The Elephant in the Room: Addressing the Affordability of a Rejuvenated, Smarter Grid

Final Avatar 80x80-Logo-SG-1-and-2-and-IX-LOGO-e1363114874895-150x150

 

Dom Geraghty

 

Adding Up All Of The Costs

The cost of transitioning to Smart Grid (SG) 2.0 is high. The cost of replacing aging power system infrastructure is high. The cost of complying with new energy policy and regulations is high. For the most part, all three of these major cost burdens on the electric power system have been analyzed separately. We need to look at the whole picture.

In the tables below, we construct a 30-year cumulated budget and net benefits forecast for the U.S. power system, integrate all three of the above major cost burdens, and suggest a practical cost management strategy that could save as much as $750 billion.

Business-As-Usual Cost

If we take a business-as-usual approach to the replacement of aging power system infrastructure and concurrent deployment of the SG, the 30-year total net costs (costs minus benefits) for the transition to the SG are estimated to be about $1.2 trillion, based on our integration and curation of numerous credible studies -- see here and here. So, despite the considerable benefits generated by the SG, they are dwarfed by the costs of deployment.

Making Electricity Bills More Affordable in the SG Era

The net result is a large and economically debilitating increase in consumer’s electricity bills, and questions around the grid operators’ ability to maintain present-day levels of service reliability.

We were sufficiently concerned by the current "silo-ed" approach to costs, and the size of totaled costs, that we decided to explore an optimized least-cost deployment strategy, the goal of which would be to trade-off ubiquitous deployment of the SG against a more “surgical” deployment that optimizes the value of SG applications.

According to our estimates, if we optimize the deployment of SG applications in a least cost deployment strategy, the net costs of this new smart/automated power system can be reduced substantially. In the calculations below, we estimate that the net costs over the 30-year period could be as low as $450 billion, plus or minus some as-yet unaccounted-for costs and savings as presented at the end of this dialog.

8. DSC_0873-150x150Even with a least cost strategy, electricity bills will not be reduced from today’s levels (see also here) – but they will grow at a slower rate, and it would seem that they will be manageable, based the assumptions below.  Note that in all scenarios, there is no avoiding the front-end loading characteristics of the transition to the SG. What we can do, though, is to first deploy those SG applications that have the highest potential for creating near-term cash savings.

Here is a sequence of seven fairly self-explanatory tables that tell the story. Assumptions used in the forecasts are provided after the tables at the end of this dialog. All dollar amounts in the tables below are in nominal $ billions, undiscounted.

Cost of Replacing Aging Infrastructure and Deploying SG 2.0

Tables 1 and 2 below present business-as-usual net cash flows for rejuvenating power system infrastructure and deploying SG 2.0.

Table 1: Budget Forecast for Power System Infrastructure*

Cash Flow Through Each 5-Year Period

Year 1- 5

Year 6 - 10

Year 11-15

Year 16-20

Year 21-25

Year 26-30

Power system infrastructure investments -- Aging Infrastructure Replacement + Capacity to Serve Demand Growth (G,T, and D) ($1.6 trillion in total)

-267

-267

-267

-267

-267

-267

Cyber-security ($22 billion in total) -- also, see here

- 4

- 4

- 4

- 4

- 4

- 4

Environmental compliance ($110 billion) -- see also here and here and here

-17

-17

-17

-17

-17

-17

Total infrastructure investment by period

-288

-288

-288

-288

-288

-288

Grand total (nominal, undiscounted $)

-1728

 

 

 

 

 

Table 2: Budget Forecast for Transitioning to SG 2.0*

Cash Flow Through Each 5-Year Period

Year 1 - 5

Year 6 - 10

Year 11-15

Year 16-20

Year 21-25

Year 26-30

SG 2.0 Investment

-133

-133

-133

Operational benefits of SG 2.0

66

66

66

66

66

66

SG 2.0-related deferred traditional infrastructure investments (benefits continue until supply/demand is re-balanced)

66

66

66

66

SG 2.0-related qualitative benefits (these accrue for the total lifetime of the assets), e.g., decreased environment pollution and service reliability

66

66

66

66

Net cash flow of SG 2.0 deployment by period

-67

-67

65

198

198

198

Grand total net cash flow (nominal, undiscounted $)

525

 

 

 

 

 

57-purple-two-linesNew-Image-150x150We can “net out” the investments in infrastructure and SG in Tables 1 and 2 to get the total cumulative cost for the power system in Table 3 below:

Table 3: Net Cash Flow for Power System Infrastructure + SG 2.0 Transition

Cash Flow Through Each 5-Year Period

Year 1 – 5

Year 6 - 10

Year 11-15

Year 16-20

Year 21-25

Year 26-30

Total infrastructure + SG 2.0 (net) investment requirements

-355

-355

-223

-90

-90

-90

Grand total net cash flow (nominal, undiscounted $)

-1203

What If We Applied a Least Cost Deployment Strategy, Optimized to Maintain an Attractive Benefit to Cost Ratio?

