TODAY’S STUDY: TODAY’S STUDY: THE COSTS AND BENEFITS OF A SMART GRID

Smart Grid Economic and Environmental Benefits; A Review and Synthesis of Research on Smart Grid Benefits and Costs

October 8, 2013 (Smart Grid Consumer Collaborative)

Executive Summary

The SGCC completed this review to help stakeholders better understand the benefits – economic, environmental, reliability, and customer choice – associated with Smart Grid investments. We present controlled studies from actual Smart Grid deployments whenever possible, synthesizing research results into a “per customer per year” context using assumptions based on actual Smart Grid deployments.

In order to reflect variability across different utility operating environments, we present a set of conservative assumptions that we refer to as the “Reference Case,” along with more aggressive assumptions reflecting “the state of the possible” that we refer to as the “Ideal Case.” We also describe the benefit drivers for each Smart Grid capability.

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Findings

We believe readers of this report are likely to reach the conclusion that Smart Grid investments offer economic benefits in excess of costs, and likewise offer significant reductions in environmental impact.

Smart Grid Investment Offers Economic Benefits in Excess of Costs

The Smart Grid appears to offer both direct benefits (those which could affect consumers’ bills) and indirect economic benefits to customers. Direct benefits are delivered through four primary mechanisms:

• Increasing electric distribution efficiency, primarily through Integrated Volt/VAr Control (IVVC).

• Facilitating changes in customer behavior, either by shifting usage away from high-demand periods or by reducing usage. These capabilities include offering customers more choices including time-varying rates, prepayment programs, and customer energy management systems.

• Reducing operating costs from capabilities such as remote meter reading and remote service disconnect/reconnect.

• Improving revenue capture through improved Smart Meter accuracy and theft detection capabilities.

The Smart Grid also appears to offer significant indirect benefits to communities through economic productivity increases associated with improved grid reliability. Capabilities such as fault location help repair crews find faults faster, while fault isolation limits the number of customers impacted by any particular service outage.

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Smart Grid Investment Offers Significant Reductions in Environmental Impact

The Smart Grid offers significant reductions in environmental impact through two sources: conservation and greater renewable generation integration. Greenhouse gas emission reductions can be traced directly to Smart Grid capabilities – such as time-varying rates and customer energy management systems – offering a conservation effect. We find that the Smart Grid increases the level of customer- sited generation that the distribution grid can reliably and efficiently accommodate.

To the extent this generation is renewable, Smart Grid capabilities designed to accommodate it offer even more significant environmental benefits. Direct and Indirect Benefits by Capability per Customer per Year

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Reference Case and Ideal Case Benefits

Table 1 summarizes the available benefits from various Smart Grid capabilities found in the research. In many cases, we have made assumptions about key benefit drivers such as customer participation rates to convert the research findings into a “per customer per year” metric. Where a range is presented, the low end represents the Reference Case, which embodies assumptions typical of the current average capability deployment. The high end represents the Ideal Case, which is based on assumptions that, though the research indicates are achievable, may not be reached unless the benefit drivers are carefully and thoughtfully optimized by Smart Grid stakeholders.

Not all Smart Grid capabilities are subject to large variation. For example, capabilities designed to improve reliability are not driven by customer participation rates. In other cases, insufficient research for a particular capability is available on which to base differences between a Reference Case and Ideal Case, rendering any such distinctions arbitrary. A summary of Reference Case and Ideal Case assumptions is presented in the appendices. Sources are footnoted throughout this review.

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Direct and Indirect Benefits

Direct benefits are those that could affect customers’ bills, whereas the indirect benefit calculations represent our attempt to translate reliability and environmental performance improvements from Smart Grid capabilities into economic terms.

It is important to note that no single utility necessarily has all of these capabilities and each utility’s results could vary significantly from these estimates. The most significant drivers of benefits and opportunities for improvement are described for each capability in this review

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Benefit Drivers

Our analysis indicates that four drivers explain most of the variation in the available benefits.

There appear to be some opportunities available to increase the benefits of Smart Grid capabilities through policy. As one example, traditional ratemaking practices may not encourage utilities to reduce sales volumes between rate cases. Once electric rates are set in a rate case, reductions in sales volume below anticipated levels reduce the likelihood that a utility will be able to cover its costs. Several Smart Grid capabilities discussed in this review, including Integrated Volt/VAr Control and time-varying rates, derive a significant proportion of available economic benefits via reductions in sales volumes. Other regulatory rules and norms may require revisions to enable some customer economic benefits, for instance billing and payment program innovations. The SGCC hopes this review will help stakeholders work together in pursuit of policy solutions that enable customer equity, provide customers with choices, and encourage utility investment, while maximizing available benefits for all customers.

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Costs by Smart Grid Component

The average Smart Grid cost per customer, based on budget information from U.S. utilities’ applications for the U.S. Department of Energy’s Smart Grid Investment Grant (SGIG) program funds, is presented in Table 3 by component.

In addition to these costs, we assume utilities will make annual expenditures equal to 4 percent of initial Smart Grid investments to operate and maintain hardware, software, and communications networks.

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Benefit-Cost Summary

Figure 1 summarizes the Net Present Value (NPV) of benefits and costs for the Reference Case, while Figure 2 does so for the Ideal Case. We assumed a 13-year project life, incorporating 3 years of implementation and 10 years of operation.

Based on available research and incorporating the Reference Case and Ideal Case assumptions detailed in this report, we find the ratio of benefits to costs range from 1.5–2.6 to 1 in the Reference Case and Ideal Case, respectively.

Subtracting the NPV of total costs from total benefits (direct and indirect) yields net benefits of approximately $247 per customer in the Reference Case and $713 per customer in the Ideal Case.

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Conclusions and Recommendations

The research presented in this review indicates that grid modernization creates direct and indirect economic benefits for customers in excess of costs. The research also indicates that the Smart Grid delivers significant environmental benefits through conservation and renewable generation integration. Opportunities to optimize these benefits are available through a holistic approach involving customer engagement, utility operations, and regulatory/governance systems. The SGCC encourages all stakeholders (utilities, regulators, advocates, and customers) to collaborate in pursuit of optimizing these benefits.

Looking forward, candid conversations among stakeholders about the critical role that the electric distribution grid plays in a community and the kind of grid a community wants to have are essential. Grid upgrades require long lead times; flexibility and reliability must be designed and built well in advance of when they will be needed. The grid we use today was not designed for the demands society seems poised to place on it in the future. Communities need to be asking key questions about the kind of grid they want, the costs required to build it, and priorities and trade-offs they can agree upon.

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As the role electric distribution plays in communities’ economic vitality and sustainability increases, a new dynamic is needed in the nature of relations among distribution utility stakeholders. This review can serve as a reasonable starting point for the evolution of a new dynamic, and the SGCC hopes stakeholders embrace it and its message in the spirit of objectivity and collaboration in which it has been researched and developed.

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