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<strong>The</strong> <strong>Smartness</strong> <strong>Barometer</strong> -<br />
<strong>How</strong> <strong>to</strong> <strong>quantify</strong> <strong>smart</strong> <strong>grid</strong> projects and<br />
interpret results<br />
--------------------------------------------------------------------------------------------------<br />
A EURELECTRIC paper<br />
F e b r u a r y 2 0 1 2
<strong>The</strong> Union of the Electricity Industry–EURELECTRIC is the sec<strong>to</strong>r association representing the common interests of<br />
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provide effective representation for the industry in public affairs, and <strong>to</strong> promote the role of electricity both in the<br />
advancement of society and in helping provide solutions <strong>to</strong> the challenges of sustainable development.<br />
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Commitment, innovation, pro-activeness<br />
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Transparency, ethics, accountability<br />
Dépôt légal: D/2012/12.105/8
<strong>The</strong> <strong>Smartness</strong> <strong>Barometer</strong> – <strong>How</strong> <strong>to</strong> <strong>quantify</strong> <strong>smart</strong><br />
<strong>grid</strong> projects and interpret results<br />
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DSO Coordination for <strong>smart</strong> <strong>grid</strong> Deployment<br />
LANDECK Erik (DE) Chair<br />
BIRKNER Peter (DE); BREUER Andreas (DE); CARILLO Susana (ES); DE LICHTERVELDE Ferdinand (BE); DI<br />
NAPOLI Mariangela (IT); DISKIN Ellen (I E); EFTHYMIOU Venizelos (CY); GLEICH Tomas (CZ); HALLBERG Per<br />
(SE); JASPER Jörg (DE); KABS Joachim (DE); KOPONEN Ari (FI); KUDRNAC Jiri (CZ); LEFORT Michel (BE);<br />
MERKEL Marcus (DE); MESSIAS António Aires ( PT); NORDENTOFT Niels Christian (DK); PETRONI Paola Lucia<br />
(IT); PETTERSSON Anders (SE); POSTMA Andre (NL); REISSING Thomas (DE); ROZYCKI Artur (PL); S ANCHEZ<br />
FORNIE Miguel Angel (ES); SCHEIDA Karl (AT); SMITH Paul (GB); TENSCHERT Walter (AT); THEISEN Thomas<br />
(DE); VANBEVEREN Donald (BE); WEISS Bertram (AT)<br />
Contact:<br />
Koen Noyens, Advisor Networks Unit – knoyens@eurelectric.org
EXECUTIVE SUMMARY 5<br />
1. INTRODUCTION – IDENTIFYING THE NEED TO QUANTIFY SMART GRIDS 6<br />
1.1 WHY DO WE NEED QUANTIFICATION? 6<br />
1.2 WHAT DELIVERABLES CAN BE EXPECTED FROM SUCH QUANTIFICATION? 6<br />
1.3 WHERE TO GO WITH THE SMART GRID DEVELOPMENT: UNIVERSALLY ACCEPTED BENEFITS 8<br />
2. SMART GRID COST-BENEFIT ANALYSIS METHODOLOGY 10<br />
2.1 BACKGROUND 10<br />
2.2 BRIEF OVERVIEW OF THE EPRI METHODOLOGY 11<br />
2.3 THE DETAILED SEVEN-STEP APPROACH 12<br />
STEP 1 – DESCRIBE THE TECHNOLOGIES, ELEMENTS AND GOALS OF THE PROJECT 13<br />
STEP 2 – IDENTIFY THE SMART GRID FUNCTIONALITIES 15<br />
STEP 3 – MAP EACH FUNCTIONALITY ONTO A STANDARDISED SET OF BENEFIT TYPES 17<br />
STEP 4 – ESTABLISH THE PROJECT BASELINE 19<br />
STEP 5 – QUANTIFY AND MONETISE THE IDENTIFIED BENEFITS AND BENEFICIARIES 21<br />
STEP 6 – QUANTIFY AND ESTIMATE THE RELEVANT COSTS 25<br />
STEP 7 – COMPARE COSTS TO BENEFITS 26<br />
3. HOW TO EXTRAPOLATE PROJECT RESULTS TO THE NATIONAL LEVEL? 30<br />
3.1 THE GRID AND ITS LIMITATIONS 30<br />
3.2 STEPS TO EVALUATE BASE COST 31<br />
3.3 KEY ASSUMPTIONS 32<br />
4. CONCLUSION AND GUIDELINES 34<br />
4.1 PROJECT LEADERS: EVALUATING A PROJECT 34<br />
4.1.1 EVALUATING A COMPLETED PROJECT 34<br />
4.1.2 AIDING PROJECT PLANNING 35<br />
4.1.3 THE CRITICAL ROLE OF COST / BENEFIT ANALYSES – DEPLOYMENT PROPOSALS 36<br />
4.2 REGULATORS & POLICYMAKERS: HOW TO MAKE INFORMED INVESTMENT DECISIONS 36<br />
4.2.1 THE EVOLVING ROLE OF THE REGULATOR 36<br />
4.2.2 WHAT IS A “SMART” INVESTMENT? 37<br />
4.2.3 EXTRACTING INFORMATION FROM OTHER PROJECTS IN EUROPE AND BEYOND 37<br />
4.3 HOW DISTRIBUTION COMPANIES AND REGULATORS CAN HELP WORK TOGETHER 38<br />
4.4 EUROPEAN FUNDING SOLUTIONS 38
Executive Summary<br />
‘Smart Grid’ solutions will only be considered as alternatives <strong>to</strong> conventional network<br />
reinforcement if inves<strong>to</strong>rs can compare such investments on a cost-benefit basis. Yet such<br />
comparisons remain challenging for two reasons: the rapidly developing and largely untested<br />
nature of ‘<strong>smart</strong>’ solutions and the difficulty of comparing two inherently different types of<br />
investment both aimed at achieving the same purpose – reinforcing distribution networks <strong>to</strong><br />
increase capacity and improve power quality, supply security and efficiency.<br />
This paper details the challenge facing the electricity distribution industry in evaluating <strong>smart</strong><br />
<strong>grid</strong> investments, both demonstration projects and large-scale deployments. It explains the need<br />
for a consistent framework allowing for such evaluation and cost-benefit analysis so that<br />
industry, regula<strong>to</strong>rs or potential inves<strong>to</strong>rs can make informed decisions on the benefits and<br />
effectiveness of a ‘<strong>smart</strong>’ investment.<br />
<strong>The</strong> evaluation method presented in this document has been developed by the Electric Power<br />
Research Institute (EPRI) and has been adapted <strong>to</strong> the <strong>smart</strong>-<strong>grid</strong> work underway in Europe.<br />
Adjustments include neglecting steps deemed beyond the necessary scope of such an analysis,<br />
and adopting the terminology defined by the European Commission Expert Group 1. This aims <strong>to</strong><br />
ensure that the methodology can be applied consistently across Europe and adheres <strong>to</strong> EU<br />
standards currently under development.<br />
<strong>The</strong> proposed evaluation methodology consists of seven steps, starting from a description of a<br />
project’s goals and eventually resulting in a direct comparison of costs and benefits. <strong>The</strong> paper<br />
describes each step and then gives practical examples from the InovGrid project, an open<br />
platform integrating end users, public standards and vendors’ interoperable solutions, led by the<br />
Portuguese distribution system opera<strong>to</strong>r EDP Distribução <strong>to</strong> inform the adaption of the<br />
methodology for its application in Europe. <strong>The</strong> work builds on intensive collaboration between<br />
EURELECTRIC and the European Commission’s Joint Research Centre (JRC).<br />
<strong>The</strong> paper finds that the methodology can support distribution companies and regula<strong>to</strong>rs in<br />
evaluating and comparing different types of ‘<strong>smart</strong>’ investments, communicating their results<br />
and developing investment strategies which incorporate ‘<strong>smart</strong>’ investment options where<br />
appropriate. <strong>The</strong> methodology can clearly help <strong>to</strong> show which technological solutions work –<br />
and which do not. Moreover, it allows for meaningful comparisons between different types of<br />
projects installed in different systems across Europe. Inves<strong>to</strong>rs receive a clear idea of the value<br />
of their initial investment; and in contrast <strong>to</strong> other approaches this methodology also pinpoints<br />
who will benefit from the investment – a useful <strong>to</strong>ol for distribution companies looking <strong>to</strong><br />
reassure regula<strong>to</strong>rs that ‘<strong>smart</strong>’ <strong>grid</strong> investments will benefit society at large.<br />
<strong>The</strong> paper thus concludes that the described evaluation method is potentially suited <strong>to</strong> purpose,<br />
although the authors recognise that this is an evolving field. <strong>The</strong> JRC are currently further<br />
developing this methodology and evaluating <strong>smart</strong> <strong>grid</strong> development in Europe, and are also<br />
engaged in reconciling EU and American terminology. In the meantime, success criteria and<br />
realistic business cases based on intensive pilots are vital <strong>to</strong> raise awareness of <strong>smart</strong> <strong>grid</strong><br />
investment needs among public and private stakeholders at national and European level. <strong>The</strong><br />
methodology presented in this paper provides a basis for evaluating such pilots and for<br />
extrapolating the combined contribution of several such <strong>smart</strong> <strong>grid</strong> projects <strong>to</strong> national and<br />
European energy policy targets.<br />
5
1. Introduction – Identifying the Need <strong>to</strong> Quantify Smart Grids<br />
1.1 Why do we need quantification?<br />
<strong>The</strong> <strong>smart</strong> <strong>grid</strong> is an enabler, not an end in itself. It is accepted worldwide that an<br />
implementation of <strong>smart</strong> <strong>grid</strong>s is absolutely necessary in order <strong>to</strong> achieve the strategic<br />
targets for integration of renewable energy sources in the most effective manner, a more<br />
secure, sustainable electricity supply, optimal and efficient use of energy and full inclusion of<br />
consumers in the electricity market.<br />
At the same time, investments for the development of <strong>smart</strong> <strong>grid</strong>s should be financially<br />
sound. Market forces must see real financial returns in achieving these energy policy goals <strong>to</strong><br />
incentivise the continued significant investments which will be required over the coming<br />
decades.<br />
As a consequence, the quantification of costs, benefits and their allocation <strong>to</strong> the<br />
appropriate beneficiaries is necessary <strong>to</strong> identify and mitigate business risks and encourage<br />
inves<strong>to</strong>rs. <strong>The</strong> process proposed is a methodological framework that will provide a<br />
standardised approach for estimating the benefits and costs of <strong>smart</strong> <strong>grid</strong> demonstration<br />
projects or subsequent larger scale deployments. Policymakers, regula<strong>to</strong>rs and inves<strong>to</strong>rs are<br />
in need of such a methodology meeting the following requirements:<br />
� A fair, consistent, repeatable and methodological approach <strong>to</strong> estimate the cost<br />
and benefits of <strong>smart</strong> network pilot projects and related investments based on<br />
data from <strong>smart</strong> <strong>grid</strong> field demonstration projects;<br />
� Identification and standard definition of the various types of benefits;<br />
� A consistent and uniform approach for all projects and deployments;<br />
� Basic principles for developing (a) computational <strong>to</strong>ol(s) that all <strong>smart</strong> <strong>grid</strong><br />
stakeholders could use <strong>to</strong> determine the costs and benefits of <strong>smart</strong> <strong>grid</strong><br />
deployments.<br />
In outlining the thought process, approach, and underlying concepts and assumptions of the<br />
proposed methodology, we aim <strong>to</strong> aid the attainment of these goals and would support the<br />
creation of a computational <strong>to</strong>ol <strong>to</strong> enhance the work of the users.<br />
1.2 What deliverables can be expected from such quantification?<br />
<strong>The</strong> adopted methodology is intended as an assessment process <strong>to</strong> be universally accepted<br />
and consistently applied providing two separate deliverables. Both deliverables contribute <strong>to</strong><br />
the ‘<strong>Smartness</strong> <strong>Barometer</strong>’ concept, which captures the idea how this technological<br />
advancement in electricity <strong>grid</strong>s achieves the set strategic European policy goals:<br />
6
1. <strong>The</strong> definition of “performance indica<strong>to</strong>rs” <strong>quantify</strong>ing the extent <strong>to</strong> which a<br />
specific <strong>smart</strong> <strong>grid</strong> project is contributing <strong>to</strong> progress <strong>to</strong>ward the “ideal <strong>smart</strong><br />
<strong>grid</strong>”. 1 This output reveals <strong>to</strong> what extent a project or deployment achieves the<br />
following <strong>smart</strong> <strong>grid</strong> services (characteristics) as defined by EC expert group 1:<br />
� Integration of new users and requirements for sustainability,<br />
� Consumer inclusion,<br />
� Improving market functioning and consumer service,<br />
� Enhancing efficiency in day <strong>to</strong> day <strong>grid</strong> operation,<br />
� Enhancing better planning of future investments, and<br />
� Ensuring network security / control / quality of supply<br />
An assessment framework <strong>to</strong> qualitatively capture the impact of a <strong>smart</strong> <strong>grid</strong><br />
