In business, economy of scale is an important concept of optimizing output while reducing cost per unit of output by increasing the size of production. For example, a larger entity would be more cost efficient per unit of production than a smaller unit, all other factors being equal. But, passing the optimum size brings in inefficiency and other complications of adapting to change, because of the rigidity of big infrastructure set up for production.

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Figure1 Cost vs. Output Graph. Source ZE

Economies of scale apply to a variety of businesses and industries, the power sector being one of them. Large electricity generating units such as fossil fuel plants, nuclear power plants, and hydro power plants have excellent economies of scale, but the long transmissions of power from these plants causes significant losses and negatively affects the environment, not to mention, the rigid infrastructure is unreliable during unusual events such as storms and extreme weather conditions.

Micro Grids – The Strategic Change

Micro grids – once just used as a way to combat blackouts – are now becoming credible alternatives to centralized sources of power (Bloomberg). A micro grid is a local electricity generating unit usually located close to load centers that normally operates connected to centralized grid. The systems use computer software and remote measuring devices to control energy sources such as rooftop solar panels and natural gas-fueled power generators. The micro grid operators generate, distribute, and regulate locally produced power.

The micro grids have recently gained huge traction because of remote area electrification, their inherent agility, and reduced costs and environmental effects. “Not much of a factor a decade ago, micro grids are expected to explode into a $40 billion-a-year global business by 2020,” based on information from data and consulting company, Navigant Research (Bloomberg).

By 2020, Navigant estimates that about 6 GW of electricity will be flowing through micro grids, which is “enough to power as many as 4.8 million homes” (Bloomberg). In fact, “in the developing world, they may leapfrog the need for conventional utilities—the same way mobile phones leapfrogged the need for landlines—and bring power to almost half of the 1.3 billion people on Earth who don’t have it” (Bloomberg).

Redefining the Scope of Utilities

The power utilities mostly rely on a few big generating plants to serve widely spread load centers, contrary to the concept of micro grids. The proliferation of smart grids is eating up the revenue base of those utilities. With the changing power industry landscape, utilities by necessity have to switch from being entities that primarily generate and distribute power to companies that help manage the surge in distributed generation flowing via micro grids, creating a revenue stream for keeping the grid stable. (To learn more about impacts of micro grids on utilities in the U.S., read our ZE DataWatch article, Will the Rise of Distributed Energy Spell the End for Traditional Utilities?)

Green Energy Corp.’s Chief Strategic Officer Steve Pullins says it’s “a hard pill to swallow” (Bloomberg). Green Energy is a commercial-scale micro grid builder based in Tennessee. Pullins compares what is happening now in the market to what happened in the U.S. car industry in the 1970s, when federal government mileage standards were imposed:  “When those rules came out, Toyota went out and hired 1,000 engineers to figure out how to meet them. GM went out and hired 1,000 lobbyists to figure out how to beat them. There is some of that going on. With a few exceptions, the utility industry hasn’t embraced micro grids” (Bloomberg).

With rapid development in distributed energy generation technologies, micro grids are making their presence felt globally. Utilities will most likely need to embrace this change and adapt their long-term strategies.

At ZE, we help our clients prepare for the changing landscape of the power sector. Our end-to-end enterprise data management tool, the ZEMA Suite, helps our clients make informed decisions and stay ahead of the markets. To learn more about ZEMA, book a free demonstration now.