GHENT UNIVERSITY

FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION

ACADEMIC YEAR 2011 2012

THE ROLE OF ELECTRICITY GRIDS IN THE ENERGY TRANSITION: AN ECONOMIC ANALYSIS

Master thesis in fulfilment of the requirements for the degree of Master of Science in Economics

Waldo Vanderhaeghen Supervised by Prof. Dr. Johan Albrecht Ruben Laleman

PERMISSION Ondergetekende verklaart dat de inhoud van deze masterproef mag geraadpleegd en/of gereproduceerd worden, mits bronvermelding. I hereby declare that the content of this master thesis can be consulted and reproduced, on condition that proper acknowledgement is given. Waldo Vanderhaeghen

Preface
This Master dissertation is the concluding work of my academic studies. After my Master in Comparative and International Politics, I have worked for the European Policy Centre, a European think tank. Working on European climate and energy policy, I became intrigued by the interaction between policy and economics. When the time came to choose a subject for my Master thesis, my interest was quickly captured by the subject of energy policy. There are several people who I wish to thank for supporting me in this project. First of all I wish to thank Prof. Dr. Johan Albrecht for entrusting me with this subject and advising on how to approach the issue. His classes on energy and climate policy have stimulated me to be critical towards studies and to look for what reports dont tell. I would also like to thank Ruben Laleman for the advice regarding the thesis content and format. Furthermore I would like to thank my girlfriend Hannah who was always there to listen to my nerdy electricity market jokes and support me in my choices and ambition. I am very grateful to my sister Femke for proofreading the entire manuscript and making waffles. I am also thankful for the help from Wouter and Niels. Finally, I would like to thank my parents for providing me with the opportunity to study. Their love, help and support have shaped me to become the person I am today. Thank you.

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EXECUTIVE SUMMARY Smart grid technology uses information and communication technologies to upgrade the traditional electricity grid infrastructure. This new system would improve overall operational and investment productivity, efficiently integrate renewable energy, enable rising demand from electric vehicles and consumers would gain more power over their electricity bills. The concept of a smart grid is fully analysed, together with an in-depth look at the technological components. The main technological problems are the lack of storage options and the absence of universal open standards for smart grid data communication. To examine the smart grids true value, an economic analysis is performed of the costs and benefits of a smart grid. There is still a great deal of uncertainty among researchers. National studies generally conclude with a positive societal business case of smart grid deployment, but they often use very challenging premises and different methods. More RD&D is warranted to determine how consumers react when faced with different price systems and better electricity usage information. Their reaction is very determining for the smart grid potential. Transmission and distribution operational savings are positive across case studies and are realised via e.g. reduced meter reading costs and operational optimisation. Safety, reliability and power quality also improve substantially across projects. The environment benefits from lower electricity consumption, grid efficiency improvements and a more efficient integration of renewable energy. And finally, energy security improves due to the lower carbon intensity and a decreased reliance on fossil fuels. Despite the many positive findings, there is a considerable gap between current and optimal smart grid investment in Europe. The main barrier inhibiting a rapid smart grid deployment is the lack of business case demonstrations due to uncertainty and maladjusted business models. Policy and regulation can assist in aligning actors interests with the desired policy goals. Technological challenges and concerns relating to data privacy and security constitute the other two barriers to progress. A quantitative assessment was made of the costs and benefits of a full smart grid deployment in Flanders. Calculations show that the annual net benefits total 0,3917-1,9463 billion and the total net present value over 5 years is 3,7975 billion. Besides a very positive societal business case for a full smart grid roll out, all stakeholders involved realise a positive business case. However, due to uncertainty there is a risk that the network operators might lose 147,59 million annually over five years. Consumers have a huge potential in savings, but these benefits strongly depend on consumer participation in energy efficiency and demand response systems.

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NEDERLANDSTALIGE SAMENVATTING Slimme netten maken gebruik van informatie- en communicatietechnologien om het traditionele elektriciteitsnet te upgraden. Een slim net zou de operationele en investeringsproductiviteit verhogen, hernieuwbare energie efficint integreren, de massale introductie van elektrische wagens mogelijk maken en de consument zou meer macht krijgen over zijn/haar elektriciteitsrekening. Het concept en de benodigde technologie voor een intelligent net worden volledig geanalyseerd. De belangrijkste technologische problemen zijn een gebrek aan opslagcapaciteit en de afwezigheid van universele open ICT-standaarden voor datacommunicatie via het slimme net. Om de werkelijke waarde van een slim net te onderzoeken, wordt een economische analyse uitgevoerd van de kosten en baten van een slim net. Er is nog veel onzekerheid bij de onderzoekers. Nationale studies besluiten vaak met een positieve maatschappelijke business case, maar gaan niet zelden uit van zeer uitdagende aannames en maken gebruik van erg verschillende methodologien. Meer RD&D is nodig om te bepalen hoe consumenten reageren wanneer zij beter worden genformeerd over hun energieverbruik en geconfronteerd worden met verschillende prijs-systemen. Hun reactie is zeer bepalend voor het potentieel van een slim net. Operationele besparingen binnen transmissie en distributie worden gerealiseerd door o.a. verminderde meterstand lezingen en operationele optimalisatie. De veiligheid, betrouwbaarheid en energiekwaliteit verbeteren overheen alle projecten. Het milieu profiteert door de lagere elektriciteitsconsumptie, netwerk efficintie verbeteringen en een meer efficinte integratie van hernieuwbare energie. Tenslotte verbetert ook de energie veiligheid door de lagere koolstofintensiteit en een verminderde afhankelijkheid van fossiele brandstoffen. Ondanks de vele positieve bevindingen is er toch nog steeds een aanzienlijke kloof tussen de huidige en optimale investeringen in slimme netten in Europa. De belangrijkste factoren die een snelle uitrol van slimme netten tegenhouden, is het ontbreken van business case demonstraties als gevolg van onzekerheid en onaangepaste business modellen. Beleid kan helpen in het uitbalanceren van de belangen van de belangrijkste betrokken partijen met het oog op de beleidsdoelstellingen. Tenslotte werd een kwantitatieve beoordeling gemaakt van de kosten en baten van een volledige ontplooiing van een slim net in Vlaanderen. Uit berekeningen blijkt dat de jaarlijkse netto-voordelen 0,3917 - 1,9463 miljard bedragen en de totale netto contante waarde over meer dan 5 jaar 3,7975 miljard bedraagt. Naast een zeer positieve maatschappelijke business case voor een volledige ontplooiing van een slim net, realiseren alle individuele betrokken partijen eveneens een positieve business case. Echter, als gevolg van onzekerheid bestaat er een risico dat de netbeheerders 147,59 miljoen per jaar zouden verliezen gedurende vijf jaar. Consumenten hebben een enorm potentieel aan besparingen, maar deze voordelen zijn sterk afhankelijk van participatie van de consumenten in energie-efficintie programmas en variabele prijsmechanismes.

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Table of content
List of figures ......................................................................................................................................VIII List of tables .......................................................................................................................................... IX List of abbreviations ................................................................................................................................X Introduction ............................................................................................................................................. 1 1 The electricity grid and the energy transition .................................................................................. 3 1.1 1.2 The energy transition ............................................................................................................... 3 The traditional grid challenged ................................................................................................ 4 Rise of renewable energy ................................................................................................ 4 Increasing demand ........................................................................................................... 6 Increasing prices .............................................................................................................. 7

1.2.1 1.2.2 1.2.3 1.3

Opportunities for change ......................................................................................................... 8 Liberalisation ................................................................................................................... 8 New investments underway............................................................................................. 9 Availability of new technologies ................................................................................... 11

1.3.1 1.3.2 1.3.3 1.4 2

Conclusion ............................................................................................................................. 12

What is a smart grid? ..................................................................................................................... 13 2.1 2.2 2.3 Definition............................................................................................................................... 13 Characteristics ....................................................................................................................... 14 Smart technologies ................................................................................................................ 15 Advanced metering infrastructure (AMI) ...................................................................... 18 Energy management system (EMS)/ Home area networks (HAN) ............................... 19 Plug-in electric vehicles (PEVs) charging infrastructure .............................................. 20 Demand response (DR) systems .................................................................................... 21 Distributed and renewable electricity generation (DG/RES) ........................................ 22 Advanced energy storage .............................................................................................. 23 Distribution automation (DA) ....................................................................................... 24 Transmission enhancement applications ....................................................................... 25 Systems management .................................................................................................... 25 V

2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 2.3.6 2.3.7 2.3.8 2.3.9

2.4 3

Conclusion ............................................................................................................................. 27

Smart grid cost- benefit analysis ................................................................................................... 28 3.1 National studies ..................................................................................................................... 28 U.S. ................................................................................................................................ 28 Europe ........................................................................................................................... 29

3.1.1 3.1.2 3.2

Benefits.................................................................................................................................. 32 Categorisation of benefits .............................................................................................. 33 Interconnecting benefits ................................................................................................ 34 Benefits by source of benefit ......................................................................................... 36 Critical remarks ............................................................................................................. 43 Summary of findings ..................................................................................................... 43

3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.3

Costs and barriers .................................................................................................................. 45 Lack of business case demonstrations ........................................................................... 45 Policy and regulation ..................................................................................................... 48 Technology and standards ............................................................................................. 48 Data privacy & security concerns.................................................................................. 49

3.3.1 3.3.2 3.3.3 3.3.4 3.4 4

Conclusion ............................................................................................................................. 49

A Flemish smart grid? ................................................................................................................... 50 4.1 The Flemish electricity system .............................................................................................. 50 Electricity generation..................................................................................................... 51 Electricity transmission ................................................................................................. 52 Electricity distribution ................................................................................................... 52 Supply............................................................................................................................ 53 Federal and regional competences and regulators ......................................................... 53 Cost structure of electricity ........................................................................................... 53

4.1.1 4.1.2 4.1.3 4.1.4 4.1.5 4.1.6 4.2

Cost-benefit analysis of a Flemish smart grid ....................................................................... 54 Costs .............................................................................................................................. 58 Benefits. ......................................................................................................................... 59

4.2.1 4.2.2 4.3

Stakeholders business case................................................................................................... 62