project on the considered electricity system (in terms of the delivery of <strong>smart</strong> <strong>grid</strong><br />
services) is recognised as an important feature, but is beyond the scope of this<br />
paper. 2 <strong>How</strong>ever, the authors recognise the importance of such a framework and<br />
the complementary value it can bring <strong>to</strong> the quantitative results of a cost-benefit<br />
analysis (CBA).<br />
2. A “Cost and Benefit analysis” assessing the profitability of a <strong>smart</strong> <strong>grid</strong> solution and<br />
associated investment. An essential outcome of this analysis is the identification of<br />
the specific beneficiaries. Benefits from <strong>smart</strong> <strong>grid</strong> investments accrue throughout<br />
the value chain from genera<strong>to</strong>rs, suppliers and cus<strong>to</strong>mers <strong>to</strong> society as a whole.<br />
This is why economic regulation defining the conditions for the so-called<br />
socialisation of a major part of the investments is key for the successful<br />
implementation of <strong>smart</strong> <strong>grid</strong>s. Too narrow a view when evaluating the cost<br />
efficiency of <strong>smart</strong> <strong>grid</strong> investments – <strong>to</strong> be undertaken mainly by DSOs – should be<br />
avoided.<br />
This paper aims <strong>to</strong> outline the first step <strong>to</strong>wards the effective attribution of costs<br />
and benefits, necessary <strong>to</strong> the development of a successful market-based approach<br />
<strong>to</strong> govern the evolution of <strong>smart</strong> <strong>grid</strong>s and achieve all related strategic policy goals.<br />
<strong>The</strong> objective is <strong>to</strong> define the methodological approach for conducting such costbenefit<br />
analyses of <strong>smart</strong> <strong>grid</strong> projects. Moreover, it provides project leaders with<br />
guidance in establishing a broad approach in their cost-benefit analyses for <strong>smart</strong><br />
<strong>grid</strong>s, taking indirect benefits and social fac<strong>to</strong>rs in<strong>to</strong> consideration.<br />
1 Important <strong>to</strong> note is that such a measurement <strong>to</strong>wards the “Ideal Grid” for a specific country should be seen<br />
as the relative and not absolute improvement. Moreover the consecutive order of functionality will not follow<br />
the same path throughout Europe; there will be "jumps".<br />
2 <strong>The</strong> EC Task Force has already elaborated an initial assessment approach <strong>to</strong> link benefits and indica<strong>to</strong>rs <strong>to</strong><br />
services and functionalities and evaluate the <strong>smart</strong>ness of a <strong>smart</strong> <strong>grid</strong> project and the merit of its deployment.<br />
European Commission Task Force for <strong>smart</strong> <strong>grid</strong>s (2010) Expert Group 1: Functionalities of <strong>smart</strong> <strong>grid</strong> and <strong>smart</strong><br />
meters.<br />
7
1.3 Where <strong>to</strong> go with the <strong>smart</strong> <strong>grid</strong> development: Universally accepted benefits<br />
In the context of this analysis, a ‘benefit’ is an impact (of a <strong>smart</strong> <strong>grid</strong> project) that is of value<br />
<strong>to</strong> any regulated or commercial body, energy consuming households or society at large. To<br />
gauge their magnitude and facilitate comparison, benefits should be quantified and<br />
expressed in monetary terms.<br />
For <strong>smart</strong> <strong>grid</strong> systems, it is well accepted that there are four fundamental categories of<br />
benefits 3 :<br />
� Economic – reduced costs, or increased production at the same cost, that result from<br />
improved utility system efficiency and asset utilisation;<br />
� Reliability and Power Quality – reduction in interruptions, service quality assistance<br />
improvement and power quality events;<br />
� Environmental – reduced impact of climate change and effects on human health and<br />
ecosystems due <strong>to</strong> pollution;<br />
� Security and Safety – improved energy security (i.e. reduced oil and gas<br />
dependence); increased cyber security and reductions in injuries, loss of life and<br />
property damage.<br />
Within each of the broad categories, there are several types of benefit and by definition they<br />
are mutually exclusive in terms of accounting for different benefit categories. <strong>How</strong>ever,<br />
<strong>smart</strong> <strong>grid</strong> functionalities that lead <strong>to</strong> one type of benefit can also lead <strong>to</strong> other types of<br />
benefits. For example, improvements that reduce distribution losses (an economic benefit)<br />
mean that pollutant emissions are reduced as well (which is an environmental benefit).<br />
Having identified the achieved benefits, it is very important <strong>to</strong> identify the beneficiaries in<br />
the process. In general, benefits are reductions in costs and damages, whether <strong>to</strong><br />
genera<strong>to</strong>rs, distribution system opera<strong>to</strong>rs, consumers or <strong>to</strong> society at large. In this<br />
evaluation process the various benefits are defined so as <strong>to</strong> avoid instances of transfer<br />
payments between these groups of beneficiaries, <strong>to</strong> avoid mistakes in the evaluation of the<br />
<strong>to</strong>tal benefits, and <strong>to</strong> illustrate benefits from the separate perspectives of each group.<br />
Broadly speaking the beneficiaries are the following:<br />
� Consumers: Consumers can balance or reduce their energy consumption with the<br />
real-time supply of energy. Variable pricing will provide consumer incentives <strong>to</strong> install<br />
their own in-home infrastructure that supports the <strong>smart</strong> <strong>grid</strong> development. <strong>The</strong><br />
<strong>smart</strong> <strong>grid</strong> information and communication infrastructure will support additional<br />
services not available <strong>to</strong>day.<br />
3 EPRI (Electric Power Research Institute) (Faruqui, A., Hledik, R.) (2010). Methodological Appr oach for<br />
Estimating the Benefits and Costs of <strong>smart</strong> <strong>grid</strong> Demonstration Projects, Palo Al<strong>to</strong>, CA: EPRI. 1020342<br />
8
� Utilities (genera<strong>to</strong>rs, transmission system opera<strong>to</strong>rs, distribution system opera<strong>to</strong>rs<br />
and suppliers): Utilities can provide more reliable energy, particularly during<br />
challenging emergency conditions, while managing their costs more effectively<br />
through efficiency and information which can be used for more effective<br />
infrastructure development, maintenance and operation.<br />
� Society: Society benefits from more reliable supplies and consistent power quality for<br />
both domestic cus<strong>to</strong>mers and all industrial sec<strong>to</strong>rs – manufacturing, services, ICT –<br />
many of which are sensitive <strong>to</strong> power outages. Renewable energy, increased demand<br />
efficiency, and electric vehicles or other distributed s<strong>to</strong>rage support will reduce<br />
environmental costs, including society’s carbon footprint.<br />
A benefit <strong>to</strong> any one of these stakeholders can in turn benefit the others. For example, those<br />
benefits that reduce costs for a DSO could lower prices, or prevent price increases, for<br />
cus<strong>to</strong>mers. <strong>How</strong>ever in such cases it is vital <strong>to</strong> ensure that benefits transferred from one<br />
party <strong>to</strong> another are not double counted. Lower costs and decreased infrastructure<br />
requirements enhance the value of electricity <strong>to</strong> consumers. Reduced costs increase<br />
economic activity which benefits society. Societal benefits of the <strong>smart</strong> <strong>grid</strong> can be indirect<br />
and hard <strong>to</strong> <strong>quantify</strong>, but cannot be overlooked.<br />
Other stakeholders also benefit from the <strong>smart</strong> <strong>grid</strong>. Regula<strong>to</strong>rs can benefit from the<br />
transparency and audit-ability of <strong>smart</strong> <strong>grid</strong> information. Vendors and integra<strong>to</strong>rs benefit<br />
from business and product opportunities around <strong>smart</strong> <strong>grid</strong> components and systems.<br />
Total benefits are the sum of the benefits <strong>to</strong> utilities, consumers and society at large –<br />
though any transfer payments between these beneficiary groups must be taken in<strong>to</strong> account<br />
and dealt with suitably. Ultimately transfer payments could be a solution <strong>to</strong> realise project<br />
financing where the global balance is positive, but where some stakeholders clearly benefit<br />
while others lose out.<br />
9
2. Smart Grid Cost-Benefit Analysis Methodology<br />
2.1 Background<br />
Over the past few years, there have been various models and constructs put forth related <strong>to</strong><br />
evaluating <strong>smart</strong> <strong>grid</strong> projects and related investments. <strong>The</strong> lack of a standard, commonly<br />
accepted opera<strong>to</strong>r-level cost-benefit framework or system has led <strong>to</strong> few effective<br />
investment analysis approaches. <strong>How</strong>ever, DSO executives and policy decision makers are in<br />
need of such a framework.<br />
Why is it so difficult?<br />
Smart <strong>grid</strong> project investment analysis is particularly difficult because it<br />
� involves a large number of technologies, programmes and operational practices;<br />
� impacts on all the operational areas of the electricity value chain in an interlinked<br />
way (transfer of costs and benefits);<br />
� requires long-term vision 4 and commitment <strong>to</strong> fully implement;<br />
� assumes active involvement of cus<strong>to</strong>mers in using new technologies and software,<br />
the reliability and extent of which is still highly uncertain.<br />
Moreover, variation among European DSOs in existing <strong>grid</strong> infrastructure (e.g. current<br />
communications and metering systems, network age and condition) or service area<br />
characteristics (e.g. cus<strong>to</strong>mer geographic density and consumer end-use loads) – even within<br />
a single country – is so great that decision makers so far could not rely on existing studies<br />
from other regions or DSOs <strong>to</strong> justify <strong>smart</strong> <strong>grid</strong> investments.<br />
From an economic point of view, certain challenges arise when attempting <strong>to</strong> apply<br />
traditional cost-benefit analysis in the context of <strong>smart</strong> <strong>grid</strong> investments. Evaluating <strong>smart</strong><br />
<strong>grid</strong> project investments can be different from traditional investment analyses:<br />
� All benefits related <strong>to</strong> <strong>smart</strong> <strong>grid</strong> investments may not be borne by the investing<br />
party and some additional costs required <strong>to</strong> realise a benefit may be borne by other<br />
parties. Should these additional costs and benefits be incorporated in<strong>to</strong> the analysis?<br />
If so, how will all costs and benefits be attributed <strong>to</strong> the appropriate parties, in<br />
modelling and analysis?<br />
� Uncertainty with respect <strong>to</strong> the magnitude of benefit streams is not unique <strong>to</strong> <strong>smart</strong><br />
<strong>grid</strong>s. <strong>How</strong>ever, some potential metrics associated with <strong>smart</strong> <strong>grid</strong>s present<br />
particularly difficult issues for accurate quantification (e.g. environmental impact,<br />
reliable levels of response). <strong>The</strong> rationale and assumptions made for some chosen<br />
parameters can greatly affect the outcome of the analysis.<br />
4 In ’10 Steps <strong>to</strong> Smart Grids – EURELCTRIC DSOs’ Ten-Year Roadmap for Smart Grid Deployment in the EU’, EURELECTRIC<br />
DSOs outline the 10 steps that are required for implementing <strong>smart</strong> <strong>grid</strong>s in Europe.<br />
10
What is necessary?<br />
Work must be done <strong>to</strong> define a methodological framework of estimating, calculating and<br />
assessing <strong>smart</strong> <strong>grid</strong> benefits and cost, including evaluation of less quantifiable benefits.<br />
EURELECTRIC, as a stimula<strong>to</strong>r of the development of <strong>smart</strong> <strong>grid</strong>s in society, takes the<br />
opportunity <strong>to</strong> address this lack and proposes in this section a common methodological<br />
