The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
Business Case Tradeoffs
Shaping long-term smart-grid strategy.
infrastructure can be leveraged to accomplish a number of objectives, the value proposition can become compelling. 2
As the utility scans the horizon for the next steps in smart grid’s evolution, it’s easy to organize the thinking around technologies. Storage, wind, solar, micro-grids, smart thermostats, pre-pay, direct load control, smart appliances, electric vehicles, distribution automation and distributed generation all have a decidedly technology footprint if for nothing more than the fact that they often are aligned with vendors, trade shows, market studies, and industry consortiums and they have unique forces shaping their product maturity. From the utility’s perspective, however, it’s better to organize around programmatic themes such as: transmission-level optimization; distribution system optimization and automation; facilitating renewable energy sources; facilitating the introduction of distributed resources; and assisting consumer choice. The technology prescription goes only so far.
To give proper consideration to these ostensibly competing opportunities, the utility will align the business case work with core company objectives. It can’t queue up the business-case efforts within silos and restrict the work to a discovery of narrow operational benefits—that won’t highlight the important tradeoffs. Take reliability as an example. It’s one completely non-fungible utility company objective—few utilities would want to trade off lower reliability with, say lower energy costs; it just isn’t a viable direction. 3 By elevating reliability into the business case it becomes possible to compare competing technology alternatives and programs around a central and non-fungible business requirement (recognizing at the same time that further concreteness around specific reliability outcomes is useful).
Part of the challenge of elevating objectives ( e.g., reliability) is that doing so will require the use of tools like power flow studies, which often is technically challenging, time consuming and expensive work. It also might require lots of work to sort out which particular aspects of reliability need addressing and how best to measure them. What’s the value, for example, of improved NERC reliability compliance, or what’s the value of being able to integrate various new forms of generation? In short, it could be difficult to bring in a very wide set of expertise into the business-case effort and create a sustained dialogue with disparate disciplines.
Another problem is that objectives might have ambiguous links to specific actions and project capabilities, and so these benefits sometimes appear intangible or soft. As a result, too often utilities don’t work hard enough to stretch the benefits case to include these benefits. Take the case of increasing commercial customer access to energy use and cost data. This is a high order priority for utilities. They also would agree that advanced metering is a concrete capability that facilitates, if not enables, energy management in commercial buildings by increasing the customer’s access to energy use and cost data. The link is clear. As reported by DOE:
By adopting energy management best practices, businesses can reduce their energy use significantly, by up to 30 percent or more. These practices include assessing energy performance, setting energy savings goals, and regularly evaluating progress, all of which require on-going access to consistent data. Use