VI

4.4 4.5

Critical remarks ..................................................................................................................... 64 Conclusion ............................................................................................................................. 65

General conclusion ................................................................................................................................ 67 References ............................................................................................................................................. 70 APPENDIX A ....................................................................................................................................... 80

VII

List of figures
Figure 1: National overall targets for the share of energy from renewable sources in gross final consumption of energy ............................................................................................................................ 3 Figure 2: Increasing costs due to market renewable energy sources penetration .................................... 5 Figure 3: The variability of wind energy over a one year period ............................................................ 6 Figure 4: Electricity prices (without tax) for household consumers (2.500-5.000 kWh) ........................ 7 Figure 5:Electricity trade in Europe ........................................................................................................ 9 Figure 6: Electric power transmission and distribution losses in % of output, average 2006-2008 ...... 10 Figure 7: Investments from selected electricity TSOs in their national grid 2004-2010....................... 11 Figure 8: Fully networked, bi-directional smart grid .......................................................................... 13 Figure 9: From traditional to smart grid ................................................................................................ 14 Figure 10: Geographical distribution of smart grid investments and project categories ....................... 16 Figure 11: Smart grid technology components ..................................................................................... 17 Figure 12: Levels of implementation of smart metering in European countries ................................... 19 Figure 13: Home area network (HAN) .................................................................................................. 20 Figure 14: Load shifting ........................................................................................................................ 22 Figure 15: Valley filling ........................................................................................................................ 22 Figure 16: Storage options .................................................................................................................... 23 Figure 17: Distribution Automation Revenue, World Markets: 2008-2015.......................................... 24 Figure 18: Smart metering communications ......................................................................................... 26 Figure 19: Possible communications infrastructure for the smart grid.................................................. 26 Figure 20: Danish smart grid: investment costs and benefits ................................................................ 30 Figure 21: Traditional industry value model ......................................................................................... 46 Figure 22: Flemish electricity system.................................................................................................... 51 Figure 23: Belgian energy mix 2011 ..................................................................................................... 52 Figure 24 Belgian energy mix 2020 ...................................................................................................... 53 Figure 25: Cost structure Belgian electricity use .................................................................................. 55 Figure 29: Flemish smart grid cost-benefit analysis.............................................................................. 58 Figure 30: Top 15% of the French load duration curve, 2008 .............................................................. 61 VIII

List of tables
Table 1: Summary of estimated costs and benefits of the smart grid .................................................... 28 Table 2: Cost-benefit of smart grid deployment in the three scenarios ................................................. 31 Table 3: Mapping between high-level services and benefits ................................................................. 35 Table 4: List of smart grid benefits ....................................................................................................... 37 Table 5: Division of benefits of smart grids in the Netherlands ............................................................ 47 Table 6: Overview annual costs and benefits main actors..................................................................... 63 Table 7: International comparison of reliability indices (2007) ........................................................... 82 Table 8: National overall targets for the share of energy from renewable sources in gross final consumption of energy in 2020 ............................................................................................................. 82

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List of abbreviations
AMI BAU CAIDI CAPEX CO2 CO2e CREG DA DG DR DSO EC EPRI ESCO EU EV GWh HAN HVAC ICT kWh MAIFI MW MWh NAP NREAP O&M OPEX PEV R&D RD&D REG RES ROR RUE Advanced Metering Infrastructure Business As Usual Customer Average Interruption Duration Index Capital Expenditure Carbon Dioxide CO2 equivalents Commission for the Regulation of the Electricity and Gas markets Distribution Automation Distributed Generation Demand Response Distribution System Operator European Commission Electric Power Research Institute Energy Service Company European Union Electric Vehicle Gigawatt hour Home Area Networks Heating, Ventilation, Air Conditioning Information and Communication Technologies kilowatt hour Momentary Average Interruption Frequency Index Megawatts Megawatt hours National Action Plan The National Renewable Energy Action Plans Operation and Maintenance Operational expenditure Plug-in Electric Vehicle Research & Development Research, Development and Deployment Renewable Energy Generation Renewable Energy Sources Rate Of Return Rational Use of Energy

SAIDI SAIFI SG SGTF T&D TA TBD TOU TSO VAR VREG

System Average Interruption Duration Index System Average Interruption Frequency Index Smart Grid Smart Grid Task Force Transmission and Distribution Transmission Automation To Be Determined Time Of Use Transmission System Operator Volt-Ampere Reactive Flemish Regulator of the Electricity and Gas market

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Introduction
Without serious upgrading of existing grids and metering, renewable energy generation will be put on hold, security of the networks will be compromised, opportunities for energy saving and energy efficiency will be missed, and the internal energy market will develop at a much slower pace (European Commission, 2011a). Todays structure of the electricity supply chain is the result of over 100 years of development. There have been periods of change in the past, but many believe the electricity grid is about to undergo one of its most fundamental changes in the coming decennia. The European electricity sector is experiencing several dynamic changes. The EU 20/20/20 targets caused a regulatory push all over Europe, resulting in a higher share of renewable energy in the total energy mix and several large-scale smart meter rollouts. Electricity demand is expected to increase due to the electrification of our economy and meanwhile electric vehicle charging infrastructure is being built all over Europe. These factors push the traditional grid up to its limits, which is an important reason why electricity prices across Europe are increasing. Technological breakthroughs have revolutionized the way we communicate and exchange information. A smart grid would use these technologies to enhance the grid. Costs would be minimised, renewable energy would be optimally used and consumers would gain more power over their electricity bills. A surge of new investments in the old European network infrastructure could accommodate such changes. The European market liberalisation and unbundling have given space for new market initiatives. The increased cross-border electricity trade also opens up new possibilities. A smart grid could enable the on-going energy transition towards renewable energy and an electrification of our economy. Based on an in-depth literature study this thesis will analyse the economic desirability of a full smart grid deployment. After framing the role of electricity grids in the energy transition, chapter two investigates what the definition and characteristics are of a smarter grid. A closer look at the smart technologies helps in fully understanding the working of a fully operable smart grid. The third chapter draws from a wide array of studies to perform a provisional cost-benefit analysis of smart grids. After comparing several national studies, a methodology is worked out to classify the different smart grid benefits. As far as possible, demonstrated smart grid benefits are quoted but where this is not possible, the research is based on estimated benefit potential. However, there is no such thing as a free lunch. Therefore, costs and barriers towards change are identified.

The final chapter tests the business case for a smart grid deployment on Flanders, one of the three Belgian regions. This is an interesting region for this case study as there has not yet been a smart grid cost-benefit analysis for Flanders or Belgium and there is some conflicting evidence regarding the benefits of a smart meter roll out (Schrijner et al. 2008; Schrijner et al., 2012). The Flemish electricity market structure is covered first, to quickly move on to the actual cost-benefit analysis. The findings of chapter three regarding costs and benefits are applied on the Flemish case. The business case for a full smart grid deployment is discussed with attention for every stakeholder. Finally some critical remarks are discussed.

The electricity grid and the energy transition

The electricity grids are the veins through which the economys blood, electricity, streams. In the 20th century eventually every person was supplied of electricity. The 21st century energy transition challenges the grid to do even more. The rise of renewable energy pushes the grid to become more dynamic in order to efficiently deal with intermittent energy sources. Demand increases at peak hours while there is already a lot of idle capacity. Prices also increase while a smarter grid could save money. And indeed, there are several opportunities for change, pushing the electricity market towards innovation. The electricity market liberalisation initiated by the European Commission (EC) opens up new markets while investments in the grid surge. And finally, the availability of new technologies enables a smarter and more efficient grid.

1.1 The energy transition

The term energy transition is used to describe the changing pattern in energy use (Grubler & Cleveland, 2011; Jiang & O'Neill, 2004). The European Union (EU) is planning to change this pattern drastically. First of all, through energy efficiency measures the EU targets to moderate total energy consumption. Secondly, by increasing the share of renewable energy the EU aims to increase the energy quality, i.e. lower carbon intensity of energy. The European Union has set three ambitious targets (European Commission, 2009b): A reduction in EU greenhouse gas (GHG) emissions by 20% below 1990 levels; A 20% reduction in primary energy use compared to 1990, realised through energy efficiency measures; Increase the share of energy from renewable energy sources (RES) to 20% by 2020 compared to the 1990 levels. Henceforth, this policy will be referred to as EU 20/20/20. The post-2020 framework goes even further. The Heads of States committed to cut greenhouse gas emissions by 80-95% by 2050 and at the same time the EU Emissions Trading System (ETS) will continue to reduce the emissions cap for the ETS sectors by 1,75% every year beyond 2020. The energy production sector is expected to support the targets with a 93%-99% reduction in CO2 emissions (European Commission, 2011b; Wilkes, 2011). To support energy efficiency, the European Union set a 2020 deadline for an 80% roll out of smart meters in Europe with a two-way communication and remote control capability, unless the member states can show it is not economically worthwhile (European Commission, 2012a). In the field of renewable energy, figure 1 illustrates the burden sharing agreement underlying the common target with national binding goals ranging from 11% for Luxemburg to 49% for Sweden. The 3

electricity sector will have to take up a larger portion of the renewable energy target than other sectors (e.g. transport). The European Commission expects the electricity sector to draw more than 30% of its energy from renewable sources (European Commission, 2009b). We can expect the RES contribution to electricity to be 1200 TWh or 33,9% of electricity production in 2020 (Jger-Waldau et al., 2011). Figure 1 National overall targets for the share of energy from renewable sources in gross final consumption of energy

Source: Own construction based on European Commission, 2009b; European Commission 2009e.