framework that allows assessment of European <strong>smart</strong> <strong>grid</strong> project results.<br />
<strong>The</strong> basic structure of the proposed framework relies on the work of the US Energy Power<br />
Research Institute (EPRI). EPRI published a report in January 2010 on an approach for<br />
evaluating the US Department of Energy’s <strong>smart</strong> <strong>grid</strong> demonstration projects. 5 It builds upon<br />
many previous studies and represents the most comprehensive approach <strong>to</strong> <strong>smart</strong> <strong>grid</strong><br />
evaluation <strong>to</strong> date.<br />
In an initiative <strong>to</strong> develop and fine-tune this methodology for the European <strong>smart</strong> <strong>grid</strong><br />
dimension recognising EU-specific drivers and priorities, EURELECTRIC collaborated with the<br />
European Commission’s Joint Research Centre <strong>to</strong> use a running <strong>smart</strong> <strong>grid</strong> project as a case<br />
study. <strong>The</strong> InovGrid project of the Portuguese distribution system opera<strong>to</strong>r EDP Distribução<br />
was selected from the JRC catalogue for application of the EPRI methodology <strong>to</strong> its full<br />
extent. 6<br />
Through the buy-in of the Inov<strong>grid</strong> management and the detailed and extensive preliminary<br />
data provision over a period of six months, real project experience proved invaluable in<br />
illustrating the steps of the cost-benefit analysis methodology. For the first time, the focus of<br />
the <strong>smart</strong> <strong>grid</strong> evaluation debate lay on sound and tangible estimated costs and benefits<br />
rather than addressing the theoretical framework in isolation.<br />
<strong>How</strong>ever the authors remain fully aware of the limits of such a case study and urge readers<br />
<strong>to</strong> bear this in mind. A single experience in <strong>smart</strong> <strong>grid</strong> operations cannot be used as a<br />
universal reference <strong>to</strong> assess the impact of such solutions on the future power system. Given<br />
the wide variety of existing pre-conditions for European utilities implementing <strong>smart</strong> <strong>grid</strong><br />
projects, variation with alternative solutions deployed will always exist.<br />
2.2 Brief overview of the EPRI methodology<br />
<strong>The</strong> EPRI approach provides a framework for evaluating economic, environmental, reliability,<br />
and safety and security benefits from the perspective of the involved stakeholders. It also<br />
indicates the level of certainty of achieving estimated benefits and focuses on identifying<br />
benefits that are directly measurable, easy <strong>to</strong> understand and quantifiable in monetary<br />
terms.<br />
5 EPRI (Electric Power Research Institute) (Faruqui, A., Hledik, R.) (2010). Methodological Approach for Estimating the<br />
Benefits and Costs of Smart Grid Demonstration Projects, Palo Al<strong>to</strong>, CA: EPRI. 1020342<br />
6 <strong>The</strong> methodology is the first case study that has been chosen. Other <strong>smart</strong> <strong>grid</strong> case studies from the JRC catalogue will be<br />
tested in the near future.<br />
11
<strong>The</strong> approach outlined in the report can be applied in generic form <strong>to</strong> most <strong>smart</strong> <strong>grid</strong><br />
investments. <strong>The</strong> EPRI methodology can be divided in<strong>to</strong> three major steps as follows:<br />
1. Characterisation of the project<br />
2. Quantification and monetisation of benefits<br />
3. Comparison of costs and benefits<br />
<strong>The</strong> joint effort between Members of EURELECTRIC, JRC and EDP Distribução resulted in a<br />
methodological framework <strong>to</strong> systematically estimate the different benefits of <strong>smart</strong> <strong>grid</strong><br />
projects in seven steps. <strong>The</strong> methodology focuses on the identification and definition of<br />
benefits through a sequential, logical estimation process.<br />
Drawing from the InovGrid case study and experiences, the logical flow of the developed<br />
methodological framework is shown in the figure below, which outlines the proposed<br />
process for identifying benefits and estimating their monetary value. <strong>The</strong> final methodology<br />
foresees seven building blocks:<br />
2.3 <strong>The</strong> detailed seven-step approach<br />
Figure 1 – Cost-Benefit Analysis Framework<br />
12
This section describes the overall seven-step structure of the cost-benefit methodological<br />
framework. Each step covers the underlying principles and recommendations on how the<br />
framework should be used. Throughout the section examples from the InovGrid project<br />
illustrate how the methodology can be applied in practice. We suggest the reader<br />
alsoconsult the complementary JRC report 7 ‘Guidelines for conducting a cost-benefit analysis<br />
of <strong>smart</strong> <strong>grid</strong> projects’, which covers more examples and addresses quantitative aspects (in<br />
its annexes) related <strong>to</strong> the calculation and estimation of costs/benefits.<br />
STEP 1 – Describe the technologies, elements and goals of the project<br />
<strong>The</strong> initial step in estimating the benefits of a project is <strong>to</strong> describe it by identifying the goal<br />
of the project and the <strong>smart</strong> <strong>grid</strong> assets.<br />
A. Goal<br />
As a first step it is important <strong>to</strong> describe the high-level goals of the overall solution and how<br />
the installed components will allow the objectives of the project <strong>to</strong> be addressed. It should<br />
be clear who the stakeholders are and how their needs are addressed.<br />
InovGrid illustration – Goal of the project<br />
<strong>The</strong> INOVGRID project 8 aims at replacing the current LV meters with electronic devices called EDP Boxes<br />
(EB), using AMM (Au<strong>to</strong>mated Meter Management) standards. <strong>The</strong> EB is a gateway <strong>to</strong> energy management,<br />
which includes the functions of <strong>smart</strong> metering, has the capacity of local interaction with other devices<br />
through an interface Home Area Network (HAN).<br />
Local control equipment (DTC -Distribution Transformer Controller) in secondary substations performs<br />
au<strong>to</strong>mation functions for the distribution transformer and collects information from the EDP Boxes and<br />
sends them <strong>to</strong> the upstream systems.<br />
<strong>The</strong> project will integrate distributed generation (DG), Electric vehicles charging network and demand side<br />
management in network operation, providing a new set of system ancillary services. <strong>The</strong> project aims at<br />
demonstrating that a properly developed integration <strong>to</strong>ol can facilitate the integration of DG, a more<br />
efficient use of energy and a reduction in CO2 emissions, without compromising security of operation and<br />
quality of supply.<br />
7 European Commission – Joint Research Centre Institute for Energy and Transport, 2012. Guidelines for<br />
conducting cost-benefit analysis of <strong>smart</strong> <strong>grid</strong> projects”, Joint Research Centre Reference Report, February<br />
2012.<br />
8 http://www.inovcity.pt/en/Pages/homepage.aspx<br />
13
B. Smart <strong>grid</strong> assets<br />
Figure 2 – InovGrid project – technical architecture<br />
Smart <strong>grid</strong> assets consist of the technologies, devices, and equipment that are purchased,<br />
installed, and made operational for the <strong>smart</strong> <strong>grid</strong> project. Assets could include, for example,<br />
in-home displays, load control devices, voltage control devices, a communications network<br />
and associated infrastructure, cyber security upgrades, enhanced fault detection technology<br />
or advanced metering infrastructure.<br />
It is important <strong>to</strong> identify what specific assets are installed, where they are installed, how<br />
the system is affected and what they do.<br />
InovGrid illustration - What <strong>smart</strong> <strong>grid</strong> technologies are installed?<br />
Distribution<br />
Transformer<br />
Controller (DTC)<br />
DTC Cell Module –<br />
Distribution<br />
Au<strong>to</strong>mation<br />
DTC Power Quality<br />
Module<br />
Local control equipment will be installed in distribution transformer<br />
stations, the main components being a measurement module, control<br />
module and communications module. <strong>The</strong> main functions are, collecting<br />
data from EB and MV/LV substation, data analysis functions and <strong>grid</strong><br />
moni<strong>to</strong>ring.<br />
Module that enables turning on and off remotely or locally, the various<br />
independent circuits of the MV-LV substation.<br />
Module that allows the recording and reporting of the quality characteristic<br />
values of the wave voltage (rms value, flicker, voltage dips, harmonics),<br />
providing information and generating alarm events<br />
Furthermore, assets can include energy resources that interact with the <strong>grid</strong>, including<br />
distributed generation, stationary electricity s<strong>to</strong>rage, plug-in electric vehicles, and <strong>smart</strong><br />
14
appliances. <strong>The</strong>se resources can generally communicate and make business decisions or<br />
receive commands based on signals from the <strong>grid</strong>, cus<strong>to</strong>mers or other opera<strong>to</strong>rs like<br />
retailers, using either integrated technology or other assets of the project.<br />
Each of the deployed assets will produce a unique list of possible functionalities. Detailed<br />
fact sheets of the installed products can also help <strong>to</strong> define those functionalities and<br />
illustrate their role in the project.<br />
STEP 2 – Identify the <strong>smart</strong> <strong>grid</strong> functionalities<br />
Once identified, these assets can be integrated <strong>to</strong> enhance the delivery and use of electricity<br />
by enabling <strong>smart</strong> <strong>grid</strong> functionalities. Functionalities describe the enhanced capabilities<br />
provided by <strong>smart</strong> <strong>grid</strong> assets for delivering electricity across the <strong>grid</strong> from power plants <strong>to</strong><br />
consumers.<br />
Expert Group 1 (EG1) of the EC Smart Grid Task Force has defined the <strong>smart</strong> <strong>grid</strong> in terms of<br />
six high-level characteristics (referred <strong>to</strong> in 1.2 above) that are delivered through 33 specific<br />
network functionalities.<br />
A. Enabling the network <strong>to</strong> integrate users with new requirements<br />
1. Facilitate connections at all voltages / locations for any kind of devices<br />
2. Facilitate the use of the <strong>grid</strong> for the users at all voltages/locations<br />
3. Use of network control systems for network purposes<br />
4. Update network performance data on continuity of supply and voltage quality<br />
B. Enhancing efficiency in day-<strong>to</strong>-day <strong>grid</strong> operation<br />
5. Au<strong>to</strong>mated fault identification / <strong>grid</strong> reconfiguration reducing outage times<br />
6. Enhance moni<strong>to</strong>ring and control of power flows and voltages<br />
7. Enhance moni<strong>to</strong>ring and observability of <strong>grid</strong>s down <strong>to</strong> low voltage levels<br />
8. Improve moni<strong>to</strong>ring of network assets<br />
9. Identification of technical and non technical losses by power flow analysis<br />
10. Frequent information exchange on actual active/reactive generation/consumption<br />
C. Ensuring network security, system control and quality of supply<br />
11. Allow <strong>grid</strong> users and aggrega<strong>to</strong>rs <strong>to</strong> participate in ancillary services market<br />
12. Improved operation schemes for voltage/current control taking in<strong>to</strong> account ancillary services<br />
13. Intermittent sources of generation <strong>to</strong> contribute <strong>to</strong> system security<br />
14. System security assessment and management of remedies<br />
15. Moni<strong>to</strong>ring of safety particularly in public areas<br />
16. Solutions for demand response for system security in required time<br />
15
D. Better planning of future network investment<br />
17. Better models of DG, s<strong>to</strong>rage, flexible loads, ancillary services<br />
18. Improve asset management and replacement strategies<br />
19. Additional information on <strong>grid</strong> quality and consumption by metering for planning<br />
