At noon on October 22, 2007, the University of California, San Diego, received an emergency call from the local utility. Regional wildfires had damaged and disabled power lines and the California grid operator had declared an energy transmission emergency. San Diego Gas & Electric asked the university to reduce the amount of electricity it was drawing from the grid and, if possible, start generating power for use by other utility customers.

Within 10 minutes, the campus swung from drawing 4 megawatts of electricity from the power grid to feeding it 3 megawatts, says Byron Washom, Director of Strategic Energy Initiatives for UCSD. “That 7 megawatts was the razor-thin margin between the San Diego Gas & Electric grid remaining up or collapsing.”

The San Diego campus was able to react so quickly in part because a half-century earlier its founders had decided to lay the groundwork for a self-sufficient power supply, or what energy experts today call a “microgrid.” The first structure erected on campus in 1962 was a central power plant designed to provide gas-fired electricity as well as district heating and cooling for the school’s buildings. That in itself was and is not unusual for an academic, or even a corporate campus. But over the years, UCSD gained self-sufficiency by adding steam turbines, solar photovoltaic panels, fuel cells and energy storage, in addition to installing power lines to transmit electricity to and from SDG&E’s electrical grid.

All of these assets now operate under the control of a sophisticated energy management system, and the campus microgrid enables the university to generate, store and dispatch electricity as needed—ultimately providing 92 percent of electricity used on campus. Although the university normally draws electricity from the SDG&E grid to meet its roughly 38-megawatt load, it can also switch to “island” mode in the event of off-campus power problems or outages, meeting all of its own electricity needs. And when electricity is in short supply on the main electrical grid serving greater San Diego, UCSD can sell power to SDG&E.

In response to the 2007 emergency call, the university fired up a 3-megawatt steam turbine and reduced power demand by adjusting climate control settings and switched to drawing cold water for its cooling system from highly efficient thermal storage tanks instead of electric chillers. “With two clicks of a mouse, with our control system, we can change 4,000 thermostats on campus,” Washom says.

UCSD and other microgrid operators are offering a modern take on the small direct current power systems installed in factories and city centers beginning in the 1870s. Like those early systems, these new designs feature local generation and distribution of electricity rather than the long-distance transmission lines and remote centralized power stations that characterized the 20th century power grid. “We’re currently deconstructing the power grid, back to [Thomas] Edison,” says Jim Reilly, whose consulting company Reilly Associates advises the Department of Energy on microgrid operation.

The roots of this deconstruction trend go back to the late 1990s, when the U.S. Department of Energy decided to jump-start research into power transmission and reliability. The move came as a response to electricity deregulation and anticipation of a coming wave of rooftop solar panels and other forms of decentralized power generation. “We did not at that time really have a concept of ‘microgrids’ per se,” says Chris Marnay, one of the pioneers of microgrid research. The idea of generating energy locally was an old one. But it took advances in controls and power electronics to enable a true microgrid that could interact with and “island” from the larger power grid. Within a few years, Marnay’s research group at Lawrence Berkeley National Laboratory formalized the notion of a microgrid in a project for the California Energy Commission.

The benefits provided by UCSD’s microgrid—agility and self-sufficiency—are now in high demand among energy users who risk severe consequences in the event of power interruptions, such as universities running sensitive lab equipment, military bases holding weapons control systems and data centers handling vast troves of information. “It’s the facilities that want abnormally high-quality power where we see most of the action at the moment,” says Marnay, who retired in June from the Berkeley Lab’s Grid Integration Group.

Extreme weather events in recent years, such as Hurricane Sandy, have reminded business, military and political leaders of the fragility of electricity infrastructure in the United States. “The increasing frequency of natural disasters is driving a stronger interest in microgrid and back-up power solutions,” says Brian Carey, who leads the U.S. cleantech advisory practice for accountancy firm PricewaterhouseCoopers, known as PwC.

A $71-million microgrid built at the headquarters of U.S. Food and Drug Administration, for instance, supplied power to the campus during and after Hurricane Sandy when the regional power grid went down. In March 2011, the Sendai Microgrid, located on the campus of Tohoku Fukushi University in Sendai City, Japan, continued to supply power and heat to customers after the devastating Tohoku earthquake and tsunami brought down power supplies throughout the surrounding region.

While resiliency has long been key to the appeal of microgrids for facilities with critical power loads, shifting energy prices and technology advances are now bringing microgrids within reach for cities and neighborhoods that want local control of their power supply or cleaner energy than that offered by their utility.

Solar photovoltaic panels now cost 80 percent less than they did in 2008. The consulting firm McKinsey & Company predicts that lithium-ion battery prices could fall to $200 per kilowatt-hour by 2020, from about $500-$600 per kilowatt-hour today. Facilities that build microgrids can also save money year after year by buying less electricity from their local utility or, in some cases, selling power to the utility when supply is tight.

“It can be a significant cost savings if a university or a hospital can actually sell power based on the real-time market pricing for power, not just at the rate they would normally pay,” says Carey, of PwC. “Prices can swing dramatically, from 15 to 20 cents per kilowatt-hour to single digits dollars per kilowatt-hour.”

According to Byron Washom of UCSD, the university saves $800,000 per month on its power bills by generating 92 percent of the electricity it consumes. The FDA says its campus microgrid saves the agency $11 million annually in energy-related costs.

Rapidly maturing technology is enabling better integration and optimization of microgrid components. Washom notes, for instance, that improved solar forecasting tools inform the campus energy management system when to charge or discharge batteries. “We are witnessing superior control systems that can manage a microgrid as well it can manage an entire facility,” he says. “There’s a whole variety of new tools that are emerging to how you manage your supply, your demand, your storage and your imports.” Soon, Washom says, energy managers will be assessing the readiness of the system’s assets every few minutes to anticipate or respond to changing conditions.

While technology races forward, however, experts say new policies are needed to hasten microgrid adoption. Marnay says current U.S. policies at the state and federal level are advancing individual energy technologies, such as solar, wind and energy storage, but more support is needed for deployment of these technologies in complex systems like microgrids.

Already, the Department of Energy has partnered with local and state officials to adapt military microgrid designs for civilian applications. In New Jersey, for example, where Hurricane Sandy knocked out public transit and left some residents without power for a week or more, DOE is working with the state transit agency to design a microgrid that would help keep electric-powered trains running during a natural disaster.

The Energy Department has also begun to take a more active role in setting standards to guide design and operation of future microgrids, as well as their integration with existing power infrastructure. Even the definition of what makes a microgrid is changing: the scale could reach as large as 60 megawatts in coming years. A group of experts from the agency are developing a plan for a commercial-scale microgrid system capable of reducing outage times by more than 98 percent at a cost comparable to a diesel-powered backup power supply while reducing emissions and improving system energy efficiency by at least 20 percent by 2020.

Standardization, Carey says, should streamline the project development process, reduce costs and improve access to financing by making it easier for banks to evaluate risk. “Having to have specialized engineering for every microgrid is obviously a very costly proposition and a big burden to their deployment,” says Marnay.

At the end of the day, microgrids threaten to upend the centralized generation and distribution model that has dominated the U.S. electricity system for more than a century, and utilities have been slow to embrace the new model. “Utilities see microgrids as a threat to their revenue streams,” says Carey. Yet the benefits of having power supplies that can split off or sync up with the traditional grid as needed are increasingly winning over utilities like SDG&E. Says Carey, “It should allow them to keep the grid more stable.”