1.2 The traditional grid challenged

The electricity grid remains largely a one-way system for delivering electricity from the producer to the consumer (infra p.13). New challenges force the grid to change to the new environment. 1.2.1 Rise of renewable energy

Climate change has raised awareness of the effects of increased carbon emissions and has focussed attention on the negative externalities of the use of electricity and its energy sources. Electricity production causes about 40% of Europes output of GHG emissions (Eskeland, Rive & Mideksa, 4

2008). The EU 20/20/20 and ETS policy plays a substantial role in pushing the electricity sector towards an increased use of renewable energy. Variable distributed generation capacities such as solar, wind and biomass power have already been installed and connected to the transmission and distribution grid. The total share of renewables in the energy mix is expected to rise to 20% in Europe, but the electricity sector is expected to take up a larger share of this share of renewables. Belgium for example targets a share of 20% RES in the electricity mix compared to a 13% target of RES in the total energy consumption. However, integrating these variable and distributed resources into the grid at high penetration levels and bringing them to the market is a challenging task. Figure 2 Increasing costs due to market renewable energy sources penetration

Source: Taskforce Intelligente Netten, 2010. Figure 2 illustrates that a traditional grid (infra p.13) will experience rising costs when renewable energy sources have reached a certain percentage of the electricity market. Wind does not blow and sun does not shine all the time, so wind turbines and solar panels sometimes stand idle and other times generate huge amounts of power. These kind of renewable energies are intermittent. Figure 3 compares the hourly output of 500MW wind power capacity every day over one year, based on Danish data. The red line shows the output of a single site, the blue line shows the multiple site output (European Wind Energy Association, 2005). The first problem with these intermittent RES is that the distribution and transmission system is not built to support the peak capacities inherent to intermittent energy. In 2011 the network operators in Schleswig-Holstein had to pay 15-20 million for wind power they could not accommodate because of network overload (Mueller, 2012). The second

problem is that sometimes there is little to no wind or sun which translates in no wind or sun energy being supplied to the grid. The only solution in a traditional grid infrastructure is to have a high base load capacity supplied by classical electricity generation plants (nuclear, gas, coal) or to have back-up plants, also working on fossil fuels, which start up when the wind dies down (e.g. gas). Unfortunately, these alternatives require huge financial investments and are large GHG emitters. Figure 3 The variability of wind energy over a one year period

Source: European Wind Energy Association, 2005. 1.2.2 Increasing demand

Electricity demand expanded substantially over the past decades. The total net electricity generation went up from 858,3TWh in 1975 by 397% to 3408,4TWh in 2010 (ENTSOE, 2010). The European energy consumption has since long been shifting to the use of electricity which was 19% in 1999 and 21% in 2010 of total energy consumption (own calculations based on Eurostat, 2011). Several new electrical and household devices have been introduced of which the most notable example is of course the computer. The share of electricity in the total energy demand is expected to rise even further, with for example the introduction of the hybrid car. Of the gross electricity generation in 2006, only 83,78% was eventually consumed (Eurostat, 2006). Already 5% to 8% of installed generation capacity is idle for 99% of the time in most parts of the EU (Faruqui, Harris & Hledik, 2009). A mass introduction of electric vehicles would increase electricity use at peak hours (i.e. evenings) leading to further inefficiencies. To supply enough energy at those peak hours would entail building a vast amount of generation capacity which would not be used during the largest part of the day. Prices would surge to unknown heights.

1.2.3

Increasing prices

Electricity prices have been increasing. The blue column in figure 4 shows the spectacular electricity price increase for household consumers in Belgium, while the green column indicates the generally increasing energy prices in the Eurozone. This is all the more notable taking into consideration the economic crisis and the associated slump in electricity demand. This pressures policy makers to look into possible cost-saving changes within the grid infrastructure. Figure 4 Electricity prices (without tax) for household consumers (2.500-5.000 kWh)

Source: Eurostat, 2011. Recently electricity prices in Europe surged with more than 20% in reaction to the German announcement that eight nuclear reactors would be closed with immediate effect and the last three in 2022. More price increases are expected as a consequence of the German and Europeanreliance on renewables (Blass & Wiesmann, 2011) Clark Gellings, Vice President Technology of EPRI and project manager of the EPRI report on cost and benefits (Electric Power Research Institute, 2011), has stated that the average electric bill will probably go up by almost 400% by 2030 unless a smart grid is deployed, in which case the price increase would be limited to 50% (Carson, 2011).

1.3 Opportunities for change

1.3.1 Liberalisation

The third energy package mandated full market liberalisation and unbundling (European Commission, 2009c). The national electricity markets had to change dramatically. Whereas the infrastructure segments, transmission and distribution, could remain monopolistic, competition needed to be introduced in the service segments, generation and supply (Deconinck & Gillard, 2005). This has caused a wave of mergers and acquisitions, as well as the emergence of new service providers (van der Zanden, 2011b). The liberalisation of the European market and increased competition boosted cross-border electricity trade. Since 1975 total electricity exchanges within Europe increased by 607%, from 62,8TWh to 381,6TWh in 2010 (ENTSOE, 2010). In terms of electricity consumption, the cross-border electricity exchanges in Europe have increased from 7,8% of electricity consumption in 1998 to 10.3% in 2005 (European Commission , 2007). This hides substantial differences among countries as can be observed in figure 5. Regional successes in particular are booming. The Nordic market (Nordpool) has existed for a long time and now the Central Western European market is also developing (APX, Belpex and Powernext) (European Commission, 2004). Within this liberalised context in a larger market, more things are possible than in the old national markets. For example, one could think about Germanys increasing reliance on intermittent renewable energy which will cause more variable exports and imports. Norway may be the solution here. It has been coined by some as Europes green battery as it draws almost all of its electricity from hydroelectric plants which could, using pumps, serve to even out the large variations in energy supply. Solutions such as these make the liberalisation of the European electricity market an interesting market opportunity for change (CEDREN, 2011).

Figure 5 Electricity trade in Europe

Source: ENTSOE, 2010 1.3.2 New investments underway

The electrification of our economy associated with a modern lifestyle strains the electricity system, which is often beyond its design life and is being stretched to the limits of its capacity. Most of the transmission and distribution systems are in operation for 30 to 50 years. These old European grids suffer from noteworthy losses of electricity of 2% to 4% in transmission and 4% to 9% in distribution (Majstrovic, 2010). Figure 6 provides a short overview of the transmission and distribution losses in Europe.

Figure 6 Electric power transmission and distribution losses in % of output, average 2006-2008

Source: Giordano et al., 2012. However, new investments in the transmission networks are setting in, as illustrated by figure 7. The annual investment of TSOs in their networks has doubled in the last five years. The top 14 Transmission System Operators (TSO) combined investment programmes grew by 13% in 2010 and reached 6,5 billion. In some countries such as the UK these investments are needed to replace aged assets, in other countries such as France and Italy the investments serve to relieve congestion. The IEA expects Europe to invest in excess of 500 billion in power transmission and distribution (van der Zanden, 2011b). An important new aspect is the need for investment to integrate RES in the grid (Capgemini, 2011). It seems the time to invest in the future is now.

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Figure 7 Investments from selected electricity TSOs in their national grid 2004-2010

Source: Capgemini, 2011. 1.3.3 Availability of new technologies

Technological breakthroughs have revolutionized the way we communicate and exchange information. Until recently, the electricity grid appeared to be immune for this evolution. However, cost reductions in grid-related information and communication technology (ICT) has enabled viable smart grid business cases to emerge. Smart meters as information gatherers have decreased in cost and the fee for data processing in data centres has also diminished. The 21st century has seen the dawn of the commercially viable electric vehicle. Few automotive manufacturers did not yet announce the production of an electric or hybrid car. According to Ernst & Young (2010) 2013 will be the year that wind energy becomes cost-competitive compared to fossil fuels. The European Union is one of the frontrunners in the smart technology field with a total of 45 million installed smart meters. In Europe, 4,5 billion has already been invested in smart grid related research, development and deployment (Giordano, Gangale, Fulli and Sanchez Jimnez, 2011). There seems to be a substantial opportunity in consolidating this head start in terms of productivity and GDP growth.

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1.4 Conclusion
The EU strongly supports the energy transition towards a low-carbon economy. The 20% reduction in GHG emissions by 2020 below 1990 levels is buttressed by a 20% increase in RES and a 20% energy efficiency increase by 2020. This creates challenges for the traditional electricity grid. Popular renewable energy sources such as wind and solar power are whimsical in their electricity generation. The traditional grid can accommodate this only with expensive back-up fossil fuel power plants. This pushes up prices. European electricity prices have already been climbing. However, Europe increasingly relies on electricity for its energy consumption. Demand has steadily been rising and is expected to continue doing so with the introduction of the electric vehicle. However, new opportunities are opening up. The liberalisation of the European internal market stimulates cross-border electricity trading and allows for new market entries. The current grid infrastructure is up for renewal and investments in distribution and transmission networks are surging. The necessary ICT technologies have become cost-effective and suitable for massive deployment.

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What is a smart grid?

This chapter starts with the definitions of a smart grid, to quickly move on to the defining characteristics. Seven characteristics or high-level services are identified which constitute the basic attributes of a smart grid. This smart grid is built on particular technologies which enable it to smarten the way the electricity grid should be planned, built, operated and maintained.

2.1 Definition
The concept and definition of a smart grid vary from very concise to very encompassing and elaborate descriptions (Electric Power Research Institute, 2010). In a narrow portrayal, a smart grid can be described in purely technological terms as the next-generation electrical power system typified by an increased usage of communication and information technology in the generation, transmission, distribution and consumption of electrical energy. A more ambitious, architectural approach is that a fully functioning smart grid would transform the electricity system from the current centralised network to a more decentralised consumer interactive network, as illustrated in figure 8 (IEEE, 2012). Figure 8 Fully networked, bi-directional smart grid

Source: ABB, 2009 The European Commission (2011a) has described a smart grid as an electricity network capable of cost efficiently integrating the actions and behaviour of all actors involved, producers, consumers and those that do both. The objective is to achieve an economically efficient and sustainable power system with low levels of energy loss and high levels of quality, safety and security of supply. Although todays grids are already smart to a certain degree, a smart grid would not only be an incremental but also a transformational change in allowing for more complexity in an efficient and effective way. The smart grid is built on intelligent monitoring, control, communication and self-healing technologies that 13

will work together, much like on the internet, to improve the economics, environmental impact and safety of the electricity grid. A small overview can be found in figure 9. Figure 9 From traditional to smart grid

Source: ABB, 2009.