E. Improving market functioning and cus<strong>to</strong>mer service<br />
20. Participation of all connected genera<strong>to</strong>rs in the electricity market<br />
21. Participation of VPPs and aggrega<strong>to</strong>rs in the electricity market<br />
22. Facilitate consumer participation in the electricity market<br />
23. Open platform (<strong>grid</strong> infrastructure) for EV recharge purposes<br />
24. Improvement <strong>to</strong> industry systems (for settlement, system balance, scheduling)<br />
25. Support the adoption of intelligent home / facilities au<strong>to</strong>mation and <strong>smart</strong> devices<br />
26. Provide <strong>to</strong> <strong>grid</strong> users individual advance notice for planned interruptions<br />
27. Improve cus<strong>to</strong>mer level reporting in occasion of interruptions<br />
F. Enabling and encouraging stronger and more direct involvement of consumers in<br />
their energy usage and management<br />
28. Sufficient frequency of meter readings<br />
29. Remote management of meters<br />
30. Consumption/injection data and price signals by different means<br />
31. Improve energy usage information<br />
32. Improve information on energy sources<br />
33. Availability of individual continuity of supply and voltage quality indica<strong>to</strong>rs<br />
<strong>The</strong> functionalities defined by EG1 describe in broad terms the different ways in which <strong>smart</strong><br />
<strong>grid</strong> technology can be used <strong>to</strong> improve the reliability, efficiency, operation, and security of<br />
the electrical <strong>grid</strong>. Depending on which <strong>smart</strong> <strong>grid</strong> assets are installed, how they are<br />
combined and how they are operated in a system, different functionalities can be triggered.<br />
16
InovGrid illustration - What can the <strong>smart</strong> <strong>grid</strong> technologies do?<br />
<strong>The</strong> DTC Cell Module, which is a very specific component of the InovGrid project, allows triggering the<br />
Distribution Au<strong>to</strong>mation functionality. Looking <strong>to</strong> the functionalities defined by EG1 of the TF <strong>smart</strong><br />
<strong>grid</strong>s, following functionalities out of the list are activated<br />
(3) Use of network control systems for network purposes<br />
(5) Au<strong>to</strong>mated fault identification/<strong>grid</strong> reconfiguration reducing outage times<br />
Figure 3 – Mapping assets <strong>to</strong> functionalities: overview matrix<br />
Figure 4 – Mapping assets <strong>to</strong> functionalities: detail<br />
STEP 3 – Map each functionality on<strong>to</strong> a standardised set of benefit types<br />
As assets are mapped <strong>to</strong> functionalities, functionalities are mapped <strong>to</strong> benefits. Each of the<br />
triggered functionalities has <strong>to</strong> be considered <strong>to</strong> determine if and how they can provide any<br />
of the <strong>smart</strong> <strong>grid</strong> benefits.<br />
<strong>The</strong> general categories of benefits include improved economic performance (such as<br />
reduced operating and maintenance costs), enhanced reliability, reduced emissions and<br />
greater energy security. <strong>The</strong> EPRI methodology has developed a complete list of four benefit<br />
17
categories comprising 22 specific benefits. This has been adopted as a comprehensive list 9<br />
that is also suitable for use in Europe:<br />
Economic<br />
Reliability<br />
Improved Asset<br />
Utilization<br />
T&D Capital Saving<br />
T&D O&M Savings<br />
Optimized Genera<strong>to</strong>r Operation (Utilities)<br />
Deferred Generation Capacity Investments (Utilities)<br />
Reduced Ancillary Service Cost (Utilities)<br />
Reduced Congestion Cost (Utilities)<br />
Deferred Transmission Capacity Investments (Utilities)<br />
Deferred Distribution Capacity Investments (Utilities)<br />
Reduced Equipment Failures (Utilities)<br />
Reduced Distribution Equipment Maintenance Cost (Utilities)<br />
Reduced Distribution Operation Cost (Utilities)<br />
Reduced Meter Reading Cost (Utilities)<br />
<strong>The</strong>ft Reduction Reduced Electricity <strong>The</strong>ft (Utilities)<br />
Energy Efficiency Reduced Electricity Losses (Consumer)<br />
Recovered Revenue Detection of anomalies relating Contracted Power (Utilities)<br />
Electricity Cost Savings Reduced Electricity Cost (Consumer)<br />
Power Interruptions<br />
Power Quality<br />
Environmental Air Emissions<br />
Security Energy Security<br />
Reduced Sustained Outages (Consumer)<br />
Reduced Major Outages (Consumer)<br />
Reduced Res<strong>to</strong>ration Cost (Utilities)<br />
Reduced Momentary Outages (Consumer)<br />
Reduced Sags and Swells (Consumer)<br />
Reduced CO2 Emissions (Society)<br />
Reduced Sox, Nox, and PM-10 Emissions (Society)<br />
Reduced Oil Usage (Society)<br />
Reduced Wide-scale Blackouts (Society)<br />
Table 1 – List of Benefits<br />
<strong>The</strong> relationship between the <strong>smart</strong> <strong>grid</strong> functionalities and the expected benefits should<br />
then be illustrated in a functionalities-benefits matrix.<br />
9 <strong>The</strong>se benefits differ from the ones published by ERGEG and the EC Task Force <strong>smart</strong> <strong>grid</strong>s. <strong>The</strong>se benefits can<br />
easily be monetized. For a description of the benefits, we refer <strong>to</strong> Annex I of the JRC report ‘Guidelines for<br />
conducting a cost-benefit analysis of <strong>smart</strong> <strong>grid</strong> projects’.<br />
18
InovGrid illustration - What benefit results from the technology?<br />
<strong>The</strong> ’Use of network control systems for network purposes’ (3) <strong>smart</strong> <strong>grid</strong> functionality can deliver a<br />
benefit like Reduced Distribution Operations Costs: it refers <strong>to</strong> meter or repair operations that can<br />
now be performed remotely instead of sending service workers.<br />
<strong>The</strong> ‘Au<strong>to</strong>mated fault identification/<strong>grid</strong> reconfiguration reducing outage times’ (5) <strong>smart</strong> <strong>grid</strong><br />
functionality can deliver a benefit like Reduced Res<strong>to</strong>ration Costs: by more quickly and precisely<br />
locating an clearing faults, field service workers can spend less time searching for the cause of the<br />
faults. It is also possible that by better isolating the fault, less damage occurs.<br />
Matching each functionality with one or more benefits from the list requires thorough analysis and a<br />
good deal of thinking.<br />
Figure 5 – Mapping functionalities <strong>to</strong> benefits<br />
STEP 4 – Establish the project baseline<br />
<strong>The</strong> implementation of a <strong>smart</strong> <strong>grid</strong> project incurs costs and delivers benefits that have <strong>to</strong> be<br />
compared with the scenario had the project not taken place. It is therefore essential for any<br />
cost-benefit analysis <strong>to</strong> define and characterise the baseline against which all other aspects<br />
of the analysis are compared.<br />
<strong>The</strong> baseline encompasses all the quantitative data that is needed <strong>to</strong> represent the current<br />
situation. Since all cost-benefit analyses are based on measuring or assessing change, two<br />
cases are required <strong>to</strong> measure the change that is <strong>to</strong> be assessed. <strong>The</strong> EPRI methodology puts<br />
forward the two types of states of the system necessary <strong>to</strong> start the evaluation:<br />
19
� <strong>The</strong> Business as Usual (BAU) scenario 10 : the baseline (or control) conditions that<br />
reflect what the system condition would have been without the <strong>smart</strong> <strong>grid</strong> system in<br />
place<br />
� <strong>The</strong> <strong>smart</strong> <strong>grid</strong> scenario: <strong>The</strong> realised and measured conditions with the <strong>smart</strong> <strong>grid</strong><br />
system installed<br />
<strong>The</strong> quantification of a specific benefit or cost, as explained in the next step, is then the<br />
incremental change in that cost and benefit metric between BAU and the <strong>smart</strong> <strong>grid</strong><br />
scenario.<br />
<strong>The</strong>re might be a number of candidate baselines for each benefit, and the <strong>smart</strong> <strong>grid</strong> project<br />
will have <strong>to</strong> select the baseline that is viewed as the most representative of the state of the<br />
<strong>grid</strong> had the <strong>smart</strong> <strong>grid</strong> project not been implemented. Important fac<strong>to</strong>rs that have <strong>to</strong> be<br />
taken in<strong>to</strong> account when defining the baseline include, inter alia, extreme events 11 , inflation,<br />
demand growth, load growth, evolution of electricity prices and final date of the project.<br />
InovGrid illustration – set the right baseline <strong>to</strong> measure the benefit<br />
Example benefit 1: Reduced Distribution Maintenance cost<br />
BAU condition Direct costs related <strong>to</strong>:<br />
- the maintenance of transformers, secondary substations<br />
- the breakdown of transformers<br />
- the theft of transformers at secondary substations<br />
Smart Grid condition Estimated reduction in maintenance with InovGrid infrastructure:<br />
- remotely control and moni<strong>to</strong>r asset condition and utilization,<br />
avoiding side visit related costs<br />
- better information on power flow and distribution load, implying<br />
less breakdown of transformers<br />
- sensors on the secondary substations that warn in case of the<br />
decreasing thefts<br />
Example benefit 2: Reduced Technical Losses<br />
BAU condition Estimation of the <strong>to</strong>tal amount of losses (in %) at Distribution and<br />
Transmission level, corresponding <strong>to</strong> <strong>to</strong>tal monetized value for the<br />
considered period.<br />
Smart Grid condition Estimated reduction in technical losses due <strong>to</strong>:<br />
- energy efficiency (consumption reduction and peak load<br />
transfer)<br />
- new capacity <strong>to</strong> control the reactive power level<br />
10<br />
<strong>The</strong> analysis should not be always based on a single BAU scenario; it can be useful <strong>to</strong> consider a limited<br />
number of options for the BAU scenario.<br />
11<br />
“Extreme events” could not be assumed in modelling a baseline scenario due <strong>to</strong> their sporadic and<br />
unpredictable nature. <strong>How</strong>ever, if an extreme event occurs over the period where the <strong>smart</strong> <strong>grid</strong> project was in<br />
operation and measurements were made, this will likely impact on the results of the “Smart Grid Scenario”.<br />
Thus, if possible, the impact of the same event should be built in<strong>to</strong> the BAU scenario. <strong>The</strong> accuracy of this<br />
would depend on there being his<strong>to</strong>rical evidence of how the system has dealt with such events in the past.<br />
20
STEP 5 – Quantify and monetise the identified benefits and beneficiaries<br />
Quantifying the benefits in this case means “measuring the effects or outcomes that the<br />
project will deliver.” <strong>The</strong> challenge lies in evaluating these effects in monetised terms. <strong>The</strong><br />
metrics needed <strong>to</strong> monetise the benefits may be quantified in terms of physical units ( e.g.<br />
reduction in kWh). <strong>The</strong> quantified benefits should in turn be monetised by applying a cost<br />
per unit (e.g. €/kWh).<br />
Every identified benefit requires an approach and data for the calculation of both the BAU<br />
condition and the <strong>smart</strong> <strong>grid</strong> condition. <strong>The</strong> incremental monetary change between both<br />
conditions can in general be expressed as:<br />
Value (€) = [Condition]BAU – [Condition]SG<br />
InovGrid illustration – what is the benefit worth?<br />
Reduced Local Meter Operations Costs (Benefit)<br />
Rationale:<br />
Figure 6 – Reduced Local Meter Operations Cost (Benefit)<br />
� <strong>The</strong> BAU condition represents the <strong>to</strong>tal costs related <strong>to</strong> local meter operations<br />
without InovGrid infrastructure in place.<br />
� <strong>The</strong> benefit is expressed as an incremental cost reduction referring <strong>to</strong> meter<br />
operations that now can be performed remotely with InovGrid infrastructure (e.g.<br />
change in contracted power, change of tariff plan, switching,<br />
connection/disconnection, etc.).<br />
� It is assumed a communications success rate of around 95%.<br />
21
