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In My View

Smart Grid Adoption

Answers Found in a Strong Business Case

Whether we call it the smart grid or not, modernization of the country’s energy infrastructure has gained far more visibility in the last few years as a convergence of economic, regulatory, and political forces placed it front and center as a national priority. Just about all stakeholders with a vested interested in an updated grid understand that the process of grid transformation is ongoing and will continue to evolve as the industry strives to achieve higher efficiency and reliability.

For an idea of what lies ahead for the United States in terms of progress toward these ends, it would be helpful to examine the financial and technological determinants that directly influence the pace of adoption.

In early 2012, KEMA took a brief survey of technology vendors, solution providers, and utilities to learn about their current progress toward smart grid rollouts and perhaps gain insight into main issues influencing business decisions in the near term.

Survey Results

The overall survey results concluded that many utilities may have hit the ground running with strong initial project rollouts but appear to have leveled off upon arriving at decision points associated with later stages of smart grid development. For example, although a healthy 66% majority of respondents reported they had been able to test the business case for implementing advanced metering infrastructures (AMIs) or distributed energy resources, no survey respondents placed follow-on related capabilities for demand response or electric vehicles as a current priority in terms of deployment.

Related to this pause in the move toward modernization are observations that the market for AMIs in the United States has “stalled” but that the market is growing in parts of the developing world—China, Brazil, and especially other parts of Asia Pacific and South America.

Inherent with the approval needed to deploy a smart grid, most regulators, municipal councils, boards of directors, or other decision bodies rely upon the development of a positive business case. The business case will often hinge on identification of the utility’s key business requirements, validation of automation systems and technology choices to be deployed, and an overall road map specifying the sequence of applications and key steps over time. Often, as a foundation to this business case lies an economic model, with sufficient analysis regarding multiple deployment scenarios, variability in key inputs, and an array of projected benefits.

A Complex Business Case

As can be expected, the smart grid business case analysis has become more complex in recent years, given the wide array of choices in technology and variability in each utility’s own specific business requirements and external environmental factors. This has resulted in a number of attempts by public or private entities to develop a generic smart grid economic model, but with mixed success. Key regulatory decisions will often come down to whether the business case invokes enough confidence with approval authorities that the underlying analysis considers all potential risks, even those not yet identified. After all, who would have predicted the irrational reactions of consumers with some of the smart metering deployment programs lately?

One real complexity in the United States is that the economic benefits in terms of energy savings from peak shifting (driven by time-differentiated rates or dynamic pricing) and demand response often do not accrue to the transmission and distribution entity but instead are monetized through wholesale markets. This makes it difficult for the utility to “commit” to a business case with the regulator and forces the regulator to make the bet on changed energy usage, something they are uncomfortable doing without an ability to hold anyone accountable.

By contrast, in some South American countries, traditional monthly metering, as we are used to in the developed world, is not uniformly present, and collecting payments for electric energy usage is a challenge. AMI projects are essential to improving utility finances, detecting and avoiding theft, and positioning the energy infrastructure on a more operationally and fiscally sound basis. Furthermore, per capita energy consumption is relatively low in South America and Asia Pacific, thus much lower levels of discretionary load are available to support the demand response benefits that are being projected in U.S.-based programs.

Focus on Risks

Building a more robust business case—one that can stand up to greater stakeholder and regulatory scrutiny—can therefore benefit from having an increased focus on the various risk factors brought about in a complex program like a smart grid deployment. For example, distribution automation systems can reduce manual steps and human actions. However, what potential safety risks are introduced when there were insufficient accompanying investments in technical training and socialization of the program’s importance within the user community? Or when backup procedures and mechanisms are not put in place in case operating equipment fails prematurely? Identifying and assessing the impacts associated with safety factors is critical to electric power and natural gas systems, so why not account for these impacts in the smart grid economic model?

Other potential areas of risk that should be quantified in the smart grid economic model include project investment risk—what are potential impacts due to inferior product quality or inferior information? What about risks due to the sustainability of the program over time or due to insufficient operations from lack of cultural acceptance? Other key questions could include, but are not limited to, the following:

  • What if the customer awareness levels have not been raised sufficiently to get them to participate in customer facing programs?
  • To what extent is disposal of replaced assets creating risks to the environment?
  • What would be the impact of realizing benefits in the event of unexpected fraud and corruption?
  • How likely are supply chain disruptions, and what impact would they have on the business case outcome?
  • What is the impact on the company’s reputation if projected benefits are not achieved?
  • What outcomes are possible due to unexpected disasters as a result of weather, cybersecurity breaches, or simple human error?

While a number of utility programs may have at least identified, and perhaps documented, potential impacts from common risk factors, the key question is this: how have these and other unidentified risks been included in the economic model to truly understand the impact to projected financial returns? Does the analysis provide enough confidence that in view of these risks, the program is well designed to mitigate or remove such factors from having a material impact? Deploying a strong analysis using proven risk management analyses and leading practices will be a key component of future smart grid business cases.

Technology and Interoperability Are Key

As important as answering the business challenges is for implementing the smart grid, KEMA’s survey data also showed that more than half of the respondents felt technology performance and interoperability were a critical influence on infrastructure investments. Indeed, globally accepted standards for equipment, software, and practices are essential for an interconnected grid.

The role of smart grids will not only impact each of these dimensions, but its progress in industry will be impacted by how well each of these areas is being addressed in the forefront of new and emerging deployments. For instance, very few smart metering or smart grid program business cases can have a positive outcome without some degree of quantified demand response benefits, or at least having a high degree of confidence in achieving operational benefits. Further developments in these areas can provide that greater certainty, perhaps improving the justification in future regulatory proceedings to fund smart grid deployment.

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