2.2 Characteristics
As becomes clear from the description given above, the smart grid has not been given a strict singular definition, allowing for discretionary interpretations. The approach of the U.S. Department of Energy (2012) and the European Commission (2011a) Smart Grid Task Force (SGTF) has been to define characteristics and benefits which should be achieved by implementing a smart grid solution along with the smart grid technologies to achieve those goals. Characteristics are here defined as prominent attributes, behaviours, or features that help to identify a smart grid as smart. The EU Commission Task Force for Smart Grids (2011a) has identified six high-level services which can be expanded to seven. To specify and clarify these services, the following also draws on the work of the Electric Power Research Institute (2011). 1. Enabling the network to integrate users with new requirements. The smart grid accommodates all generation and storage options. Besides supporting large, centralised power plants, it also guarantees the integration of distributed energy resources connected to the distribution network (e.g. renewable energy generation (REG), electric vehicles (EV), cogeneration and storage). 14

2. Enhancing efficiency in day-to-day grid operation. The smart grid optimises asset use and operates efficiently through applying current technologies to enhance automation, monitoring, protection and real time operation. 3. Ensuring network security, system control and quality of supply. The smart grid can better resist attacks (e.g. vandalism, falling tree or flooding) on the grid infrastructure. First of all it can observe, react and alert when a threat is recognised within the system with the help of sensors, cameras, automated switches and the in-built intelligence. Secondly the grid is self-healing by accurately identifying and isolating the problem to minimize an outage. The grid software can also perform continuous predictive analysis to detect future problems and suggest corrective actions. 4. Enabling better planning of future network investment. The smart grid enables better investment planning through accurate modelling of networks based on more accurate data. 5. Improving market functioning and customer service. The smart grid improves data and data flows allowing for new market opportunities. Third party vendors can provide new products and services supplying customers with a wider range of choices and tools for managing their electricity costs and usage. 6. Enabling and encouraging stronger and more direct involvement of consumers in their energy usage and management. The smart grid reintegrates consumers into the electricity market by fostering a greater electricity consumption awareness and more choices regarding electricity price schemes. 7. Empowering the European integrated electricity market. Although this is not incorporated in the list of high-level services of a smart grid (European Commission, 2011a), it is not a negligible point. A smarter grid will allow for better coordination of the increasing use of intermittent energy sources and cross-border electricity trade in the EU.

2.3 Smart technologies

The integration of smart technologies in the electricity grid should not be seen as a revolution, but rather an evolution of how the electricity grid should be planned, built, operated and maintained. In the future, electric power will still be transported and distributed over copper and iron. The key principles of physics will not change due to the implementation of smart grid technology. The gradual smartening of the electricity grids is a continuous process. New technologies such as digital metering, distributed renewable generation, storage or electric vehicles together with smart applications such as grid automation, energy management systems and demand-response systems, will eventually lead to a smarter grid. Several technologies depend on one another to function optimally and to realise the full benefits of a smart grid.

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Figure 10 Geographical distribution of smart grid investments and project categories

Source: Giordano et al., 2011. Figure 10 illustrates the geographical distribution of smart grid investments and project categories. These correspond loosely with the technology areas defined above. An outlier is the 15% of the total budget spent on smart grids in the EU which goes to the integrated system category. These projects investigate the integration of the different technologies and applications into the wider smart grid system and thinking. This highlights again that we cannot consider each smart technology in isolation, but should think of it as part of the wider grid system. However, to clarify the workings of a smart grid, introspection into the individual technologies behind the system is very useful (Giordano et al., 2011).

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Figure 11 Smart grid technology components

Source: own work based on van der Zanden, 2011b; Elzinga D., 2011. A fully optimised electricity system will make use of all the different technologies in figure 11. It is the most common classification of technologies (National Energy Technology Laboratory, 2010). They span the entire system from generation over transmission & distribution to supplying customers. These eight technology areas define the smartness of the grid: Advanced metering Infrastructure (AMI) Energy management system1 / Home area networks (HAN) Electric vehicles (EVs) charging infrastructure Demand response (DR) systems Distributed and renewable electricity generation (DG/RES) Advanced energy storage Distribution automation (DA) Transmission enhancement applications

In most literature the term energy management system is used instead of energy management services although they mean the same. In this paper the term energy management system will be used.

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 2.3.1

Systems management Advanced metering infrastructure (AMI)

Smart meters are the basis of the smart grid intelligence. The old analogue meters simply measured the total quantity of electricity consumed. These accumulation meters required manual reading to calculate how much energy has been used within a billing period. More advanced interval meters record energy use over shorter intervals, typically every 30 minutes. Smart meters are even more sophisticated allowing for two-way communication and remote readings of energy use over even shorter intervals. The device provides a real-time display of electricity use and pricing information and contains ports with which other electrical appliances can be automatically controlled (supra p.19). The utility can apply dynamic tariffs and can cut and restore the electricity supply from a distance due to for example non-payment, overload of the grid or outage (Ekanayake, 2012). The advanced metering infrastructure (AMI) is responsible for the two-way communication between the smart meter and the utility company. At the consumers side, smart meters communicate consumption data to the user via the users energy management system (supra p.19). They can supply the information to the consumers home area network (HAN) to make the consumer more aware of his/her electricity usage. Combined with accurate pricing information at the time of use (ToU) the AMI is the crucial link between utilities and HANs to enable e.g. demand response systems and efficient electric vehicle implementation. At the utilitys side, the AMI data collected from smart meters is analysed by back office systems to help in optimising operations, economics and consumer service performance. The data can be used to minimise outages, track grid deficiencies, support grid automation and improve asset management (Elzinga D., 2011). Pushed by government regulations and initiatives, or actively driven by utilities, several EU countries already have a big coverage of smart meters (figure 12). In 2011, smart meters were installed with 10% of the EU households. This number is expected to reach 100 million by 2016 (Seung-Yoon, 2012). Frontrunners are for example Sweden and Italy which have more than a 95% penetration of smart meters. Other countries are lagging behind (Renner et al., 2011). In total about 45 million smart meter devices have been installed for a total investment cost of 4,5 billion (Giordano et al., 2011). Figure 12 provides an overview on who are the first movers and laggers within Europe in the field of smart metering. Although Belgium scores well in terms of utility activity, there is little to no regulatory push, as illustrated recently (Winckelmans, 2012).

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Figure 12 Levels of implementation of smart metering in European countries

Source: van der Zanden, 2011a. The AMI costs are on average 100/meter based on the data from the Giordano et al. (2011) study. This largely corresponds with the estimates of the Electric Power Research Institute study (2011). Leaving out the commercial and industrial sectors, the residential meter cost for meter + AMI is $4080/unit. Adding a remote disconnect and HAN option, the price range evolves to $80-140/meter (Electric Power Research Institute, 2011). Current trends indicate that European households could save 10% of their consumption (i.e. 60/year) through smart meter applications (European Commission, 2011a). 2.3.2 Energy management system (EMS)/ Home area networks (HAN)

The smart meter element in AMI on itself will not save energy, it are the energy management tools built on this enabler that will deliver the electricity benefits. A Home Area Network (illustrated in figure 13) is an integrated ICT system of smart meter, in-home display, microgeneration, smart appliances, smart sockets, HVAC (Heating, Ventilation, Air Conditioning) facilities and plug-in hybrid/electric vehicles (Ekanayake, 2012, p. 109). The energy management system (EMS) is the decision processor operating the HAN, and therefore the electricity flow, organising demand response participation, controlling distributed generation (e.g. solar panels), charging the electric vehicle and possible storing energy (e.g. in the electric car battery) to sell it later. The EMS is the interface for the consumer to control his/her electricity usage. The customer chooses at what price and when e.g. the dishwasher and dryers should work and the energy management system arranges the smartest (i.e. cheapest) solution to keep the refrigerator and the living room at the desired temperature.

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Figure 13 Home area network (HAN)

Source: Ekanayake, 2012. From home security firms over telecom companies to utilities are taking steps to enter the EMS market. A notable example in Belgium has been the smart energy box from Electrabel, one of Belgiums biggest electricity producers and suppliers. In the box there are four energy plugs and the access codes to a web application where you can track and control your electricity use. You can switch electrical appliances off and on from a distance (Electrabel, 2012). However, things are quickly moving past these rather simple applications. GE, Whirlpool and U-Snap for example are rushing in the smart home appliances market. As can be observed in figure 10, the UK is the frontrunner in the smart home application market. From 2011 to 2015 that market is expected to grow by 61% from $146.0 million to $969.0 million. For example, in 2015 the sales of smart washers are projected to be $207,9 million, sales of smart refrigerators are projected to reach $161,7 million and sales of smart dryers are projected to be $150,7 million (Rodriguez, 2010). 2.3.3 Plug-in electric vehicles (PEVs) charging infrastructure

Plug-in electric vehicles (PEVs) will also need to be connected to the HAN and EMS. They are defined as any hybrid vehicle with the ability to recharge its batteries from the grid, providing some or all of its driving through electric-only means (Electric Power Research Institute, 2011, p.140). Smart grid supporters see it as the distributed alternative for large scale electricity storage capacity by using the electric car as a battery, where the vehicles electricity can feed back into the grid when needed (vehicle to grid: V2G), thereby balancing daily load cycles. First of all it is clear that there will need to be PEV specific charging infrastructure. People will tend to charge their PEVs in the evening (17-20h) which is already a peak moment in terms of electricity use. But even if they wait until it is night-time, the stress placed on local transformers would be enormous and supplementary investments would need to be made to accommodate the additional demand on the grid. To avoid increasing peak electricity demand, the timing and pattern of PEV battery loading should be carefully planned. Smart charging programmes using flexible pricing strategies would have to be put into place (infra p.21).