A. Externalities - Parameter Values for Monetisation<br />
When calculating benefits, it is clear that some benefits, such as reduced emissions or<br />
reduced damages <strong>to</strong> end-users from power interruptions, are difficult <strong>to</strong> monetise. A project<br />
would, for example, need <strong>to</strong> estimate the emissions before the project on the electricity<br />
generated for the area under study, and after the <strong>smart</strong> <strong>grid</strong> investments are in place. In this<br />
respect the choice of the right parameter values is important. 12<br />
On <strong>to</strong>p of that, the project may deliver benefits that cannot be accurately monetised. <strong>The</strong>se<br />
benefits include, inter alia, new services and products offered, vehicle-<strong>to</strong>-<strong>grid</strong> services, job<br />
creation and new business opportunities. In general, they benefit the public or society at<br />
large. <strong>The</strong>y should not be overlooked and should be taken, quantitatively or qualitatively,<br />
in<strong>to</strong> account in the <strong>to</strong>tal <strong>smart</strong> <strong>grid</strong> project assessment.<br />
<strong>The</strong> following benefits require specific attention:<br />
Reliability and power quality benefits<br />
To monetise reliability and power quality benefits, the most common approach is <strong>to</strong> apply<br />
the cost per un-served kilowatt-hour (or cus<strong>to</strong>mer hour depending on regula<strong>to</strong>ry<br />
framework) from the interruption-cost estimates. Benefits calculated from this approach are<br />
a direct function of the change in the number of interrupted hours (from what is<br />
experienced under a baseline conditions <strong>to</strong> what is experienced after <strong>smart</strong> <strong>grid</strong> investments<br />
are made). 13<br />
Environmental benefits<br />
To the extent that they can be reasonably quantified (and that they can be attributed <strong>to</strong> the<br />
<strong>smart</strong> <strong>grid</strong> investment), environmental benefits should be quantified, monetised in the costbenefit<br />
framework and designated a societal benefit. In some cases, environmental benefits<br />
can be estimated based on the average cost of installing remediation equipment as an<br />
alternative, such as emission reduction technology. In other cases, there are market<br />
instruments from which the benefits can be readily calculated (e.g. spot and future values of<br />
allowances traded in market exchanges).<br />
Societal benefits<br />
From an economist’s viewpoint, substantial benefits accrue <strong>to</strong> consumers and, more<br />
interestingly, <strong>to</strong> third parties because of positive externalities created from a <strong>smart</strong> <strong>grid</strong><br />
implementation. <strong>The</strong> analysis should include a unique list of societal benefits and internalise<br />
all externalities, thereby understanding and valuating the community welfare effects.<br />
System opera<strong>to</strong>rs and regula<strong>to</strong>rs should ultimately include benefits with a broader societal<br />
impact in their assessments. Some typical benefits include:<br />
12<br />
Annex II of the JRC report offers an approach for <strong>quantify</strong>ing and monetizing <strong>smart</strong> <strong>grid</strong> benefits illustrated<br />
by parameters.<br />
13<br />
Sullivan, M.M., Mercurio, M., Schellenberg, J. (2009) “Estimated Value of Service Reliability for Electric Utility<br />
Cus<strong>to</strong>mers in the United States,” Report LBNL-2132E, prepared for the Office of Electricity Delivery and Energy<br />
Reliability, U.S. Department of Energy, Berkeley, CA: Lawrence Berkeley National Labora<strong>to</strong>ry, June 2009.<br />
22
� Environmental and health benefits due <strong>to</strong> decreased peak electricity generation and<br />
the associated release of pollutants in<strong>to</strong> the atmosphere ( as peaking capacity is<br />
generally carbon-intensive rather than renewable).<br />
� New industries can develop <strong>to</strong> deliver a whole new spectrum of products ( prepayment,<br />
demand response programmes), energy efficiency applications and new<br />
technologies (<strong>smart</strong> appliances, s<strong>to</strong>rage, etc.) . Smart <strong>grid</strong> projects could leverage<br />
innovation in distinct areas like electric vehicles, renewables, distributed generation<br />
and energy efficiency.<br />
� Sustained job creation: including direct utility jobs created by <strong>smart</strong> <strong>grid</strong> programmes<br />
(new skills, jobs created in the broad “energy services” sec<strong>to</strong>r), non-utility <strong>smart</strong>-<strong>grid</strong><br />
related jobs (contrac<strong>to</strong>rs, technology design, manufacturing, for example in new<br />
industry lines like plug-in electric hybrid vehicles).<br />
B. Beneficiaries<br />
When conducting the analysis, it is of extreme importance <strong>to</strong> take in<strong>to</strong> consideration the<br />
complete value chain and all the effects that a society experiences from producing and<br />
consuming electricity in the <strong>smart</strong> <strong>grid</strong> deployment, and not only the effects on the<br />
genera<strong>to</strong>rs that produce electricity and their registered consumers who consume<br />
electricity. Benefits need <strong>to</strong> be clearly allocated <strong>to</strong> their beneficiaries.<br />
InovGrid illustration - Beneficiaries<br />
Figure 7– Benefits accrue through the value chain: ESCO, DSO, Consumer, Producer, Regula<strong>to</strong>r<br />
23
Where <strong>smart</strong> <strong>grid</strong> investments are <strong>to</strong> be made by distribution companies, it is vital that<br />
regula<strong>to</strong>rs bear the relevant beneficiaries in mind. Increasingly there are examples of the<br />
DSO bearing significant costs which will be recovered by other stakeholders than the DSO<br />
who made the investment. This is for example the case in the cost-benefit analysis<br />
performed by the Irish energy regula<strong>to</strong>r (CER) , facilitated by ESB Networks, of a national<br />
<strong>smart</strong> metering rollout based on a large-scale test deployment over two years. As illustrated<br />
below, although there was a significant net benefit <strong>to</strong> society, the DSO experienced a<br />
financial loss.<br />
Background:<br />
Figure 8 - NPV benefits of <strong>smart</strong> metering in Ireland (€m), as determined by the Irish CER<br />
This study was based on the full deployment of <strong>smart</strong> metering in Ireland, with<br />
installation beginning in Q3 2014 and continuing until the end of 2017. <strong>The</strong> benefits<br />
presented here are the Net Present Value (NPV) in 2011 based on cash flows 2011-<br />
2032. <strong>The</strong> costs and benefits included are those which are robustly quantifiable – a<br />
range of less reliably quantifiable benefits were also taken in<strong>to</strong> consideration in<br />
reporting but not included in calculations.<br />
Amongst these benefits was an expectation that by the end of the CBA period CO2<br />
emissions would be 100,000-110,000 <strong>to</strong>nnes below baseline each year and annual SO2<br />
emissions lower by 117-129 <strong>to</strong>nnes. Quantified benefits pertaining <strong>to</strong> the cus<strong>to</strong>mer<br />
and distribution system opera<strong>to</strong>r included efficiency and peak shifting such that<br />
cus<strong>to</strong>mer bills are reduced and distribution capacity uprates may be deferred. <strong>The</strong><br />
expected cus<strong>to</strong>mer behaviour was based on an 18 month cus<strong>to</strong>mer behavioural trial<br />
with <strong>smart</strong> metering and a range of stimuli including in-home displays, web portals,<br />
variable tariffs, higher levels of billing information and more regular billing.<br />
24
STEP 6 – Quantify and estimate the relevant costs<br />
<strong>The</strong> relevant costs of a project are those incurred <strong>to</strong> deploy the project, relative <strong>to</strong> the<br />
baseline. <strong>The</strong> complete picture of costs is required <strong>to</strong> determine if the project has delivered<br />
a positive return on investment and, if so, at what stage during or after deployment the<br />
cumulative spend matched the benefits accrued.<br />
EPRI provides some guidelines when defining the appropriate costs:<br />
� Cost data can come directly from the project, estimated or tracked by the<br />
inves<strong>to</strong>r;<br />
� Capital costs are amortised over time; each project has <strong>to</strong> estimate its activitybased<br />
costs, using its approved accounting procedures for handling capital costs,<br />
debit, depreciation, and taxes;<br />
� Both baseline and actual project costs should be tracked, with a distinction<br />
between costs that would normally be incurred in a-scale investment and those<br />
due <strong>to</strong> the RD&D aspects of the project.<br />
Moreover, it is important <strong>to</strong> note that costs should always be estimated and/or calculated<br />
on the same time intervals for which benefits are calculated. In general, following costs<br />
could be considered:<br />
Category Type of Cost<br />
Programme Planning and administration<br />
Smart Grid programme implementation<br />
Marketing<br />
Measurement, verification, analysis<br />
Participant incentive payments<br />
Capital investments Generation<br />
Transmission<br />
Distribution<br />
Other<br />
Operation & maintenance Generation<br />
Ancillary service<br />
Transmission<br />
Distribution<br />
Meter reading<br />
Participant incentive payments<br />
Losses and theft Value of losses<br />
Value of theft<br />
Reliability Res<strong>to</strong>ration costs<br />
Environmental costs CO2 control equipment and operation<br />
CO2 emission permits<br />
SO2, NOx, PM control equipment and operation<br />
SO2, NOx emission permits<br />
Energy security Cost of oil consumed <strong>to</strong> generate power<br />
Cost of gasoline, diesel and other petroleum products<br />
Costs <strong>to</strong> res<strong>to</strong>re wide-area blackouts if any actually occur during the<br />
project period<br />
Research and development R&D costs<br />
Table 2 – Overview of costs<br />
25
InovGrid illustration - Cost of Action tracked<br />
For the estimation of relevant costs of the InovGrid project, EDPD made a recent market consultation.<br />
Other costs were measured by the company and tracked in their accounting notes.<br />
Figure 9 – Cost of Action tracked for the InovGrid project<br />
STEP 7 – Compare costs <strong>to</strong> benefits<br />
Once costs and benefits have been estimated, they need <strong>to</strong> be compared in order <strong>to</strong><br />
evaluate the cost-effectiveness of the project. This comparison could be done by using one<br />
of the following universally accepted approaches (also put forward by the EPRI<br />
methodology):<br />
- Annual comparison: Compiling the annual benefits and costs over the duration of<br />
the project – i.e. the differences compared with the BAU condition for both benefits<br />
and costs for each year of the study period.<br />
- Cumulative comparison: Presenting costs and benefits cumulatively over time, with<br />
each year’s costs or benefits being the sum of that year’s value plus the value of all<br />
prior years. This approach helps identifying the ‘break-even’ point in time when<br />
benefits exceed costs.<br />
- Net present value (NPV): Calculating the net present value, in which benefits minus<br />
costs each year of the project are discounted using an agreed discount rate. <strong>The</strong> NPV<br />
represents the <strong>to</strong>tal discounted value of the project – i.e. the <strong>to</strong>tal amount by which<br />
benefits exceed costs after accounting for the time value of money.<br />
- Benefit-cost ratio: This method shows the ratio of benefits <strong>to</strong> costs. It represents the<br />
size of benefits relative <strong>to</strong> that of the costs. If the ratio is greater than one, the<br />
project is cost-effective.<br />
All of the above approaches have their individual benefits, but it is up <strong>to</strong> the individual<br />
project team representing the interests of the financing consortium <strong>to</strong> decide what<br />
methodology <strong>to</strong> use and what <strong>to</strong> present <strong>to</strong> whom. Each approach provides added value for<br />
the different interested stakeholders, being the shareholders, regula<strong>to</strong>rs and policymakers.<br />
26
InovGrid illustration - Annual Comparison<br />
