by John McDonald

 

John McDonald is the General Manager of T&D Marketing for GE Energy. He is also an IEEE Fellow and the co-author of several seminal books on power engineering. It is his ability to look at both sides – the market side and the technology side – that caused us to recruit him as a contributor to SGN. Portions of this article were updated and adapted with permission from “Leader or Follower: Developing the Smart Grid Business Case,” which appeared in the November/December 2008 issue of IEEE Power & Energy Magazine.

 

Technology and market forces are converging to fundamentally change the way the grid operates, with consequences we will feel for generations. We must make decisions as significant as those wrestled over by Edison and Westinghouse as they debated DC versus AC power distribution. To make those decisions and to quickly capture the benefits of the Smart Grid, utilities need to get organized and act with urgency. They must understand the challenges; and then they can apply four approaches that will help them get past the roadblocks.

 

Challenges Facing Utilities

Despite the changing environment, a number of challenges are preventing utilities from fully understanding and developing their Smart Grid strategies:

• Technology obsolescence: Fearing new discoveries will render current solutions outdated, utilities resort to a wait-and-see approach. This is particularly the situation with communications technologies that form the backbone from the meter end-point typically to the substation. Options span powerline, broadband, and radio frequency technologies as well as the quickly maturing WiMAX, 3G and 4G or LTE (long-term evolution) applications.
• Silo conditions: Smart Grid efforts lag when utility departments work only within their own area and fail to collaborate with one another. The vision for the Smart Grid becomes narrow rather than comprehensive.
• Cautious skepticism of benefits:  Overcautious utilities become mired in a prolonged period of piloting multiple technologies. While pilots are an important step in confirming both the suitability and the benefits of Smart Grid technologies, often pilots are designed to test specific rather than a broad set of capabilities.

Moving Forward

To break through these barriers, utilities need to be willing to try some new approaches. I have identified four solutions that can help utilities move Smart Grid projects through existing bottlenecks:

·       Cultivating a cross-functional perspective

·       Developing a strong business case

·       Relying on open standards

·       Pacing investment and deployment

 

Cultivating a Cross Functional Approach

Breaking out of departmental silos requires a cross-functional perspective merging engineering, field operations, back office, IT, customer operations as well as generation skills and expertise. Many Smart Grid efforts find their genesis in AMI initiatives. But utilities that have had success moving their Smart Grid vision forward have typically formed cross-functional groups with strong executive mandates to explore and develop the business case for Smart Grid. For example, AEP has a cross-functional group driving Smart Grid development from both the corporate and operating company perspectives.

 

Once assembled, the team of cross-functional experts, backed by executive sponsors, is tasked with developing the business case for Smart Grid. Many utilities already have an AMI case. In those instances, the Smart Grid business case can build upon the AMI case.

 

Developing a Strong Business Case

In developing the business case, the cross-functional team’s central question is to assess the impact of a Smart Grid. That assessment should look at a broad range of benefits while also considering the associated costs based on existing and emerging technology options. Possible benefits include:

• Significant O&M cost reductions across metering, customer care, billing, and credit and collections have been documented by utilities that have had advanced metering infrastructure (AMI) systems implemented for several years. Additional O&M reductions in field operations in both gas and electric have been more challenging to capture but the opportunities are certainly visible.
• Avoided capital spending is also a critical and key benefit supported through demand response and asset optimization based on advanced monitoring and diagnostics. For bundled utilities, avoided capital covers both generation and grid investments. For unbundled utilities, this typically involves avoided power purchases in addition to grid investments.
• Significant reliability benefits are driven by Smart Grid as well. The combination of AMI and fault detection, isolation and restoration (FDIR) creates a powerful driver to reduce SAIFI (System Average Interruption Frequency Index) as well as SAIDI (System Average Interruption Duration Index). On the other hand, more accurate reporting of outages as opposed to traditional estimation methods may actually increase CAIDI (Customer Average Interruption Duration Index) and quicker automatic restoration does result in shifting events from SAIFI into MAIFI (Momentary Average Interruption Frequency Index).
• Improved customer service will grow out of Smart Grid deployment. Currently, many utilities struggle to provide accurate information back to the customer on key areas such as billing and outage notification and updates. Accurate and instantaneous meter reads eliminate bill estimation challenges. They also make it easier to provide customers with up-to-date service information. In addition, two-way communication and demand response give customers more control over their energy consumption.
• Grid safety is enhanced through Smart Grid applications. Integration of mobile workforce applications with advanced geospatial information systems and asset monitoring and diagnostics provides frontline crews with accurate location and state of sensitive equipment. The ability to diagnose outages more comprehensively also helps in crew safety preparation.
• Making the grid ready for renewables is a critical role for the Smart Grid. With intermittency of larger-scale renewable energy sources (such as wind farms) and the technical challenges of flowing power back and forth from distributed generation, grid controls are increasingly important. Future benefits of integrating plug-in hybrid vehicles (PHEVs) and more advanced microgrids will also require Smart Grid infrastructure to become reality.

