers, and customers alike have to filter their incoming information. Hype has a high signal-to-noise ratio. Companies will need to guide their strategic focus, particularly when their industries are inundated with new technologies and applications. If you are a supplier or a utility, you should be able to find the most appropriate approach, with the right resources, timing, and targeted outcomes. These are still the early days of microgrids. There is tremendous opportunity, indeed, for companies to make their mark and win. So, too, is there risk. The ability of a company to engage its capabilities strategically will determine the likelihood that it will successfully navigate that risk.