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The second challenge is that the smart grid dream of the PEV as a distributed battery has yet to be proven true. There are no proven applications which provide reverse flow power capabilities (V2G). Furthermore, the impact on battery durability, the economics of the system and the acceptance among stakeholders, has yet to be demonstrated (Electric Power Research Institute, 2011). Despite these challenges, the expectations regarding the rise of the PEVs are high. The IEA in its World Energy Outlook 2010 expects the sales of electric vehicles (EV) to reach 3 million per year by 2020 and 20 million per year by 2035 (Taylor, 2010). PHEVs are expected to sell even better, with a total of 8 million by 2020 and over 60 million by 2035. National policies are pushing quite hard in the direction of more electric vehicles. The Netherlands targets a total of 800.000 PEVs by 2020 (Hbner & Prggler, 2011). Germany aims to put 1 million PEVs on the road by 2020 in the e-Mobility Plan. The UK goes even further to 1,7 million EVs but France is aiming even higher to 2 million EVs by 2020 (van der Zanden, 2011b). 2.3.4 Demand response (DR) systems

Demand response systems can help in dealing with the higher peak demand caused by e.g. EVs and renewable energy. Broadly speaking DR stands for the communication about the electricity use and price changes in the market between the utility and the consumer. Through flexible pricing at time of use, consumers can minimise their electricity bill by choosing (or letting the EMS choose) to consume at times of low prices instead of at peak demand, and utilities can balance or level the load consumption patterns. This in turn can help to avoid investments in new power plants, conserve resources and moderate energy prices. Where today only static pricing or, at most, day/night time tariffs exist, the range of different pricing schemes will expand offering real-time or dynamic pricing to consumers (National Energy Technology Laboratory, 2008). Generally three types of pricing schemes can be identified (Ekanayake, 2012): ToU rates: predefined, different prices for different time blocks. Its most common form is the day/night time rates. Its the least efficient or effective in reducing peak demand. Real-time pricing (RTP): the electricity prices fluctuate hourly based on the wholesale electricity price. Hourly rates are announced in advance. RTP is the most efficient & effective, but is very complex and volatile. Critical peak pricing (CPP): a hybrid design of ToU and CPP. The basic rate structure is ToU, although utilities are earlier in informing about peak days/hours. However, the peak hour price is increased substantially. As proven in more than 70 pilots, the reduction of peak demand in response to dynamic pricing ranges up to 58% and averages about 20%. These customer responses do persist over time with 21

some pilots operating already since 1990. Over 90% of low income customers saved money in various pilots (Faruqui, 2011). Figure 14 Load shifting

Source: Ekanayake, 2012. Figure 15 Valley filling

Source: Ekanayake, 2012. Figure 14 illustrates the case of load shifting; the demand response system causes a consumption shift between times of the day from on-peak to off-peak consumption. In this case the use of the washing machine (consuming 1kW/2h) was shifted to an off-peak period. The total energy consumption is left unchanged. Figure 15 shows the case of valley filling. Again the goal is to decrease on-peak demand. Valley filling solves this issue by storing energy in the off-peak period in for example a PEV or electric storage heater and releasing this energy in the on-peak period. However, in this case the total energy consumption has increased, as storing electricity also consumes electricity. 2.3.5 Distributed and renewable electricity generation (DG/RES)

This is not a smart grid technology in the strict sense of the word, as one can also find it in traditional grids. None the less it is considered important within the smart grid context. Electricity generated from renewable energy sources (RES) such as solar, wind or wave, is intermittent. When there is no wind, there is no wind energy. Where most countries gain their electricity from large centralised plants, DG embraces the small and local, generating electricity close to the electricity source and close to the point of consumption. Both methods of electricity generation are on the rise (supra p.4).

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However, integrating DG and intermittent RES in the grid is not an easy task. The main issue is that the energy source is no longer 100% reliable. The electricity market is not a normal market where supply and demand interact in a normal way. In the short run the rule is that users cannot consume more than there is supply. The opposite is also true, when there is too much supply, that electricity is lost. Smart grid technologies, such as distributed automation (infra p.24) and advanced energy storage (infra p.23), can offer solutions by reintroducing market forces into the electricity system. 2.3.6 Advanced energy storage

The surge in supply of intermittent resources generates volatility in prices on the wholesale electricity market. The uneven demand for energy during the day creates on-peak and off-peak moments in the day when electricity is respectively expensive and cheap. Reducing the on-peak demand for electricity would reduce the need for electricity generation. As discussed above, demand-response systems could alleviate some of the pressure by changing the demand pattern. However, to achieve a perfect market system advanced energy storage capacity is needed. Figure 16 Storage options

Source: Boston T., 2010. Figure 16 provides an overview of the most important storage options. The biggest promise lies with pumped hydro. A hydroelectric facility can store power by pumping up water behind the dam when demand is low (and prices are low) to release it when demand surges (and prices go up). Hydro power accounts for 98,5% of Norways production of electricity. Many therefore see Norway as the future battery of Europe balancing renewable energy from EU mainland with Norwegian hydro power (Heineman, 2011). As discussed before, PEV batteries are another very promising, yet largely

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unexplored field for storage capacity. Flywheels are an already common rotating mechanical device to provide continuous energy when the energy source is discontinuous (Beacon Power, 2012). More classical means of storage are water heaters and stationary batteries already used as load levelling. 2.3.7 Distribution automation (DA)

Bob Uluski of EPRI suggested in 2010 the following definition of distribution automation (DA): A set of intelligent sensors, processors, and communication technologies that enables an electric utility to remotely monitor and coordinate its distribution assets, and operate these assets in an optimal manner with or without manual intervention (Casemore & Gohn, 2010, p. 1). DAs goal is automatic realtime adjustment to changing loads, generation, and failure conditions of the distribution system, usually without operator intervention. Utilities have been automating their distribution systems since the 1960s and the term DA is said to have originated in the 1970s. (Giordano et al., 2012). However, the dawn of the smart grid challengs the DA to do even more, resulting in increasing DA investments (figure 17). Figure 17 Distribution Automation Revenue, World Markets: 2008-2015

Source: Giordano et al., 2012. There are two main DA applications. First of all, DA helps to reduce electricity losses. In Europe, about 5% from the generated electricity is lost in transmission and distribution due to outages, equipment failure, load inefficiencies, feeder losses or voltage variation (Giordano et al., 2012). The enhanced sensors and smart meters provide better data, enabling improved asset utilisation (Ekanayake, 2012). Eventually DA would enable a smart and self-healing distribution system improving the system operation in terms of reliability, quality, efficiency and effectiveness (Ekanayake, 2012). 24

The second main application is DAs role in integrating intermittent RES and dealing with peak demand. Electricity demand and supply is expected to fluctuate strongly due to PEVs and RES. Where DR moderates this issue on the side of the consumer, DA diminishes its negative impact on the utilities side. First of all DA enables faster communication, optimising load following, the practise where utilities add additional generation to meet on-the-spot demand in the distribution system. Automation via DA fine-tunes this process so generators produce neither too little nor too much (North Pacific, 2012). Secondly DA stimulates an improved interaction between storage options and peak/off-peak demand. Thirdly, interaction between DA and the system management (infra p.25) improves scheduling and predicting additional need for generation capacity and high/low prices (which in turn can be used for DR systems). 2.3.8 Transmission enhancement applications

The transmission system operators (TSOs) are responsible for transmitting high-voltage electricity from producers to distribution system operators (DSOs). In many ways they are the backbone of the electricity system conveying large amounts of electric energy across borders, countries and regions. Whereas a failure in the distribution system has but little effect, a transmission equipment failure cascades into causing huge blackouts. While it is less common in Europe, if it happens, millions of people are affected and costs can run extremely high in a very short period of time. Transmission enhancement applications help to avoid such blackouts and achieve higher efficiency levels. Improvements also aid in coping with the integration of energy resources in remote places such as offshore windmill parks. The system employs advanced sensors in the form of e.g. phasor measurement units and new-operator simulation and visualisation tools which provide better data on the situation on the ground. The improved availability of this data together with high-speed communications enable building a more dynamic management of the transmission system, compared to todays quasi-steady state control (Electric Power Research Institute, 2011). 2.3.9 Systems management

Figure 18 shows the communications structure of a smart grid. Every Home Area Network (HAN) is connected to an individual smart meter. All the smart meters of the households of a certain neighbourhood are in turn connected to the Neighbourhood Area Network (NAN). The Wide Area Network (WAN) accumulates the data from all the NANs and HANs together with information from energy suppliers, network operators, producers and other actors. The WAN is used for corporate business and market operations. Expectations are that the communications infrastructures WAN and SCADA will merge in the smart grid to become the utility WAN (Ekanayake, 2012).

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Figure 18 Smart metering communications

Source: Ekanayake, 2012. Figure 19 illustrates how the electricity system data will be collected and processed in a smart grid setting. The different levels use different technologies and systems. The energy management systems (EMS) operate on the HANs. The distribution management systems (DMS) run on the NAN level. The supervisory control and data acquisition (SCADA) systems work together with the system control centre on the utility WAN. Figure 19 Possible communications infrastructure for the smart grid

Source: Ekanayake, 2012. AMI and grid optimisation systems will continuously gather and send information which will travel through the ICT grid (figure 19). These data carry very valuable information which can be processed to increase a networks efficiency, profitability, safety and reliability. Systems management is one of the crucial smart grid technologies towards a truly integrated electricity grid with sophisticated control

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systems that turn the data into useful information for producers, network operators, suppliers, government and third party vendors.

2.4 Conclusion
The concept of a smart grid is not bound to a strict definition. Descriptions allow for a quite a bit of discrepancy in defining what a smart grid is. The smart grid should efficiently integrate RES and EV, improve overall operational and investment productivity, increase security and quality of supply, advance customer involvement and general market functioning, and empower the European internal electricity market. Smart meters and grid automation technologies form the two key improvements around which a new grid infrastructure the smart grid is built. Integrating these into a wider smart grid system, increases their benefits manifold. Electric vehicles and intermittent renewable energy challenge the grid to deal with higher fluctuations between peak and off-peak periods and bigger load-divergences between demand and supply. The smart grid deals with this issue on two levels. At the consumers side, demand response systems send price signals to even out consumption patterns or accommodate spikes in supply. The consumers advanced metering infrastructure sends the real-time electricity use and receives the price changes. The energy management system reacts by automatically managing the consumers electricity use based on the settings previously determined by the customer. At the side of the network operator, storage options can be used to buffer supply and demand peaks. Distribution automation technology, together with systems management, further accommodates these changing electricity flow patterns through e.g. automated load following. The smart grid also improves overall efficiency and security & quality of supply. AMI and EMS provide real-time usage information to the consumers, helping them to improve their energy efficiency. DA and transmission enhancement applications improve the operational efficiency of the network. Systems management based on better data can drive up investment productivity. And finally, the data gathering and control abilities of DA, systems management and other smart grid technologies has inspired some to call a smart grid self-healing, ensuring the security and quality of supply.