<strong>The</strong> annual comparison allows identifying in which years the costs exceed benefits. Initial investments<br />
in the first phases of the <strong>smart</strong> <strong>grid</strong> deployment deliver benefits only after some time. Please note<br />
that the figures shown below are only indicative and (for confidentiality reasons) n ot represent the<br />
exact numbers of the InovGrid project.<br />
Sensitivity analysis<br />
Figure 10 – Annual comparison of costs <strong>to</strong> benefits<br />
When comparing costs <strong>to</strong> benefits, this must be carried out around certain fac<strong>to</strong>rs or<br />
parameters depending on the choice of the project coordina<strong>to</strong>rs. <strong>The</strong>se are generally<br />
parameters with a high degree of variability and/or uncertainty. Key assumptions underlying<br />
the analysis, including those that drive estimates of major cost components, should be<br />
clearly documented, and the variability or uncertainty of estimates should be incorporated<br />
in<strong>to</strong> those estimates.<br />
<strong>The</strong> proposed methodology recommends including a sensitivity analysis as part of the costbenefit<br />
information filing supporting the <strong>smart</strong> <strong>grid</strong> project investments. Indeed, different<br />
geographies and regula<strong>to</strong>ry environments will have different impacts on the cost and<br />
benefits quantification. <strong>The</strong> sensitivity analysis should:<br />
� Identify the key variables. Good candidates include the cost and reliability of<br />
technology, cus<strong>to</strong>mer behaviour change achieved, discount fac<strong>to</strong>r when calculating<br />
net present values, emission costs and reliability fac<strong>to</strong>rs, which have a wide range of<br />
potential values and are more subjective in nature.<br />
27
� Produce different cost-benefit results in order <strong>to</strong> demonstrate the impact various<br />
scenarios might have on the economic and societal profile of the <strong>smart</strong> <strong>grid</strong> project.<br />
We consider the following two fac<strong>to</strong>rs as having a high impact on the final outcome of the<br />
analysis:<br />
� Discount rate<br />
<strong>The</strong> realisation of <strong>smart</strong> <strong>grid</strong> benefits and costs may occur gradually and over extended<br />
periods of time. <strong>The</strong>refore, all cost-benefit analyses in support of a <strong>smart</strong> <strong>grid</strong> investment<br />
should reflect and adjust for the expected timing of estimated costs and benefits. <strong>The</strong> rate of<br />
return on <strong>grid</strong> investments or the interest rate on long-term state bonds could be a<br />
reasonable choice for a discount rate. <strong>How</strong>ever, different discount rates can be used <strong>to</strong><br />
assess the benefits for different beneficiaries, e.g. consumers may have a different assumed<br />
cost of capital compared <strong>to</strong> system opera<strong>to</strong>rs.<br />
<strong>The</strong> question of discount rate as should be applied and the influencing fac<strong>to</strong>rs in its<br />
determination depend on the context in which the analysis is <strong>to</strong> be considered. Two cases<br />
warrant consideration here – the rate applied in analysis <strong>to</strong> inform a purely commercial<br />
decision regarding the financial implications of implementing a technical solution in<br />
comparison with other options for the benefit of the investing party, and analysis for<br />
comparative purposes where a project may be publicly funded <strong>to</strong> realise potential benefits<br />
<strong>to</strong> society.<br />
Where a <strong>smart</strong> <strong>grid</strong> investment is being considered by the <strong>grid</strong> opera<strong>to</strong>r as an alternative <strong>to</strong><br />
more conventional investments on purely technical and financial terms, it must be noted<br />
that “<strong>smart</strong>” investments are often far closer <strong>to</strong> typical telecommunications investments,<br />
generally with a higher risk level than conventional utility investments. Additionally, this is<br />
often less mature technology, applications and a new technological environment for the<br />
utility, increasing the risk of not achieving expected returns. Thus if the discount rate is <strong>to</strong><br />
fairly reflect the relative risk of the projects, a higher discount rate should be applied <strong>to</strong> the<br />
“<strong>smart</strong> investment” analysis.<br />
<strong>How</strong>ever as the useful economic lifetime of <strong>smart</strong> <strong>grid</strong> assets will likely be shorter, this<br />
higher risk is limited <strong>to</strong> a shorter period. Thus should there be a will <strong>to</strong> incentivise “<strong>smart</strong>”<br />
investments over conventional ones for societal reasons on the part of government, the<br />
regula<strong>to</strong>r or other policy determining organisations, an appropriate means of achieving this<br />
would be through allowing the <strong>grid</strong> opera<strong>to</strong>r a higher WACC and shorter depreciation on<br />
such investments, thus seeing the additional risk subsidised by the driving body.<br />
<strong>The</strong>re is however, a case for a lower discount rate <strong>to</strong> be applied on a theoretical level <strong>to</strong><br />
show what the return for society on an investment will be relative <strong>to</strong> the return seen on<br />
other public investments. Where a “<strong>smart</strong> <strong>grid</strong>” is being considered for social reasons with<br />
the costs and gains <strong>to</strong> society, then it would be appropriate for the discount rate <strong>to</strong> reflect<br />
the risk <strong>to</strong> the state, specified by the state body responsible for determining whether the<br />
project will be publicly funded. In this case the DSO is merely the implementing body<br />
contracted by the state, with funding for the project guaranteed. (In this case, the DSO is an<br />
appropriate body <strong>to</strong> be contracted both due <strong>to</strong> opportunity, expertise and experience and<br />
also as it is likely <strong>to</strong> be able <strong>to</strong> fund the project at a lower interest rate than many other<br />
28
odies which will likely be fully commercial. Thus the <strong>to</strong>tal cost borne by the public will likely<br />
be lower.)<br />
With a “risk free” rate as specified by the appropriate body applied, all project risk must be<br />
diligently built in<strong>to</strong> the cash flows by the DSO in forming the financial model of the<br />
investment. This risk includes the uncertainty in achieving cost savings which a project is<br />
expected <strong>to</strong> deliver.<br />
<strong>The</strong> interaction between discount rate and implementation schedule of a project will have a<br />
direct impact on the NPV cost of the project. Thus it is vital that both are accurate and do<br />
not disproportionately emphasise costs or benefits at any stage in the project. Where the<br />
costs or rate of return vary over the discounting period, this must be factually reflected. This<br />
is pertinent in the case of <strong>smart</strong> <strong>grid</strong>s, as evidence <strong>to</strong> date suggests that benefits are<br />
achieved later due <strong>to</strong> the interdependence of different systems which must be deployed, the<br />
current immaturity of technology leading <strong>to</strong> price volatility and the requirement for public<br />
engagement <strong>to</strong> realise potential benefits.<br />
It must be borne in mind that no generic discount rate can be applied in either case as this<br />
will depend on a complex combination of matters including the debt level of the funding<br />
body. <strong>The</strong> rate applied in any case, be it utility WACC or the rate on state bonds, requires<br />
calculation by those fully informed on the case in question and qualified <strong>to</strong> do so. <strong>How</strong>ever<br />
standardising the useful economic lifetime of assets would be a far more achievable<br />
measure due <strong>to</strong> its dependence on technology rather than financial status of a body.<br />
� Lifetime<br />
<strong>The</strong> lifetime over which a cost-benefit analysis is conducted should reflect the projected<br />
useful life of the <strong>smart</strong> <strong>grid</strong> investment or system. It represents the continuous period of<br />
time when the components and system of the investment operate correctly and reliably <strong>to</strong><br />
perform their designed functionalities. <strong>The</strong> project coordina<strong>to</strong>r should carefully document<br />
the basis for its determination of the investment’s useful life and also the length of time over<br />
which reasonable cus<strong>to</strong>mer and societal benefits can be reliably estimated.<br />
InovGrid illustration – Sensitivity analysis: parameters that impact benefits<br />
- Deferred Distribution Capacity Investments:<br />
o Different consumption trends (increasing or retracting) can influence this variable<br />
o Also the current installed capacity in a given country influences this benefit<br />
- Reduced Meter Reading cost:<br />
o This variable has a direct relation with the number of local readings on the baseline<br />
situation<br />
o <strong>The</strong> cost of local reading may also be different from location <strong>to</strong> location (e.g. manpower<br />
cost, <strong>to</strong>ols available)<br />
- Reduced Distribution cost:<br />
o <strong>The</strong> potential of this benefit is related with the number and type of local meter<br />
operations that can differ in different geographies or regula<strong>to</strong>ry environments<br />
- Reduced Technical losses:<br />
o In countries where the consumption is more concentrated or closer <strong>to</strong> the<br />
generation points (<strong>grid</strong> density) or with different consumption mix in different<br />
voltage levels (HV versus LV), the level of technical losses will be variable<br />
29
3. <strong>How</strong> <strong>to</strong> extrapolate project results <strong>to</strong> the national level?<br />
<strong>The</strong> methodology presented in Chapter Two provides insight in<strong>to</strong> how <strong>to</strong> interpret results of<br />
single projects. <strong>The</strong> costs, benefits and their allocation <strong>to</strong> beneficiaries across society can be<br />
identified through the process described by the different steps. This could prove an effective<br />
<strong>to</strong>ol <strong>to</strong> evaluate the impact of a project on a part of the electricity system.<br />
<strong>How</strong>ever, once individual project results have been evaluated against a well-defined<br />
baseline, there is the need <strong>to</strong> extrapolate what the combined contribution of several such<br />
<strong>smart</strong> <strong>grid</strong> projects <strong>to</strong> the national and European targets would be. This should be done <strong>to</strong><br />
inform the on-going policy move <strong>to</strong>wards a low carbon power system, considering the<br />
technological environment and standards which will impact the rollout process. <strong>The</strong>re is an<br />
added value in determining <strong>to</strong> what extent a project has led <strong>to</strong> improving broader<br />
“indica<strong>to</strong>rs” that represent the evolution <strong>to</strong>wards a <strong>smart</strong>er European <strong>grid</strong>. Simultaneously,<br />
the evaluation of projects values on a European wide scale should include detailed analysis<br />
of the scaling-up and replication conditions.<br />
As it stands, the methodology itself provides no clear answer as <strong>to</strong> how this can be achieved.<br />
Some first fundamental conceptual ideas are elaborated in this chapter. <strong>The</strong>y rely on some<br />
of the aspects of the EPRI report 14 which aimed <strong>to</strong> produce a preliminary estimate of the<br />
required investment needed <strong>to</strong> create a viable <strong>smart</strong> <strong>grid</strong> in the USA. <strong>The</strong> determination of<br />
European KPIs is an on-going process.<br />
3.1 <strong>The</strong> <strong>grid</strong> and its limitations<br />
<strong>The</strong> national quantification process should start by separating the project deliverables in<strong>to</strong><br />
distinct functional areas and making a number of assumptions about technology<br />
development, deployment, and cost over the desired study period. For consistency<br />
throughout Europe stakeholders need <strong>to</strong> agree on a study period and other key assumptions<br />
