Brattle study details benefits of utilities’ grid modernization efforts
The Brattle Group recently analyzed the business case and cost recovery mechanisms for grid modernization investments in the United States.
Commissioned by the National Electrical Manufacturers Association (NEMA), the study “Reviewing the Business Case and Cost Recovery for Grid Modernization Investments: Summary of Recent Methods and Projects,” looked at 21 recent grid modernization investments as well as conducting 10 case studies to assess the cost-benefit analysis of grid modernization technologies, especially when relating to customers and utilities.
The researchers analyzed five areas of grid modernization: distribution infrastructure hardening and resiliency; transmission infrastructure hardening and modernization; smart grid and distribution system modernization; advanced metering infrastructure (AMI); and distributed energy resources (DERs).
“Smart Grid and distribution system modernization investments take the front seat in most of the grid modernization plans we have reviewed,” said Sanem Sergici, lead author of the study. “I think there is finally the appreciation that the ‘utility of the future’ will not be possible with an antiquated grid. More utilities are proposing smart grid and distribution system modernization plans and regulators are also more enthusiastic about enabling these proposals,” added Sergici, a principal in Brattle Group’s Boston office who specializes in the areas of energy efficiency, demand response, smart grid and innovative pricing.
The results of the study showed that most advancements of grid modernization were undertaken due to local or state policy requirements, although some were also done because of utility initiatives. Sergici said that projects motivated by legislation or regulatory orders “did not necessarily have a much smoother approval process,” but that the success was mostly determined by the strength of the cost-benefit analysis presented tor regulators.
“However, there were still some exceptions to this, such as Public Service Company of Colorado’s (PSCo) Advanced Grid Intelligence & Security (AGIS) program which had a benefit-to-cost ratio of 0.87, indicating that projected costs were estimated to exceed projected benefits, yet eventually received approval,” Sergici said. “The utility discussed that the investments from the program were necessary for other initiatives and innovative rate structures to move forward, pointed to benefits that were harder to quantify and therefore not included in the cost-benefit analysis, and emphasized the importance of investments to support reliability and safety for customers.”
The researchers found that most regulatory approvals were contingent on benefit-cost tests, although some were also approved based on break-even analysis, proof-of-cost prudency, and foundational nature of investments for enabling other utility initiatives.
“Traditional cost of service model has worked very well for so many years for the regulation of electric distribution business,” Sergici said. “But given the evolution in the power industry, it is leading to unsatisfactory outcomes for utilities and other stakeholders, including customers and regulators.”
Sergici explained that “the revenue recovery process does not always match utility costs as they are incurred.” Because rates are usually set for multiple years, revenue requirements that are estimated when setting rates are almost always different from costs that are incurred by the utility after the first year. The researchers believe this could slow down the pace of innovation and any initiatives.
Because of this, “grid modernization investments that would enable a more distributed energy future may lead to short-term and long-term earning losses for utilities under the traditional cost of service model in the absence of modifications to this model,” Sergici added.
The researchers also found that some jurisdictions have been considering broader application of alternative regulatory models, including “performance-based regulation,” due to the need of cost recovery of grid modernization investments. Brattle expects the trend to continue as the need for grid modernization increases.
Sergici added that several states that have “innovative regulatory environments” (including New York and California) are evaluating or have instituted the new mechanisms.
Bringing the stakeholders to the discussion early in the process and incorporating their input into the cost-benefit analyses also helps to achieve a favorable outcome, according to Sergici. Customer engagement is a key component of any grid modernization effort, the study found.
“Utilities are moving away from the ‘ratepayer’ mindset and trying to find new ways to turn into more customer-centric organizations,” Sergici said. “Along with the evolution of the power industry, the typical utility customer has also been evolving. More and more customers are interested in new technologies, having more rate options and having access to cleaner energy choices. Utilities’ grid modernization efforts will help meet these new needs and demands from their customers.”
Sergici added, “A key element of any grid modernization plan should be to communicate the value of these new investments to their customers and have them understand and appreciate the new and enhanced level of service they will be getting from their utility.”