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Smart grid cost- benefit analysis

This chapter will analyse this cost-benefit division of smart grid investments. National studies will be covered first with a special interest for countries which can be compared to Flanders/Belgium. Lacking enough data, Europe has often been chosen as a point of reference. Subsequently we will focus on the smart grid benefits, digging into the mechanisms behind e.g. energy efficiency and operational savings. Finally the main costs and barriers to a smart grid roll out are discussed.

3.1 National studies

3.1.1 U.S.

Electric Power Research Institute (2011) recently made a well-respected and very elaborate costbenefit. Table 1 shows that the estimated net investment requirements needed to realise a smart grid in the U.S. are only $338 to 476 billion compared to a total benefit between $1294 and 2028 billion. This results in a positive balance and a benefit-to-cost ratio of 2,8 to 6,0 in favour of smart grid deployment. The estimated costs encompass almost the whole spectrum of smart grid related expenses based on e.g. the number of distribution substations, kilometres of transmission lines and the incidence of vandalism. However, some expenditures were excluded, such as the cost of new transmission lines, energy efficient devices and consumer appliances and devices. The total costs for consumers will thus most likely be higher than estimated in this study. Table 1 provides an overview of the costs and the benefits. Table 1 Summary of estimated costs and benefits of the smart grid 20-year total ($billion) Costs Transmission and substations Distribution Consumer Net investment required Benefits Productivity (real GDP) Safety (work environment) Environment Capacity (peak load) Cost of energy Power quality Quality of Life (comfort etc.) Security (self-healing) 1 13 102 299 330 42 74 152 1 13 390 393 475 86 74 152 28 82 232 24 338 90 339 46 476 Low High

Reliability & availability Total benefit Balance Benefit-to-cost ratio

281 1294 956 2,6

444 2028 1552 6,0

Source: Electric Power Research Institute, 2010. The major benefits of a smart grid roll out are improvements to the environment, capacity, cost of energy, security and reliability: The environment benefits from a reduction in sulphur hexafluoride emissions, clean-up costs and power plant emissions as there is less need for a high base-load and peak loads are better managed. The capacity is increased due to demand response systems lowering demand in peak hours so energy demand is evened out. This effectively reduces the need for new infrastructure and improves the usage of existing cable lines. The life-cycle cost of energy service would also decrease due to e.g. lower operation and maintenance costs, lower transmission and distribution losses and higher end-use energy efficiency. A smarter grid would also improve the work environment for utility employees. The reliability of the grid would improve substantially in the U.S. by reducing frequency and duration of outages. The U.S. is more sensitive to outages as has been shown in recent history. In 2003 the North East of the USA experienced a blackout costing approximately $6,4 billion and the 12 hour San Diego outage of 2011 resulted in a permanent local economic loss of $100 million (Ernst & Young, 2012). 3.1.2 Europe

Several European member states have also been active on the issue of smart grids, partly due to the ambitious EU 20/20/20 goals, but also in view of the longer term (2035 and 2050). Germany, Finland, Italy, Spain, Ireland and other countries are performing very well in the field of smart grids (Giordano et al., 2011). Denmark, Great Britain and the Netherlands will be discussed in more detail. Denmark is moving very fast in the field of renewables and is, like Belgium, a small country. The Netherlands is often taken as an example for Flanders due to its proximity and the fact the two countries share the same trade context. Great Britain is a fast mover in the field of energy services and emphasises the smart grids GDP growth potential. A. Denmark Denmark has been a frontrunner in terms of renewable energy, especially wind energy, and municipal heat via cogeneration. In a recent report Energinet.dk and the Danish Energy Association (2010) 29

conclude that a smart grid is the most effective and cost efficient method for upgrading the power system. The total investment cost of a smart grid would approximately be DKK 9,8 billion (or 1,3 billion) in present value (albeit at an annual discount rate of 5 per cent). The costs are mainly due to the deployment of metering, control and automation at the consumers premises and in the power grid. Benefits are slightly lower than the costs, totalling DKK 8,2 billion, making a net cost of DKK 1,6 billion. Figure 20 provides an overview of these costs and benefits. However, in total the smart grid strategy would result in an estimated DKK 6,1 billion net benefit. The reason is the so-called avoided costs. In Denmark the traditional expansion strategy without a smart grid would cost DKK 7,7 billion without benefits. Therefore, taking into account the avoided costs, a smart grid turns out to be the less costly option. Looking into the origin of the costs and benefits, large variability can be observed. The Energinet.dk & Danish Energy Association (2010) estimates are based on ambitious 2025 premises such as a 50 per cent wind turbine capacity of Denmarks annual electricity consumption, a total of 600.000 electric and plug-in hybrid vehicles and around 300.000 individual heat pumps. It has to be taken into account that when lowering expectations, we have to lower the smart grid benefit estimates. Also, in the business as usual scenario without smart grids, 74% of the costs stem from the need to strengthen the distribution network. If the EV and heat pump growth scenario doesnt happen, those avoided costs are much lower. Figure 20 Danish smart grid: investment costs and benefits

Source: Energinet.dk & Danish Energy Association, 2010 B. Great Britain 30

An Ernst & Young study published in April, 2012, takes a different approach and investigates the employment and broader gross value added to the British economy (Ernst & Young, 2012). In Great Britain the smart grid concept is isolated from the smart metering deployment. As a consequence, the following study only considers the smart grid costs and benefits. The report investigates the effect of a 23 billion investment. They estimate 6 billion in direct benefits from increased activity along the supply chain, 5 billion in indirect benefits on the purchases of intermediate inputs and capital goods and a 2 billion induced impact of personal purchases of employees and business owners from additional income. This results in a net cost of 10 billion. However, the risks of inaction are also substantial: (i) failing the carbon targets (worst case: total cost of 126 billion in net present value over the 2012 2050 period) , (ii) increasingly rising cost of energy (rising to a total cost of 4 billion in 2050), (iii) deteriorating network performance (12h blackout can cost around 7 billion) and (iiii) inhibited growth of secondary and supply chain industries and associated export potential. The conclusion from this study is that developing a smart grid has a substantial growth inducing potential. However, much depends on the premises regarding avoided costs. C. The Netherlands In the Netherlands KEMA and CE Delft (2012) made a report based on the social cost-benefit analysis of smart grids. Albeit they still await the results of some smart grid pilot projects to make their data more accurate, they were able to make a well-founded cost-benefit analysis for the Netherlands. They ran three scenarios, (i) the business as usual (BAU 2050) with only a limited CO2 emissions reduction, (ii) combination (C&N 2050) of Coal with carbon capture and storage & Nuclear (80-95% CO2 reduction) and (iii) combination (R&G 2050) of renewables and gas (80-95% CO2 reduction). Table 2 Cost-benefit of smart grid deployment in the three scenarios NPV ( billion) COSTS Investments in smart grids Operation & maintenance smart grids Costs for new equipment Welfare loss due to changes in timing in response to pricing -2,10 -2,50 tbd -2,10 -2,50 tbd -2,10 -2,50 tbd BAU 2050 C&N 2050 R&G 2050

tbd

tbd

tbd

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Total costs BENEFITS Avoided gridinvestments Avoided electricity losses Avoided investments in centralised generating capacity Avoided investments in large scale electricity storage More efficient use of electricity Energy savings Lower load issues External effects Welfare loss due to comfort and time gain Total benefits BALANCE Internal interest rate Source: KEMA & CE Delft, 2012.

-4,60

-4,60

-4,60

2,50 0,30 1,20

5,80 0,50 5,10

4,10 0,90 1,00

0,00 1,30 0,70 0,40 0,60 tbd 7,10 2,50 13%

0,00 1,40 0,70 0,50 0,10 tbd 14,10 9,50 28%

0,10 1,60 1,50 3,20 0,10 tbd 12,50 7,90 31%

As can be observed in Table 2 the benefits far outweigh the costs in every scenario. Even in the BAU 2050 scenario the benefits still overshadow the costs with 2,5 billion and an internal interest rate of 13%. This means that smart grids are profitable, even under the scenario of little to no intermittent renewable energy sources on the market. The C&N scenario comes out as the most profitable choice as many of the electricity generation plants are already in place and the electricity produced is nonintermittent meaning there is less need for additional generation and grid investments.

3.2 Benefits
As has become clear, benefit estimations vary widely across studies. They use dissimilar categorisations and focus on different benefits. In this subchapter we will look into the origins of the

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smart grid benefits and try to monetise the effect of every source of benefit on the eventual smart grid cost-benefit analysis. 3.2.1 Categorisation of benefits

In the past many attempts have been made to come to more clear-cut categorisation of the benefits arising from a grid transition to smart grid deployment. Approaches have varied from a focus on avoided costs, economic growth and the societal division of benefits. Faruqui, Hledik & Davis (2009) based their estimations on the present value of avoided costs. A smart grid lowers several costs while making some even obsolete, e.g. meter operation and maintenance, peak load generating capacity, energy loss due to ancillary services for distributed energy resources, energy from gasoline, carbon emissions and lack of reliability. The KEMA (2009) study can be framed within the the American Recovery and Reinvestment Act of 2009. It identifies four benefit categories: (i) economic stimulus, (ii) energy independence and security, (iii) integration and interoperability and (iiii) business plan robustness. Pullins (2008) chose a different approach by dividing the benefits according to the stakeholders receiving them. o The utilities benefit in lowering the operational costs due to e.g. outage management, more efficient workforce and improved processes. They would also be capable of improved asset management in e.g. system planning and capital asset utilisation. o The consumers would experience a higher power quality and reliability. They would be able to improve their energy efficiency through better information regarding electricity use and to lower their bill through demand response systems. o o Consumers who are also producers of e.g. solar energy can benefit more fully from their investment. Society at large can profit from the smartening of the grid via a reduction in emissions and an increase in consumer surpluses. These studies mainly originate from the beginning of the economic crisis and at the start of the talks around a stimulus package. Since then the European Commission has also developed a smart grid costbenefit framework and there has been a move towards a certain kind of standardisation in the field of smart grid cost-benefit analysis. The European Commission defined in their communication (2011a) 11 benefits of a smart grid deployment. This draws from the work of the third expert group of the EU Commission Task Force for Smart Grids (2011c). These 11 benefits are (I) sustainability, (II) grid capacity, (III) efficiency, (IV) consumer participation, (V) grid connection and access, (VI) coordinated grid development, (VII) EU internal electricity market, (VIII) informed consumers, (IX) market mechanisms, (X) mitigated consumer bills and (XI) security & quality of supply. 33