for the evaluation process <strong>to</strong> form a basis for comparison.<br />
It is important <strong>to</strong> clarify assumptions and definitions in the evaluation process. <strong>The</strong> whole<br />
power delivery system should cover everything from the electrical <strong>grid</strong> busbar at the<br />
generating plant <strong>to</strong> the energy-consuming device or appliance at the end-user. This means<br />
that the power delivery system encompasses generation step-up transformers; the<br />
generation switchyard; transmission substations, lines, and equipment; distribution<br />
substations, lines and equipment; intelligent electronic devices; communications; distributed<br />
energy resources located at end users; power quality mitigation devices and uninterruptible<br />
power supplies; sensors; energy s<strong>to</strong>rage devices; and other equipment.<br />
14 EPRI (Electric Power Research Institue) (2011). Estimating the Costs and Benefits of the Smart Grid, a<br />
Preliminary Estimate of the Investment Requirements and the Resultant Benefits of a Fully Functioning Smart<br />
Grid, Palo Al<strong>to</strong>, CA: 2011. 1022519<br />
30
3.2 Steps <strong>to</strong> evaluate base cost<br />
To conduct a quantitative estimate of the level of investment needed over the chosen time<br />
period, a good approach is <strong>to</strong> separate the core technologies of the project in<strong>to</strong> four broad<br />
areas: transmission, substations, distribution and the cus<strong>to</strong>mer interface. <strong>The</strong> cost<br />
estimation process should be further divided in<strong>to</strong> the following categories <strong>to</strong> consistently<br />
identify the base cost for the required development:<br />
� Elements that meet load growth and correct network issues through installation,<br />
upgrade, and replacement of built network capacity. This is the conventional<br />
means of accommodating new cus<strong>to</strong>mers (new connects), serving increasing<br />
energy demand of existing cus<strong>to</strong>mers, and mitigating other network issues<br />
including bottlenecks or potentially high fault currents.<br />
� <strong>The</strong> additional investments needed <strong>to</strong> develop and deploy advanced<br />
technologies <strong>to</strong> enhance the functionality of the electricity system and achieve<br />
the functionalities of a <strong>smart</strong> <strong>grid</strong>.<br />
Maintain<br />
Reliability<br />
Figure 11 – <strong>smart</strong> <strong>grid</strong> investment types<br />
<strong>The</strong> figure above illustrates that the division between the various investment types may not<br />
be clearly identifiable and for this reason, base cost evaluation is very important as a<br />
platform for benefit evaluation. In the figure above, the first two segments (red and blue)<br />
represent investments required <strong>to</strong> maintain adequate capacity and function of the existing<br />
power delivery system, while the third segment is the additional cost <strong>to</strong> elevate this system<br />
<strong>to</strong> that of a <strong>smart</strong> <strong>grid</strong>.<br />
31<br />
Power Delivery<br />
Power Delivery<br />
system of the
3.3 Key Assumptions<br />
In this future planning and quantification exercise, cost estimates could be based on four key<br />
assumptions for clarity and consistency:<br />
1. Incorporate technologies that make the electricity system <strong>smart</strong>er, but also stronger,<br />
more resilient, adaptive, and self-healing. Costs are likely <strong>to</strong> decrease while<br />
performance levels are expected <strong>to</strong> increase over the assessment period.<br />
Technological options and the roll-out process will have different impacts on CAPEX<br />
and OPEX.<br />
2. Where reasonable and cost-effective, incorporate solutions which adhere <strong>to</strong><br />
European and national regula<strong>to</strong>ry standards:<br />
� Consistent with the functionality requirements of Mandates M/441, M/468<br />
and / or M/490.<br />
� Complies with public standards and vendors interoperability<br />
� Meets requirements of European renewables targets (and related<br />
European Directives) as well as national roadmaps<br />
� Meets supply quality standards such as EN50160<br />
3. Consider technology and policies that meet load growth and power system needs by<br />
enhancing <strong>smart</strong> <strong>grid</strong> functionality. <strong>The</strong>se must give due regard <strong>to</strong>:<br />
� <strong>smart</strong>er network management<br />
� <strong>smart</strong>er integrated generation<br />
� <strong>smart</strong>er markets & cus<strong>to</strong>mers<br />
4. Simultaneous deployment of different <strong>smart</strong> <strong>grid</strong> functionalities will be mutually<br />
beneficial. While deployments will realistically be made along parallel paths and in<br />
discrete steps, planning should consider the interaction between the systems being<br />
deployed (for example, in considering future distribution au<strong>to</strong>mation, it should be<br />
noted if there is likely <strong>to</strong> be <strong>smart</strong> metering deployed in the area over the DA roll-out<br />
period, how the communications systems and additional local data could be<br />
leveraged and add <strong>to</strong> system benefits for little marginal cost increase).<br />
Smart <strong>grid</strong>s will not be rolled out in a single all-encompassing deployment. Grid<br />
development is an incremental and continuous step-by-step learning process, characterised<br />
by different starting points and projects throughout Europe, leveraging on-going advances in<br />
technology and expertise. Rather than instant revolution, this should be a steady evolution<br />
which must include cus<strong>to</strong>mers, energy suppliers and producers.<br />
Project leaders and <strong>smart</strong> <strong>grid</strong> stakeholders must therefore bring results of research and<br />
demonstration projects <strong>to</strong> the national and European level. <strong>The</strong> dissemination of<br />
information, results, best practices and lessons is vital <strong>to</strong> inform effective development and<br />
integration of optimal solutions. In addition, <strong>smart</strong> <strong>grid</strong> development can prove a catalyst for<br />
future partnership and action on a larger scale.<br />
32
Success criteria and realistic business cases based on intensive pilots are vital <strong>to</strong> shape views<br />
and raise awareness of <strong>smart</strong> <strong>grid</strong> investment needs among public and private stakeholders<br />
on national and European level. Tangible cases in support of <strong>smart</strong> <strong>grid</strong> investment can only<br />
be presented at national and European level if preliminary estimates on costs and benefits<br />
can be presented.<br />
33
4. Conclusion and guidelines<br />
Regula<strong>to</strong>rs and distribution companies are at a unique crossroads. Electricity networks have<br />
developed for decades along a similar path, with the challenge of supplying increasing<br />
demand being met through investment in conventional infrastructural capacity.<br />
<strong>How</strong>ever there is a paradigm shift in electricity generation and supply. Distributed<br />
generation, pushed in energy policy, is playing an ever more dominant role in distribution<br />
networks which were never designed <strong>to</strong> harness that energy.<br />
While the related planning challenges alone could perhaps be met by continued<br />
conventional investment, this would be costly and environmentally unsound. More urgently,<br />
there are a range of operational challenges which need new solutions. Au<strong>to</strong>mation,<br />
protection, control and moni<strong>to</strong>ring must all be developed <strong>to</strong> meet the challenges <strong>to</strong> supply<br />
quality that have already become apparent with the proliferation of distributed generation.<br />
Thus integrating planning and operational solutions, with the required innovation and<br />
ingenuity, could lead <strong>to</strong> optimal, cost-efficient and technically effective, sustainable network<br />
development. <strong>The</strong> key is <strong>to</strong> invest in the right kind of development. Thus investment<br />
decisions need evidence-based, like-for-like comparison of the options available.<br />
<strong>The</strong> methodology described in this paper can have two main purposes, independent but<br />
inherently linked in their goal of informing financial decisions regarding <strong>smart</strong> <strong>grid</strong><br />
investments. This is a <strong>to</strong>ol <strong>to</strong> aid project leaders in a cost-benefit analysis of their work and a<br />
sound, repeatable method that can assist regula<strong>to</strong>rs in developing the right investment<br />
incentives, based on the comparison of the relative costs and benefits of different <strong>smart</strong> <strong>grid</strong><br />
investments and <strong>to</strong> whom they apply.<br />
In developing this methodology, it has been crucial that the outcomes be applicable <strong>to</strong> the<br />
European context rather than just the situation in the United States, for which it was<br />
originally developed. Thus every effort has been made <strong>to</strong> align the American and European<br />
terminology (“services”/“characteristics”, “functions”/“functionalities”).<br />
4.1 Project Leaders: evaluating a project<br />
4.1.1 Evaluating a completed project<br />
Ultimately it is the role of the project leader <strong>to</strong> illustrate the results of the project. If the<br />
technical solution developed in a project is <strong>to</strong> be adopted, a clear concise illustration of the<br />
cost-benefit is vital.<br />
In adopting this approach, as is always the case where there are quantified outputs, the<br />
quality of the available data will have a direct bearing on the outcome’s credibility. This<br />
34
eing the case, the formulae available for benefit quantification are globally recognised and<br />
highly credible. For many of the variables required for quantification a breadth of data is<br />
available.<br />
One example is the case of figures used for inflation. To add most credibility, they should be<br />
appropriate <strong>to</strong> the region of deployment (or from which assets are procured), the currencies<br />
involved and based on credible forecasts by the appropriate economic bodies. <strong>How</strong>ever if a<br />
“<strong>smart</strong> <strong>grid</strong>” project is <strong>to</strong> be compared <strong>to</strong> a conventional investment by the same body, the<br />
accepted inflation figure used by the utility in regular investment appraisals may be the most<br />
suitable <strong>to</strong> give an accurate comparison. Similar care must be taken in applying demand<br />
growth projections and the evolution of electricity prices. In all cases, however, it is vital <strong>to</strong><br />
explicitly state the figures used, their sources and, if necessary, the rationale for the choice<br />
of particular figures.<br />
<strong>The</strong> quality of description of project assets – the technology <strong>to</strong> be deployed and<br />
operational/control systems employed – has a significant bearing on what the completed<br />
report will communicate. Smart <strong>grid</strong> development and integration is a field of international<br />
concern and implicit in this is the barrier which language can create. While a written<br />
description of a project’s process and goals has merit, many reviewers will be far better able<br />
<strong>to</strong> objectively evaluate the project and its applications if they receive a comprehensive<br />
overview of the technology involved in the form of technical specifications. Graphical<br />
descriptions giving an overview of the project and integrating the individual assets and<br />
systems tend <strong>to</strong> communicate more universally and directly than text.<br />
Clarity and accuracy are vital <strong>to</strong> ensure that the completed analyses have the highest level of<br />
credibility and that the quality of the project can be best communicated. Indicating the level<br />
of uncertainty in all results ensures that they can be interpreted in context. Future<br />
development of this methodology could perhaps define levels of uncertainty, relating the<br />
“label” <strong>to</strong> sensitivity bands, his<strong>to</strong>rical variation in the quantity in question or other suitable<br />
ranges.<br />
4.1.2 Aiding project planning<br />
Project leaders often find themselves in the challenging position of trying <strong>to</strong> leverage<br />