Table 4 below presents the elements of our "Least Cost Optimized Strategy".

Table 4: Cash Savings from Implementing a "Least Cost Optimized Strategy" for SG 2.0 Applications*

“Least Cost Optimized Strategy” Elements for Reducing Total Investment Requirements

Year 1 - 5

Year 6 - 10

Year 11-15

Year 16-20

Year 21-25

Year 26-30

Conversion of existing DG to dispatchability (190 GW @ savings of $1500/kW minus $175/kW = $1325/kW)

8

8

8

8

8

8

DR reduction in peaking capacity required of 188 GW @ $1,500/kW (note: some double counting with SG 2.0 deferred capital line item above)

24

24

24

24

24

24

Optimization of SG 2.0 Applications (“80/20” Rule”)**
- Capital reduction of 80% based on less SG systems being installed

106

106

106

106

106

106

- Operational benefits reduction of 20%

-13

-13

-13

-13

-13

-13

- Deferred capital benefits reduction of 20%

-13

-13

-13

-13

- Qualitative benefits reduction of 20%

-13

-13

-13

-13

Interoperability savings (25% of total installed costs of SG applications) starting after 5 years

33

33

Retrofitting of equipment with SG 2.0 applications versus replacement with new equipment (10% savings)

13

13

13

Total savings from “Least Cost/Optimized Strategy” per period

138

171

145

99

99

99

Grand total savings (nominal, undiscounted $)

751

Trans purple150x150What Is the Cumulative Cash Requirement to Implement Our "Least Cost Optimized Strategy"?

The total cost for power system infrastructure and SG 2.0 deployment based on our least cost optimized strategy is presented in Table 5.

 

Table 5: Net Cash Flow for Infrastructure + SG 2.0 Based on a Least Cost Optimized Deployment Strategy

Net Cash Flows for Least Cost Strategy

Year 1 - 5

Year 6 - 10

Year 11-15

Year 16-20

Year 21-25

Year 26-30

Least Cost infrastructure + SG 2.0 deployment for power system for each 5-year period

-217

-184

-78

9

9

9

Grand Total Net Cash Flow (nominal, undiscounted $)

-452

So, using this least cost strategy, we have estimated that we can reduce the total net cost from $1.2 trillion to $452 billion. Still tough to finance, of course, given that the undiscounted costs exceed the undiscounted benefits.

While these benefits may not include all of the societal, security, and national economy benefits of the power system, the qualitative benefits "line item" in Table 2 already includes a significant portion of them and this portion is reflected in the net cash flows of the Least Cost Optimized Strategy in Table 5.

Bottom line: based on this admittedly high-level analysis, it seems worthwhile that we as stakeholders in the success of the SG should look hard at least-cost deployment options for the SG.

Let’s Not Overlook Other Less-Considered or Hard-to-Calculate Costs and Cost Savings

Pole w/Wires 150x150The above analysis is obviously far from comprehensive in terms of accounting for some of other less-analyzed costs and potential cost-saving alternatives, as presented in the tables below. We need to do more work on developing a better understanding of, and quantifying, these.

Table 6: Unaccounted-For Costs in the Above Forecasts

Unaccounted-For Costs

Year 1 - 5

Year 6 - 10

Year 11-15

Year 16-20

Year 21-25

Year 26-30

Incremental cost of maintaining current levels of reliability, e.g., unserved energy***, higher reserves

TBD

TBD

TBD

TBD

TBD

TBD

Non-corporate R&D on SG 2.0 technologies and  applications****

TBD

TBD

TBD

TBD

TBD

TBD

Higher capital costs of renewable production mandated by RPS and increased transmission capacity requirements (see here)

TBD

TBD

TBD

TBD

TBD

TBD

Costs of upgrading end-of-life AMI 1.0 systems

TBD

TBD

TBD

TBD

TBD

TBD

Costs of GHG mitigation

TBD

TBD

TBD

TBD

TBD

TBD

Costs of potential utility stranded T&D assets

TBD

TBD

TBD

TBD

TBD

TBD

Subsidies to support policy and regulatory initiatives either added to electricity bills, or added to consumers’ tax base

TBD

TBD

TBD

TBD

TBD

TBD

Cost of potential regulatory lag for SG 2.0-enabling policy changes, e.g., slower implementation of dynamic pricing, harmonization of retail and wholesale power markets relative to the availability of commercialized SG 2.0 applications