However, this paper will not use this list of benefits as an evaluation criterion for three reasons. First of all, the expert group never meant for it to be a static list, but rather a complete summary (EU Commission Task Force for Smart Grids, 2011c). Secondly, most studies use and advice only 4 or 5 benefit criteria. Finally, the European Commissions Joint Research Centre (Giordano et al., 2012) also advices using the Electric Power Research Institute (2010) cost-benefit framework in its publication of April, 2012, on guidelines for cost-benefit analysis. Thus henceforth, the Methodological advice of the Electric Power Research Institute (2010) in defining the term benefit will be followed. A benefit is an impact of smart grid deployment that has a value for a household, firm or society in general (Electric Power Research Institute, 2010). Examples of such benefits are lower electricity costs for consumers or decreased operation and maintenance costs for utilities. Benefits cannot be collated with smart grid services or functionalities which are outcomes of a project, such as higher consumer participation or a lower peak load. Four fundamental categories of benefits can be identified (Giordano et al., 2012; Electric Power Research Institute, 2010), namely (i) economic, (ii) reliability & power quality, (iii) environmental and (iiii) security & safety benefits. 3.2.2 Interconnecting benefits

Although the Electric Power Research Institute (2010) claims the categories are mutually exclusive, they do overlap in practise. A good example is energy efficiency. It increases productivity, decreases utility costs and could lower electricity prices, while also decreasing greenhouse gas emissions. It is important to realise when studying the business case for a single technology or functionality, that the indirect costs or benefits may exceed the direct costs or benefits. Table 3 demonstrates this interconnection. It illustrates the difficulty to link a service exclusively to one benefit or to calculate the effect of smart grid technologies on a certain benefit without taking secondary and tertiary effects into account. Table 3 is based on personal research and insight. The definition of primary and secondary benefits is derived from McGregor et al. (2012) with further technical details from Giordano (2012). The benefits in brackets are indicative and in no way exhaustive. Table 3 is also a warning sign towards Table 4. Be careful with rushing to conclusions based on the benefits delivered by a certain high-level service or technology: the benefit might actually be higher than appears at first sight or might actually be lower due to overlapping benefits.

34

Table 3 Mapping between high-level services and benefits

High-level services
Integrate with requirements Economic users Enhancing new efficiency O&M Network security Better planning of Market grid & quality of network investments functioning Involvement & consumers of EU market electricity supply customer service benefit Primary benefit

Secondary benefit Primary benefit Secondary benefit Primary (lower ancillary (decrease O&M (lower O&M for (deferred costs, electricity T&Ds) losses,)

benefit Primary benefit Primary D&T (better customer (lower services lower prices)

meter (lower prices)

service costs)

investments)

& reading costs & electricity price) Secondary benefit Secondary benefit (lower cut & (less outages,

Reliability and Power Quality Environmental

Secondary benefit Secondary (less outages) benefit outage restoration costs) Primary (less CO2)

Primary

benefit Secondary benefit

(lower (less outages and (lower electricity & peak load) losses)

restoration due to

costs more stability) remote

possibility) Primary benefit Primary benefit Secondary benefit (less CO2 due to (less CO2 due to (less CO2 due to lower electricity lower electricity cross-border RES interaction) Primary (avoidance blackout) benefit EU

benefit Primary benefit Secondary benefit (less CO2) (less T&D losses)

Benefits

consumption ) Energy Security Primary (more benefit energy secondary benefit Primary (avoidance major (reduced blackouts) benefit wide-

consumption )

independence)

scale blackouts)

Source: (own work based on ideas in McGregor et al., 2012; Giordano et al., 2012)

35

3.2.3

Benefits by source of benefit

Table 4 provides a more detailed overview of the different benefits a smart grid could deliver. The benefit category classification is based on Giordano et al. (2012) and Electric Power Research Institute (2010). On top of this classification, the choice has been to supplement this with the element of productivity & growth as this proved quite important in the British case (supra p.30). When available, case studies of demonstrated or expected benefits are used, mainly from Giordano et al. (2011), McGregor et al. (2012) and U.S. Department of Energy (2010). Projects which proved a certain benefit in real-life case studies are indicated in the table as realised, other benefits are expected benefits.

36

Table 4 List of smart grid benefits Benefit Category Benefit Source of Benefit demonstrated or expected benefits Realised: Change in pricing mechanisms causes U.S. consumers to shift their use with ToU rates 5-10% and with critical peak pricing (CPP) rates 20-30%, saving them 26-37% of on-peak power and $100/year. These cost savings are dwarfed by the total cost savings for the non-participating customers. When only Demand response (DR)/ shifting load 3% of customers in the 51 million customer PJM interconnection market shifted their demand during the 100 highest-use hours in 2005, the shifting customers saved $17,5 million in costs and the non-shifting consumers saved $120 million (Fox-Penner, 2010). Economic Electricity cost savings Pepco Holdings Inc utility (U.S.) estimates saving $95-314 million from demand response, with as a consequence lower electricity bills in the future (McGregor et al., 2012). With DR, Pacific Gas and Electric (U.S.) realised a consumption reduction of 16,9% through the SmartRate programme. 88% of the respondents experienced lower costs as a result of SmartRate participation. Customers falling under the programme realised a 25% saving on their electricity bill (George S., Bode J., Hartmann E., 2011). The Oklahoma Gas and Electric (U.S.) realised a 9% Lower energy consumption/energy efficiency consumption reduction. The European GAD projects estimates the energy reduction potential through DR to be 15% (Giordano et al., 2011). With better energy use information, Pacific Gas and Electric (U.S.) realised a 20% consumption reduction totalling 2.060 GWh, 357 MW and $16,8 million (Pacific Gas and Electric Company, 2011). Realised: (EU) Smart meter interfaces with Italys 32 million smart meters encouraged 57% of the involved customers to change their behaviours (29,3% delayed their use of domestic appliances to the evening, 11.9% avoided the simultaneous use of different appliances, 7.5% switched off appliances instead of leaving them in standby and 6.6% used less the white-goods) (Giordano et al., 2011). This Telegestore

37

project is expected to reduce energy consumption by 5-10% and 1% of demand is likely to shift to low peak load times. The Federal Energy Regulatory Commission (U.S.) estimates that providing the customer with real-time energy information can reduce their consumption with 18% (McGregor et al., 2012). Network efficiency/ performance Services customer to Outages/billing disputes Oklahoma Gas and Electric (U.S.) has invested in distribution automation and volt/VAR power control2, realising a voltage reduction of 2% corresponding with a 1-2% energy consumption reduction and it has been able to delay a new power generation plant till after 2022 (McGregor et al., 2012). Realised: The balance power settlement was reduced from 13 to 2 months in the Storstad Smart Metering Project (EU). The number of calls related to meter-reading and invoices dropped by 56% over two years (Giordano et al., 2011). Realised: SAIDI (system average interruption duration index) decreased by 62% from 128 to 49 minutes in the Telegestore project (EU) (Giordano et al., 2011). Reduced generation costs Generation Energy consumption reduction and the drop in peak load due e.g. to energy efficiency measures and DR result in deferred generation capacity investments. Estimates regarding the height of the drop range from 1,2-20% (U.S.). Burbank Water and Power (U.S.) estimate a 5% peak load reduction, Eastern MAAC (U.S.) expects a 1,2% reduction and a 3,6% reduction in SE MAAC, both through DR systems (Pepco Holdings Inc.). Others go to a 20% reduction in critical peak load expectations such as Pepco Holdings Inc in the PHI service area and the Federal Regulatory Commission for the U.S. in general (McGregor et al., 2012). This has not been monetised.

from costs/ancillary improved service3 cost asset utilization

2 3

Controlling the voltage and VAR (Volt-Ampere Reactive power) levels of the system to improve system performance. An ancillary service supports the transmission of electricity from its generation site to the customer. Services may include load regulation, spinning reserve, non-spinning reserve, replacement reserve and voltage support.

38

Transmission and distribution capital savings Transmission and Distribution operation and maintenance savings reduced Economic losses & Optimised T&D network efficiency Reduced meter reading cost Reduced O&M costs The 32 million Smart meter deployment in Italy by Enel under the Telegestore project realised 500 million in yearly savings with a 5 year payback period and a 16% internal rate of return. This system for example enables Enel to manage 3.027.000 bad payers in 2008 and through a decrease in SAIDI the cost/customer went down from 80 to 48 from 2001 to 2009 (McGregor et al., 2012). Help centre costs decrease. As mentioned before the Storstad Smart Metering project (EU) realised a 56% drop in calls for meter-reading and invoice related issues over a two year period (Giordano et al., 2011). Pepco Holdings (U.S.) reports that smart solutions helped to avoid 582 utility service call backs to customers after Hurricane Irene (McGregor et al., 2012). In total, Pepco Holdings (U.S.) estimates operating savings of $75 million in terms of 15 year net present value, Oklahoma Gas and Electric (U.S.) estimate a $4 million saving in O&M due to automation and Burbank Water and Power (U.S.) hope to realise $523.000 in savings due to advanced metering infrastructure (McGregor et al., 2012). Electricity theft takes several forms such as meter tampering, stealing via illegal connections, billing irregularities, and unpaid bills. The smart meter Telegestore project (EU) enables Enel to better manage Theft reduction Reduced electricity theft 3.027.000 bad payers in 2008 (Giordano et al., 2011). As smart meters can very precisely measure electricity consumption, meter tampering and illegal connections will be extremely difficult to hide. Progress in this field cannot be monetised as there are no exact data on electricity theft. In the U.S. theft costs are estimated to be between 0,5 and 3,5 of annual gross revenues (Smith, 2003). 39 Deferred T&D capacity investments Estimates regarding lower peak load (electricity consumption smoothing) and lower energy consumption have already been given. The prospects are very good. The lower peak loads and lower energy consumption result in a lower investment need in transmission and distribution lines. This has not been monetised.

