How Do You Invest $400 Billion (in the SG)? — Part I

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Dominic Geraghty

 

SGiX is about business cases. Obviously, one needs a very strong set of business cases to commit to an investment of as much as $400 billion for SG 2.0, even if it is over a period of 30 years.

DSC_1310-150x150We are going to propose that a “Managed Deployment Strategy” might give us the best chance of success, i.e., delivering prioritized, well-defined benefits over time coupled with a commensurately-paced investment rate. We will define and present the “Managed Deployment Strategy” in Part 2 of this dialog series.

In all of this, we are assuming that the above required capital for SG 2.0 can be made available even in the context of an industry that appears to need an additional ~$1.7 trillion for infrastructure investments over the same period of time, estimated as follows:

Estimate of the Total Capital Requirements of the Power Sector through 2030

Investment Category

$ Billions

Comment/Reference

SG 2.0

$400

See Dialog, here
Traditional Power System Infrastructure (G,T, and D)

$1,600

See Dialog, here
Cyber-security

$22

Zpryme, Pike market research reports cited by GreenTechMedia
Environmental Compliance

$110

EEI 2011
Policy-Driven Subsidies

$ ?

For example: RPS, EVs, DG, Storage, etc.

Total

$2,132

Caveat: the above estimates and those below are based on data from a variety of different sources. The sources reflect somewhat different or overlapping definitions of the costs (capital investments), and it is possible that some of the benefits may be double-counted. Some other costs and benefits were not counted -- see below.

Analyzing SG Benefits and Costs

Let’s first review what we know about the “top-down” aggregate benefits and costs of the SG, and identify the “gaps” in terms of inclusion and quantification. We are then positioned for our following Part II dialog about the desirable attributes of a “Managed Deployment Strategy” for SG 2.0.

From a business case perspective, we know that it is meaningless to evaluate an aggregated investment of $400 billion in terms of aggregated top-down benefits.

The (estimated) $400 billion total capital requirement for the 30 year SG 2.0 deployment actually consists of a large set of business cases which must be evaluated individually in terms of their costs and benefits.

DSC_1253-150x150The business cases will be influenced by many situational factors including technology risk, market risk, location, and the timing of the receipt of benefits (relative to the timing of the expenditures) created by the investment.

This “bottom-up” approach would then be rolled up into an integrated benefit and cost picture for SG 2.0, and would be more accurate and more useful in terms of execution/implementation than the “top-down” analyses below.

This work of disaggregating a general SG 2.0 applications deployment into individual business cases that can be rolled up into an aggregate deployment “vision” has yet to be done.

Available Estimates of the Costs and Benefits of SG 2.0

Nevertheless, most of us would like to get some comfort that the potential benefits of SG 2.0 deployment exceed its potential costs, in an aggregate sense. Apart from a few isolated business cases related to SG 2.0, all that is available to us today are aggregated business cases anyway.

So, here, we will work with what we’ve got to get an overview of the expected costs of a generic deployment of SG 2.0, and the types of individual SG 2.0 applications that might be expected to create acceptable benefits.

First, we will provide a summary of two published studies estimating the aggregate costs and benefits of SG 2.0 deployment through 2030 in the U.S. While both estimates have some weak spots or some assumptions that might generate skepticism, they have been carefully done and provide a lot of quite useful information.

DSC_0190-150x150Secondly, we’ll present a summary of the 2011 Smart Grid Deployment Plans developed by three California utilities. Although many of the benefits were not quantified by all of the utilities, the 2011 PUC’s report to the Governor states that the benefits are expected to be just as financially significant as the costs (which are substantial), and include avoided transmission and distribution investments, avoided energy procurement costs, measurable reliability improvement, and reduced greenhouse gas emissions.

"Top-Down" Estimates of the Costs and Benefits of SG 2.0 Deployment for the U.S.

1. Perfect Power Institute Report

Our first estimate was published in 2012 by the Perfect Power Institute (associated with the Galvin Electricity Initiative). It uses “grid modernization” and SG themes somewhat interchangeably, and proposes a broad definition of the SG.

The report provides a great deal of useful granularity related to the total costs per residential household of SG 2.0 by specific application type and expected market penetration, and breaks down the estimated annual savings per residential household into direct and indirect savings.

It also provides an estimate of the revenue potential per household for behind-the-meter SG-related activities.

Here’s a summary of the report’s estimated SG costs per residential household:

 Cost Category

 Subcategory

Estimated Annual Cost per Household

Clean Power Supply Investment

 $80

Power Delivery Investment
Transmission and area distribution

$12

Local distribution system or micro-grid improvements

$37

Local substation automation

$25

Circuit loops with smart switches

$25

Undergrounding local cables (50% penetration)

$50

 Total

 $150

End-Use Investment
Local clean power supply

$46

Smart meters

$20

Home automation

$100

 Total

 $165

 Approximate Annual Cost

~$400

The Perfect Power Institute report estimates the annual savings created by SG applications per household as follows:

Savings Category

Subcategory

Estimated Annual Savings per Household*

Direct Bill Savings (including avoided rate increases)
Electricity consumption savings

$125

Dynamic pricing tariffs

$110

Avoided capacity costs

$130

Improved generation efficiencies

$200

Reduced T&D losses

$20

 Total

 

$585

Indirect Savings
Improved reliability and power quality

$400

 Total

$400

Future Revenue Potential
Revenue for providing electricity and ancillary services

$140

Emission reduction credits

$110

 Total

$250

Public Health, Safety, and Homeland Security

Significant, but not estimated

 Total Benefit

 $1,200

*Number of households: 125 million

The Perfect Power Institute’s analysis thus produces a benefit/cost ratio of 3:1.