funding for projects. Without economic merit, even the most technically accomplished<br />
system will never become a solution.<br />
When using this method <strong>to</strong> appraise a project in the planning or pre-planning stages, as aid<br />
in leveraging project funding, it has the potential <strong>to</strong> enhance project planning. Sensitivity<br />
analyses around asset costs, implementation schedules or the balance between budgetary<br />
allowances <strong>to</strong> different areas (technology, installation, marketing, communications) can<br />
prove an invaluable indica<strong>to</strong>r as <strong>to</strong> how best <strong>to</strong> allocate a budget and how <strong>to</strong> structure the<br />
project <strong>to</strong> give the best possible chance of achieving the potential benefits.<br />
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4.1.3 <strong>The</strong> critical role of cost / benefit analyses – deployment proposals<br />
Where a <strong>smart</strong> or innovative technical solution has been implemented and tested in a<br />
demonstration project, the next step is <strong>to</strong> roll out the solution, deploying it where required<br />
across the networks.<br />
Regardless of a project’s technical merit, obtaining investment is a matter of communicating<br />
the expected benefits. Ultimately, communicating benefits is most universal and most<br />
practical when expressed in monetary terms – inves<strong>to</strong>rs must be able <strong>to</strong> see the value that<br />
their initial investment can offer.<br />
While this method is ideal for post-analysis, where the costs and benefits are measured and<br />
real, giving a measured and quantified result, it also provides an instrument for the appraisal<br />
of a full rollout. Inevitably, this is required <strong>to</strong> secure the investment needed.<br />
This method has a unique value where one is looking <strong>to</strong> obtain project funding, in indicating<br />
not only the benefits, but <strong>to</strong> whom they apply. Thus where a project may have limited value<br />
<strong>to</strong> the distribution company – with a similar cost-benefit <strong>to</strong> a conventional investment and<br />
the less tangible benefit of innovation and development of expertise within the company – it<br />
may have a range of benefits for society, the environment or others. <strong>The</strong>se will strengthen a<br />
business case, particularly as presented <strong>to</strong> the regula<strong>to</strong>r whose primary concern is <strong>to</strong> society<br />
at large rather than the distribution company.<br />
4.2 Regula<strong>to</strong>rs & Policymakers: how <strong>to</strong> make informed investment decisions<br />
4.2.1 <strong>The</strong> evolving role of the regula<strong>to</strong>r<br />
Just as the core role of electricity networks is in delivering secure, reliable power supplies<br />
rather than facilitating the technology and systems integrated on them, so the purpose of<br />
“<strong>smart</strong> networks” is in enhancing the security, quality and efficiency of existing networks in<br />
the most cost-effective manner possible. Though attaining environmental targets (EU 2020<br />
targets, Kyo<strong>to</strong> Pro<strong>to</strong>col amongst others) may be an objective in itself, the most cost-effective<br />
means of achieving this will vary from region <strong>to</strong> region, system <strong>to</strong> system or population <strong>to</strong><br />
population.<br />
Regula<strong>to</strong>rs play a central role in supporting the development of the networks of the future<br />
<strong>to</strong> be done by DSOs. <strong>The</strong> solutions integrated in<strong>to</strong> networks, be they conventional<br />
infrastructural upgrades or more complex solutions based on control and communicational<br />
development, will require investment and the investment decisions taken by distribution<br />
companies are heavily influenced by the regula<strong>to</strong>ry environment. Thus regula<strong>to</strong>rs are faced<br />
with the question as <strong>to</strong> what investment incentives are needed <strong>to</strong> best serve the people. A<br />
primary task <strong>to</strong> address this question consists of designing a flexible economic regula<strong>to</strong>ry<br />
framework that allows DSOs <strong>to</strong> take responsibility in making the right investment decisions.<br />
In this view, the methodology presented in this paper provides regula<strong>to</strong>rs with a clearsighted,<br />
broad analysis of the possible benefits of <strong>smart</strong> network investment, necessary for<br />
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the development of the appropriate regula<strong>to</strong>ry financing model applied <strong>to</strong> DSOs. With the<br />
right incentives for innovation included, such a model will ensure the investment climate<br />
that is needed for <strong>grid</strong> opera<strong>to</strong>rs <strong>to</strong> further innovate in technologies and systems which<br />
contribute <strong>to</strong> the development of the <strong>grid</strong> <strong>to</strong> play its part in the efficient delivery of a lowcarbon<br />
economy.<br />
Innovation can lead <strong>to</strong> solutions which offer improved network performance – the key is in<br />
supporting the innovation which offers this in an efficient, reliable and cost-effective<br />
manner. Ultimately, environmental sustainability can only be achieved hand in hand with<br />
technological and economic sustainability.<br />
4.2.2 What is a “<strong>smart</strong>” investment?<br />
A “<strong>smart</strong> investment” does not have <strong>to</strong> be heavily reliant on ICT – the <strong>smart</strong>est, most<br />
sustainable investment is the one which achieves the goal at the lowest cost.<br />
Thus determining what constitutes the <strong>smart</strong>est investment is a matter of making a clear,<br />
objective, like-for-like comparison of investment options. <strong>The</strong> methodology proposed here<br />
compares the intended investment option <strong>to</strong> a baseline – the same system without the<br />
investment under investigation having been made. <strong>The</strong> same methodology can be applied <strong>to</strong><br />
any conventional investment <strong>to</strong> directly compare the two solutions: the “<strong>smart</strong>” investment<br />
or the conventional one.<br />
<strong>The</strong> key value in this methodology and its widespread adoption is that it provides a means of<br />
comparing the relative costs and benefits of different projects and options on the most<br />
generic, levelled playing field possible. Thus a range of “<strong>smart</strong> <strong>grid</strong>” projects can be<br />
compared by regula<strong>to</strong>rs <strong>to</strong> understand which offers the most suitable technical solution<br />
while delivering the kind of financial return required in their own economic, political and<br />
legal environment. While no analysis can be considered absolutely accurate or universal, the<br />
adoption of this standard approach at least facilitates the comparison of projects.<br />
4.2.3 Extracting information from other projects in Europe and beyond<br />
Learning from past or on-going projects is vital in assessing future projects under<br />
consideration – the challenge is in identifying how past projects, often in other regions, can<br />
give insight in<strong>to</strong> future projects or deployments in one’s own area.<br />
Projects which have been assessed under the proposed methodology lend themselves <strong>to</strong><br />
this purpose through explicitly highlighting those underlying figures and assumptions in each<br />
calculation which may be region or regime specific. It is important for anybody using past<br />
project evaluations as an indica<strong>to</strong>r <strong>to</strong> take these variables in<strong>to</strong> account. Similarly, the insight<br />
offered in the included sensitivity analyses allow regula<strong>to</strong>rs, policymakers or any other<br />
assessors <strong>to</strong> better apply the results <strong>to</strong> their own context.<br />
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While a project’s exact financial benefits cannot be directly assumed <strong>to</strong> remain the same if it<br />
were repeated or deployed in another region or system, the proportional breakdown of<br />
benefits and benefitting stakeholders should be broadly indicative of the more global<br />
application. Using the sensitivity analyses <strong>to</strong> put the results of a given project in the context<br />
of a specific regula<strong>to</strong>r’s region of concern, an indication of the benefits for various<br />
stakeholders and society in general can be derived.<br />
4.3 <strong>How</strong> distribution companies and regula<strong>to</strong>rs can help work <strong>to</strong>gether<br />
It is in the interest of all those concerned in network development – regula<strong>to</strong>rs, distribution<br />
companies, genera<strong>to</strong>rs and consumers included – that the best, most effective and costefficient<br />
investments be made in a timely manner. Beyond this, innovation will lead <strong>to</strong> new<br />
and more effective solutions. <strong>The</strong>re must be an onus on distribution companies who are<br />
developing and operating networks <strong>to</strong> innovate, design, test and develop solutions which<br />
have the potential <strong>to</strong> be more sustainable. Equally, regula<strong>to</strong>rs must encourage this, but<br />
always in a manner which reflects the concerns of society as <strong>to</strong> economic sustainability.<br />
Both parties will better meet their aims with cooperation. It is imperative that regula<strong>to</strong>rs<br />
clearly communicate what they require, in technical, economic and environmental fields.<br />
<strong>The</strong> support mechanisms or frameworks they intend <strong>to</strong> deliver must be clearly<br />
communicated and the criteria for their application made transparent.<br />
Similarly distribution companies must develop both their systems and their expertise <strong>to</strong><br />
deliver the solutions which will provide benefits <strong>to</strong> all stakeholders in so far as possible.<br />
Both parties must continue <strong>to</strong> perform due diligence both in innovation as <strong>to</strong> how they<br />
operate and in the level of knowledge and expertise amongst their organisations. Only with<br />
the appropriate skills, experience, ability and expertise can either side develop or analyse as<br />
is required <strong>to</strong> achieve positive results. Needless <strong>to</strong> say, these attributes will be increasingly<br />
essential in managing the electrical <strong>grid</strong> of the future.<br />
4.4 European funding solutions<br />
Smart <strong>grid</strong> projects entail inherent uncertainty as they have not yet been tested on a large<br />
scale. Given that large-scale demonstration projects would generate new information on<br />
how <strong>smart</strong> technologies perform in practice, these projects would lead <strong>to</strong> positive<br />
externalities for all <strong>smart</strong> <strong>grid</strong> ac<strong>to</strong>rs. EU policymakers can help accelerate the development<br />
of <strong>smart</strong> <strong>grid</strong>s by facilitating financing options for <strong>smart</strong> <strong>grid</strong> projects.<br />
In this perspective, EURELECTRIC welcomes the inclusion of <strong>smart</strong> <strong>grid</strong> projects in the<br />
current draft Regulation on Guidelines for Trans-European Energy Infrastructure (part of the<br />
Connecting Europe Facility), as well as the fact that distribution companies are identified as<br />
potential project promoters. <strong>The</strong> methodology outlined in this document could contribute <strong>to</strong><br />
the discussions on the selection and moni<strong>to</strong>ring approach for the implementation of <strong>smart</strong><br />
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<strong>grid</strong> projects of common interest, thereby providing guidance on the evaluation of projects’<br />
contribution <strong>to</strong> the relevant criteria.<br />
Ultimately, EURELECTRIC continues <strong>to</strong> support the SET Plan and the European Electricity Grid<br />
Initiative, believing that knowledge sharing, dissemination of best practices and large-scale<br />
demonstration projects will be needed <strong>to</strong> accelerate and optimise <strong>grid</strong> implementation in<br />
Europe <strong>to</strong> the benefit of cus<strong>to</strong>mers.<br />
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