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Policies Get Smart

State and federal incentives push utilities to invest in grid intelligence.

Fortnightly Magazine - June 2008

The power system in North America is at a crossroads. The system has delivered unprecedented growth and prosperity since it started as a single system in New York City more than a century ago. But the next half century presents significant challenges. Since 1990, electricity demand has increased 25 percent and is expected to double by 2050. The issue of carbon management is emerging as a game changer, putting additional stress on the system.

Moreover, capital investment requirements are staggering. The cost to build new transmission is increasing—often exceeding $1 million per mile. According to Jeff Sterba, CEO of PNM Resources, with a business-as-usual approach, approximately $750 billion to $800 billion will have to be invested in the electrical grid and generating infrastructure by 2020 (see Figure 1) . This puts extreme pressure on industry and society to find ways to capitalize, site, permit and build the infrastructure necessary to meet the demand challenge.

The technology revolution provides an opportunity to optimize—and perhaps reduce—these capital investments. Smart metering and grid automation technologies create opportunities to tap a new operational resource—the demand side.

Research indicates that broad use of demand-side management could mitigate up to $70 billion of the projected $450 billion investment needed between now and 2020. Unlike critical peak pricing, which is called upon approximately 12 times a year, fully automated demand response can deliver valuable, persistent responses in real time, all the time. This capability can reduce wholesale market volatility; support integration of renewable power sources; improve system reliability and resistance to disturbances and blackouts; and defer expansion costs.

But while technology is a fundamental element of the solution, transforming the grid requires additional, key ingredients—specifically, regulatory innovation and consumer engagement.

Smart Grid Incentives

Historically, utilities have been given a guaranteed a rate of return on capital investments, with profits tightly coupled with the volume of energy customers’ use. This has created a disincentive for utilities to invest in alternatives to capital asset construction, even when the alternative investments—such as distributed generation, energy efficiency or demand response—might reduce customer rates, improve reliability efficiencies and offer environmental benefits.

Title XIII of The Energy Independence and Security Act of 2007 (EISA) provided a federal policy signal to change this profit model. Specifically, §1307 reads, “Each State shall consider requiring that, prior to undertaking investments in nonadvanced grid technologies, an electric utility of the State demonstrate to the State that the electric utility considered an investment in a qualified smart grid system based on appropriate factors, including (i) total costs; (ii) cost-effectiveness; (iii) improved reliability; (iv) security; (v) system performance; and (vi) societal benefit.

“Each State shall consider authorizing each electric utility of the State to recover from ratepayers any capital, operating expenditure, or other costs of the electric utility relating to the deployment of a qualified smart grid system, including a reasonable rate of return on the capital expenditures of the electric utility

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