However, it includes generation, transmission and distribution infrastructure investments which we would not count as SG 2.0 investments under our standardized definition of the SG. And the results also need to be interpreted carefully in the context of the varying assumptions used to allocate the benefits and costs on a per household basis.

2. EPRI Report on the Costs and Benefits of the Smart Grid

Our second estimate of the costs and benefits of SG 2.0 comes from EPRI (2011).

DSC_1334 150x150EPRI does not include new generation plant or new transmission line investments in their SG investment estimate, an assumption that we would agree with as we consider those to be infrastructure investments rather than SG 2.0 investments.

Investments in cyber-security for the distribution system are also not included in EPRI's SG costs.

EPRI estimates the costs of implementing SG 2.0 to be in the range of $338 billion to $476 billion, with a breakdown as follows:

Investment Category

Low-End Cost Estimate ($B)

High-End Cost Estimate ($B)

Transmission

82

90

Distribution

232

339

Customer

24

46

Total

338

476

The benefits are estimated to be in the range of $1.3 trillion to $2 trillion.

The EPRI analysis thus produces an average benefit to cost ratio of about 3:1. We should note that energy storage appears to comprise a disproportionate percentage of the benefits (13% for the high-end of the range, and 25% for the low-end).

Each of the above reports presents a very helpful step forward, but they wouldn't provide sufficient granularity upon which to base a “Managed Deployment Strategy” driven by the merits of individual business cases for SG applications.

More Granular Analyses of the Costs and Benefits of SG Deployments – the California Utilities' Smart Grid Deployment Reports

Some interesting and quite useful analysis has been provided in the 2011 Smart Grid Deployment Plans delivered to the CA PUC by CA utilities. While the plans are not intended to incorporate detailed cost and benefit analyses, the utilities have estimated that grid modernization will require a combined investment of $6 billion to $8 billion dollars over the next 10 years. Similarly to the two reports discussed above, the information published in the plans is not sufficient for individual business case evaluation (nor was it meant to be).

The following table summarizes the costs and benefits estimated in 2011 by PG&E, SCE, and SDG&E for deploying the smart grid in their service areas through 2020* – note that all of these utilities caution that many of the numbers are conceptual and subject to change:

 California Utility

 Costs

 ($ billions)

 Benefits

($ billions)

 

Comments

PG&E*(20-year study period)

$1.3 – $1.95

$0.9 – $2.0

Plus the  benefits related to (1) a 10% – 20% increase in reliability, and (2) 1.4 – 2.1 million tonnes of avoided CO2
SCE

$1.87

Qualitative list of benefits only, e.g., safe and reliable integration of bulk and distributed renewable resources and EVs, 1,900 MW of DR, 1,000 of DLC, 250,000 MWh/year of energy conservation, improved customer satisfaction and choices

Investments are mainly for platform infrastructure, renewable energy goals, and empowering customers
SDG&E

$3.5 – $3.6

$3.8 – $7.1

Benefits will “minimally reduce operating costs and so are not projected to significantly impact rates”

It is clear from the above conceptual estimates that the benefits of deploying the smart grid over the time periods studied are approximately equal to the costs in two out of the three utilities – this does not represent a compelling top-down case for the SG. Plus some of the benefits are “soft”, i.e., not monetizable.

64 Light mauve t linesMost concerning and surprising is the warning above by SDG&E that the deployment of the smart grid is not expected to create operating savings that can reduce customers’ bills, offsetting the capital costs of the SG deployment.

However, we should not jump to conclusions about the economic efficacy of utility-led SG 2.0 deployments in CA – a different conclusion is likely to be reached when bottom-up, location-specific, situation-specific, analyses of individual SG 2.0 applications are conducted.

Some applications will exhibit attractive benefit/cost ratios, and some will not lead to a viable business case. These future analyses will allow the utilities to prioritize SG projects and selectively/”surgically” deploy the ones that represent an acceptable return on investment. In contrast to the deployment of AMI, SG 2.0 applications do not need to be deployed to 100% of the customer base or across all parts of the power system.

Future analyses of specific SG 2.0 installations will also be conducted by self-optimizing end-use customers in order to decide which SG 2.0 applications, if any, to invest in behind-the-meter – an important activity that can offset the utilities’ enormous capital costs for modernizing the grid.

We will discuss this business case-based investment prioritization process in the upcoming Part II of this dialog: our proposed “Managed Deployment Strategy” for SG 2.0.

As always, comments welcome and appreciated (in the box below).

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