In addition to the quantifiable benefits, the business case must also ensure the following:

·       Reliability

·       Customer satisfaction

·       Environmental and distributed energy benefits

·       Financial benefits

 

Understanding these benefits and their secondary and tertiary impacts is important to establishing the business case. Many of them have already been documented in recent filings and industry discussions. Recent filings in California, for example, demonstrate the net present value (NPV) business cases that AMI can deliver. Recent announcements by Progress Energy on integrated volt/var controls, by PG&E on distribution automation, by AEP on its GridSmart initiatives and by Duke Energy on its development of broad Smart Grid applications indicate that momentum is growing for a more comprehensive Smart Grid definition.

 

The business case can also be developed by evaluating Smart Grid capabilities individually. For example, AMI, Fault Detection, Isolation and Recovery (FDIR), Volt/VAR can be assessed as three independent modules and their returns can be measured separately (although there will be cost interdependencies).

 

Once a business case has been pulled together, the next step is to understand how Smart Grid fits into the broader utility strategy, especially developing the regulatory case for these investments. Completing the financial and business regulatory cases helps the utility build a "road map" for deployment which indicates where the value is, what is the right sequencing of decisions and how regulatory actions should progress (and with what step-gates). Vendor assessment and technology selection should follow once the deliverables on the Smart Grid are established.

A Smart Grid roadmap should address four primary areas:

1. Technology available today and planned for the near future
2. Industry standards, existing or in process, and their impacts on technology decisions
3. Goals and objectives and needs of the utility (align roadmap with corporate goals and objectives)
4. Results of business case  

Employing Open Standards

Open standards can go a long way toward solving the problem of technological obsolescence.  For example, while communication technologies are certainly evolving, IP-based open standards are fast becoming the expectation. This means smart equipment (e.g., meters, sensors, capacitor bank controllers) is designed to be agnostic to alternative communication environments.

 

In addition, hybrid solutions are also becoming more common. These combine technologies to fit specific terrain characteristics of a utility and help mitigate the risk of single technology investments. Humayun Tai, a partner with McKinsey who works with utilities on developing their Smart Grid strategies, commented "Utilities need to work backwards from understanding what specific grid and metering functionalities they need, how this translates into bandwidth, latency, and other requirements and then determine what is the optimal communications solutions. AMI and grid applications have distinct needs and can be addressed differently."

 

Pacing Development

Because benefits from Smart Grid accrue over time, investments in Smart Grid need to be paced such that the cumulative benefits correspond with the timing of needs. For example, developing and launching a successful demand response program takes time because it relies on educating and convincing customers. To defer near-term, peak-based generation investments or to avoid expected high-cost power purchases in constrained markets, a utility will need to launch its demand response program several years ahead of when it needs the additional capacity.

 

In addition, pacing deployment provides a trade-off between spreading upfront investment costs and the payback period. Targeting deployment with areas where there are greater benefit opportunities (e.g., higher losses, uncollectibles, lower reliability pockets) can also alter payback periods.

 

Leader or Follower?

As the Smart Grid matures, there is urgency in developing a Smart Grid vision. Utilities owe it to themselves to take advantage of the interest PUCs are showing in granting accelerated depreciation or financing costs for pilots. The gap between leader and follower will widen. The four guidelines outlined above will help utilities get organized and systematically develop fact-based perspectives.