How Do We Pay for a Modern Grid?

In last month's column, I discussed the US grid research agenda and whether it is too narrow or too broad. This month, we will discuss paying for the Modern Grid. I’ll show how you can spend a fraction of your ‘business-as-usual’ capital layouts on Smart Grid-related improvements at a zero-cost differential.

The Modern Grid Initiative is a DOE-funded project managed by the National Energy Technology Laboratory

First of all, what I am about to recommend for your consideration is not mainstream thought.  However, it does have credible analysis and study behind it.  What if we look at the capital project budgets planned at every utility over the next 5 to 10 years (not just T&D but also generation), we see substantial dollars.  Doug Houseman, CapGemini Utility Consulting Practice told me that a soon to be released survey will show that the US industry is planning to spend more than $2.8T over the next decade (Business As Usual case).  This is more than everyone’s predictions of the cost of modernizing the grid.

From four Smart Grid studies we have participated in since 2002, the costs of modernizing the grid with intelligence and integrated technologies, will cost between +6% more and -20% less than the current “Business As Usual” capital projects budget.  This depends on whether the Smart Grid effort is focused on reliability (+6%) and renewables penetration (-20%).  So, if you are East of the Mississippi, it’s probably +6%, and West of the Mississippi, it’s probably -20%.  For the nation, this roughly works out to be a zero difference.  That’s right, by comparison, enacting a Smart Grid strategy in the US will cost no more than the “Business As Usual” capital projects spending already planned, maybe less.

Paying the Price

One of the analyses the NETL Modern Grid Initiative team conducted was to review the financial perspective of the electric system recognizing that it has lots of inputs and outputs, financially. 

It is important to note the concept of industry average asset utilization (AU). This is a system where you have four broad areas of capital expenditures and asset utilization: generation, transmission, distribution and consumer systems. If we affect a change in the Consumer Systems and Distribution AU, it will affect a change in the Transmission and Generation AU.  The money that is already planned to be spent in additions for growth and replacement of retiring assets is roughly $936B. 

Our analysis shows that if we use $266B which represents the replacement money for generation-assets and the consumer systems planned annual purchases of distributed generation, and invest that money in grid upgrades with intelligence and integrated technologies, we can effect a positive change up the entire chain.  This money would improve the Consumer Systems AU to 10% and Distribution AU to 40%, resulting in a significant improvement in Transmission and Generation as well.  The result is spending $266B completely offsets the $936B planned capital influx in the “Business as Usual” case.  This is consistent with the results of the four Smart Grid studies mentioned above.

It seems like a no-brainer.  So, why hasn’t the industry done something about it?  Good question.

Recognizing the Cost

We are not sure the industry recognizes the macro-financial aspects of the electric system. Some folks do, but such financial perspectives as outlined above are non-traditional in the utility industry.  In other industries, the model developed above is an obvious step in any manufacturing process cost analysis where asset utilization is king.  In our industry, we don’t even measure it.  We are the only capital-intensive industry where asset utilization doesn’t seem to matter.  Certainly, utilities are not rewarded for using assets well.  The fixed rate of return and regulatory processes do not reward good AU, in fact, they reward low AU.

Low asset utilization is the real cost in our electric financial system.  Everything else is fluff.

The Bottom Line

There is more than enough capital planned over the next 10 years to fund modernization of the US electric system at zero cost differential.  We just need to change the “Business As Usual” case from spending money on the traditional things to spending it on things that improve asset utilization.

Next month, we will discuss policy and regulatory change needed for modernizing the nation’s grid.
   Email Steve Pullins