TBD

TBD

TBD

TBD

TBD

TBD

End-use consumer investments in SG applications

TBD

TBD

TBD

TBD

TBD

TBD

Table 7: Unaccounted-For Cost Savings in the Above Forecasts

Unaccounted-For Cost Savings

Year 1 - 5

Year 6 - 10

Year 11-15

Year 16-20

Year 21-25

Year 26-30

Use of existing public communications systems and network management services instead of building proprietary private communications systems to support SG 2.0 applications

TBD

TBD

TBD

TBD

TBD

TBD

Offsetting savings from incentive-based rate-making i.e., “PBR (“performance-based rate-making”)

TBD

TBD

TBD

TBD

TBD

TBD

Offsetting positive cash flow: lower operating costs of renewable production -- see here and here

TBD

TBD

TBD

TBD

TBD

TBD

Offsetting benefits: qualitative benefits of policies such as RPS (many of these benefits accrue for the total lifetime of the assets) – these are different from SG 2.0 qualitative benefits

TBD

TBD

TBD

TBD

TBD

TBD

Cheaper natural gas prices lowering generation costs

TBD

TBD

TBD

TBD

TBD

TBD

Sale by customers of their energy consumption data

TBD

TBD

TBD

TBD

TBD

TBD

Rental of SG 2.0 infrastructure to providers of SG 2.0 applications

TBD

TBD

TBD

TBD

TBD

TBD

*List of Assumptions Underlying the Above Forecasts

Assumes a nation-wide commitment to an accelerated deployment of SG 2.0 (a big assumption!), and that 100% of the total SG 2.0 cost (~$400 billion) is incurred in the first three time-periods (over 15 years), for a cost per 5-year period of $133 billion per period.

Assumes that the benefit to cost ratio for SG 2.0 is 3:1 per the previous top-down analyses by Perfect Power and EPRI. We are also going to assume that the operational benefits provide 33% of the total benefits, and the deferred capital expenditure benefits and qualitative benefits together comprise 66% of the total. (Note that the bottom-up analyses of the three CA utilities for SG deployment through 2020 show a benefit to cost ratio of 1:1, so we may be optimistic in choosing the 3:1 benefit to cost ratio above, but this conclusion depends on whether the utilities included the value of qualitative benefits.)

If total benefits of SG 2.0 are $1.2 trillion, i.e., a 3:1 benefit to cost ratio, then the operational benefits are $400 billion, and when linearized over 5 year periods amount to $66 billion per period.

DSC_1310-150x150We are assuming that the deferred capital and qualitative benefits begin to accrue after 10 years. Deferred capital and qualitative benefits together amount to $800 billion, assumed to be divided 50%/50% between deferred capital and qualitative benefits, and when linearized over 5-year periods, each amount to $66 billion per period. These benefits are assumed to begin at the start of the third time period (by year 11). The deferred capital benefits occur until the supply/demand curve completes its re-adjustment (assumed to be completed within the 30 year period). We assume that the qualitative benefits continue indefinitely, even though one could argue that they only continue for the life of the assets that deliver these benefits.

Conversion of existing customer-owned DG to dispatchability – we assumed an all-in conversion cost of $175/kW.

Cost of new generation capacity – we assumed an average cost of $1,500/kW.

Interoperability savings: it was assumed that system integration + installation costs for SG 2.0 applications are 50% of the total costs, and that system integration costs are 50% of that, i.e., 25% of total installed costs.

Please note that given the diversity of definitions, there may be some double-counting of costs in the numbers above. For example, some of the deferred capital costs associated with the SG 2.0 and the least cost investment strategy may already be accounted for in some of the cited projections of infrastructure investment requirements.

**We have applied the “80/20 Rule”: this assumes that for all SG 2.0 application deployments, 80% of the benefits can be achieved with a 20% deployment, i.e., we are using an optimized deployment strategy tied to the “most valuable” nodes across the SG. Yes, this is a fairly optimistic assumption, but we do know of two recent cases where “surgical” deployment of an SG application reduced the number of deployment nodes by about 67% while still delivering most of the value. One of the deployments was based on a power system simulation model that identified the “most valuable nodes” for deployment.

***Unserved energy/outage costs, if calculated, could be based on rule-of-thumb average cost estimates cited by NARUC: residential -- $2.50/kWh; commercial: $10/kWh; industrial: $25/kWh.

****R&D costs: we see the most challenging needs being the development of (1) real-time control and automation algorithms, software and systems for smart grid, and (2) large-scale power system dynamic simulation models that include market operations.

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

Leave a Reply

Your email address will not be published. Required fields are marked *