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Smart-Grid Strategy: Quantifying Benefits

Modeling the value of various technologies and applications.

Fortnightly Magazine - July 2009

when it is most costly. If properly designed, the SG would provide enough flexibility to handle the increased charging load, and possibly allow PHEVs to send excess power back to the grid. The technological hurdles associated with emerging technologies create great uncertainties in the timing and valuation of their benefits, but are no less important in SG benefit analyses. DER and PHEVs are transformative technologies that hold extraordinary potential for economic and environmental benefits.

These two major categories—established and leading-edge—represent a simplified description of all potential benefit streams. To quantify these value streams, each component of the SG is evaluated for seven types of benefits: avoided metering costs, avoided generation investment, avoided T&D costs, energy cost savings, system reliability benefits, carbon emission reductions, and (for later use with the PHEV module) avoided gasoline costs. Each component of the SG provides a different set of benefits from among these seven metrics. The total value of an SG investment is the sum of benefits from each component of the SG listed above. In abbreviated equation form: Total SG Value = Sum of the Values from AMI, DR, EE, DER, and PHEV.

Big Picture Benefits

Good SG strategies begin with careful assessments of risk levels, opportunities, and the regulatory environment. Utilizing some general assumptions and industry observations, an analytical model generates baseline benefit estimates and reveals big-picture benefit trends. A few of these benefits can be captured with little to no investment, but most require significant capital outlays.

To illustrate this thought experiment, consider a fictional utility called Smart Power, which serves approximately one million customers in an urban area and has experienced growth in peak demand at a slightly faster rate than growth in energy consumption (see Figure 1) . Based on current industry trends, Smart Power might deploy AMI to all customers by 2012. To quantify all benefits, the model considers a 40-year time horizon, which is necessary to capture the impacts of emerging technologies.

For AMI, the model considers the direct value from avoided meter reading and operations and maintenance (O&M) costs. These avoided costs represent a major benefit for Smart Power as AMI allows it to reduce labor costs and increase operational efficiency by reading meters remotely. Current annual metering costs for traditional meters are conservatively estimated to be $15 million a year for this utility (or roughly $15 per customer per year). These avoided costs amount to a present value of $250 million. The next step, of course, would be to compare this against the costs of AMI.

The next benefit stream 5 includes customer savings from dynamic pricing alone, as well as savings from dynamic pricing offered in conjunction with such enabling technologies as two-way communicating thermostats in residential applications and automatic DR in commercial and industrial (C&I) applications. 6 Dynamic pricing significantly can reduce Smart Power’s capacity requirements by decreasing system peak demand. The model reveals that these technologies potentially could decrease the utility’s system peak demand by approximately four percent over the 2010 to 2050 horizon. Dynamic pricing has the potential to generate $347 million in savings