Estimates from the U.S. indicate the creation of 280.000 new direct jobs over the 2009-2012 period of which Productivity & economic Economic growth Job growth Added value 140.000 new indirect jobs will persist beyond the smart grid deployment. There are no studies checking these estimates on the facts. Smart grid job creation would provide an annual benefit of $215 million (KEMA, 2008). A GB study estimates that the smart grid sector will generate 13 billion of Gross Value Added between now and 2050 in the GB, sustaining around 8000 jobs during the 2020s and exports of 5 billion worth between now and 2050 (Ernst & Young, 2012). Safety Workers hazard exposure Fewer field workers would be needed due to remote reading of smart meters, resulting in the U.S. in an annual hazard exposure benefit of $1 million (Giordano et al., 2011). U.S. cost estimates of past outages differ from $2,7 billion (residential) to $11,756 billion (medium & large commercial & industrial) billion for momentary interruptions and for interruptions of 8 hours from $10,7 billion (residential) to $93.89 billion (medium & large commercial & industrial) (U.S. Department of Energy, Safety, reliability and Reduced cost Power Quality of power Shorter outages (reduced duration) 2010). Shorter outage duration (SAIDI system average interruption duration index; CAIDI - customer average interruption duration index) realised in the Telegestore smart meter project where SAIDI went from 128 to 49 minutes (Giordano et al., 2011). Southern California Edison (U.S.) realised a reduction of 33 minutes or 47% of CAIDI Improvements and a reduction in total minutes outage of 18.950 minutes due to distribution automation (McGregor et al., 2012). The Inovgrid project (EU) estimates to realise a 3-10% reduction of SAIDI through DSO automation (Giordano et al., 2011). Burbank Water and Power (U.S.) estimate a reduction of $50.000/yr loss. Pepco Holdings Inc (U.S.) estimates to achieve a reduction of 19% in SAIDI and 7% in CAIDI resulting in avoiding $1600-4700/MWh loss for residential users and $700050.000/MWh loss for commercial and industrial users (McGregor et al., 2012). Fewer short & major outages Fewer outages (MAIFI momentary average interruption frequency index; SAIFI system average interruption frequency index) are estimated to occur in the Inovgrid project (EU) with a 1-5% reduction of 40

interruptions

SAIFI. The Commonwealth Edison utility (U.S.) estimates a reduction of 100.000-175.000 customer interruptions (McGregor et al., 2012). The Electric Power Research Institute (U.S.) estimates an overall reliability improvement of 40% through DA (2011). Reduced costs from better power quality Fewer momentary outages Fewer severe sags and swells Lower harmonic distortion Dependent on the fuel type used in generating the electricity, the realised and estimated electricity Lower electricity Lower greenhouse Environmental gas emissions consumption by fuel type consumption reduction illustrated earlier will reduce a certain amount of greenhouse gas emissions. San Diego Gas & Electric (U.S.) estimates the avoided emissions (2011-2020) from energy reductions and peak load shifting to be 0,7 million tons of CO2e or $12-83 million4 in monetary terms (San Diego Gas & Electricity, 2011). Realised: Pacific Gas & Electricity (U.S.) avoided in 2010 alone 1.020.885 tons of CO2 and 215 tons of NOx through their energy efficiency programme (Pacific Gas and Electric Company, 2011). As the Oklahoma Gas and Electric utility (U.S.) has proven, a grid efficiency improvement such as DA can effectively scrap the need for a new power generation plant (McGregor et al., 2012). Other T&D O&M improvements will have the same effect: decreasing the need for additional power generation. This reduces GHG emissions from power generation. San Diego Gas & Electric (U.S.) estimates the avoided emissions Power quality is especially important for high-tech applications which need a steady supply of electricity at the exact correct voltage. Especially industrial and commercial users are sensible to a loss in power quality. A higher MAIFI, meaning a greater occurrence of interruptions, has a negative influence on power quality. Intermittent power supply such as DG wind or solar power has a negative effect on sags and swells, smart solutions could remedy this (Watson, 2010). This has not been monetised.

At $17-118 per ton CO2e

41

Grid efficiency improvements

(2011-2020) from distribution automation to be 0,7 million tons of CO2e or $10-79 million in monetary terms (San Diego Gas & Electricity, 2011). As pointed out earlier, traditional grid systems have difficulties in dealing with intermittent energy resources.

Lower greenhouse gas Environmental emissions Higher percentage of efficient renewable energy integration into the grid

A smart grid is better equipped to efficiently use these RES as discussed earlier (supra p.22). In comparison with a traditional grid, the smart grid enables an effective reduction in greenhouse gas emissions by integrating more RES in the total energy consumption. San Diego Gas & Electric (U.S.) estimates the avoided emissions (2011-2020) from distribution automation to be 5,4 million tons of CO2e or $85-612 million in monetary terms (San Diego Gas & Electricity, 2011). However, this figure depends in large part on quantity of electricity produced by renewable energy sources and cannot be attributed (completely) to smart grid innovations. Total In Europe smart grids could reduce greenhouse gas emissions by 9% by lowering the annual primary energy consumption of the EU energy sector (Bio Intelligence Service, 2008). Transport accounts for 33% of final energy consumption in the EU (Eurostat, 2011), using almost uniquely

Greater energy security from Energy Security reduced oil & gas consumption Electric vehicles Lower % electricity generation by gas

oil-based fuels. The electric vehicles motor is more energy efficient and consumes (almost) no oil-based fuels (Energinet.dk & Danish Energy Association, 2010). As discussed earlier, Germany targets 1 million EVs by 2020 and 6 million by 2030 compared to a total vehicle fleet of 41 million in 2007. The Netherlands go for 800.000 EVs by 2020 compared to a total vehicle fleet of 7,5 million in 2007 (ACEA, 2007). If they realise their targets, these two extremes within the EU would cut their total GHG emissions by 0,25% (Germany) and 2,5% (Netherlands) (own calculations), thereby lowering the carbon intensity and carbon dependency of their economy.

Reduced damage

Reduced wide-scale blackouts

Wide-scale blackouts such as in 2006 when millions were affected in France, Germany, Belgium, Austria, Spain and Italy, costing millions of euros, would be less likely to occur (Castelfranco, 2006).

Source: own work based on cited references. 42

3.2.4

Critical remarks

Table 4 provides a good overview of the (expected) benefits illustrated in projects and case studies. However, attention needs to be called to five issues. First of all, there is a lot of uncertainty about the benefits. The expected benefits are often based on very uncertain assumptions and future scenarios. The existence of large confidence intervals is often ignored, boosting the smart grid business case. Secondly, as pointed out by Table 3, the benefits often overlap. This can cause studies to double count certain benefits or neglect indirect effects negatively affecting the smart grid business case. For example, utilities may invest in AMI and publicise demand response pricing systems in order to decrease peak loads and their associated costs. However, this will most likely also depress electricity consumption, causing utilities income to drop. Of course there are also cases of positive indirect effects. Thirdly, it is important to choose the correct baseline when calculating savings. For example, we should compare the costs incurred by the traditional grid for integrating EVs and 20% RES in its systems, with the smart grid costs. The Danish case study clearly pointed out that these avoided costs of EV and RES integration in a traditional grid are substantial (supra p.29). It would be wrong to neglect these costs and assume a baseline scenario of e.g. no RES growth. The fourth issue is that a smart grid is a systemic change. Although the business case may be made for each technology in itself, there is a broader picture. As illustrated in Table 3, some benefits can only be reaped when there is a sufficient integration of the different technologies and new market players have successfully assumed their roles. For example, smart meters may be profitable on themselves, without the smart grid. However, if utilities use these smart meters in combination with e.g. distribution automation and demand response, further savings could be realised. The fifth concern is that cost-benefit analyses are unique for every region or country so that costbenefit analyses are hard to generalise to other regions or countries. Variables include: higher electricity prices and/or price elasticity higher consumer participation in demand response systems; already high-tech grid lower marginal rate of return (ROR) on smart grid investments; higher percentages of DG and renewable energy generation (REG) higher ROR on smart grid investments. 3.2.5 Summary of findings

National cost-benefit analyses of smart grid deployments are very positive regarding its profits for all stakeholders involved. A more detailed survey of the sources of the smart grid benefits supports this view. A short summary: 43

Economic benefits: Demand response systems have been proven to generate substantial benefits. A small percentage of consumers shifting their electricity use to off-peak moments produces costsavings for participating and non-participating customers (5% to 37%). DR is also a strong incentive to lower overall electricity consumption (1% to 16,9%). Better time of use information regarding energy consumption encourages energy efficiency efforts (e.g. by 20%). Distribution automation has proven to lower the voltage reduction and increase network efficiency resulting in a 1-2% energy consumption reduction. Outages and billing disputes are abridged in number and intensity. Generation costs are reduced; the effect is dependable on energy consumption and peak load reductions. T&D investments are deferred; the effect is dependable on energy consumption and peak load reductions. T&D operational and maintenance cost reductions have proven to have a substantial potential in Italy with a payback period of only 5 years. This was realised through e.g. better management of bad payers, reductions in electricity theft, shorter outages, lower meter reading costs, less service calls and higher automation. Economic growth is supported; based on GB & U.S. estimations thousands of new jobs would become available thanks to a smart grid rollout. Safety, reliability and power quality benefits: Workers safety increases thanks to remote, instead of physical, meter reading. Power interruption costs go down with 3% to 62%, also improving power quality.

Environmental benefits GHG emissions diminish due to lower electricity consumption, grid efficiency improvements and a more efficient integration of renewable energy into the grid. The EU estimate is that smart grids could reduce GHG emissions by 9%. Cost reduction estimates are heavily dependent on the price of CO2. Energy security Electric vehicles are expected to take up a substantial market share, decreasing the economys carbon dependency and raising its energy independency. Wide-scale blackouts causing huge damages are less likely to occur. 44

3.3 Costs and barriers

As illustrated above, the benefits are wide-ranging and have a huge potential. Nevertheless, the costs of and barriers to a full-fledged smart grid deployment are also substantial. The Electric Power Research Institute (2011) for example estimates the total cost of smart grid deployment by 2030 in the U.S. to be $337,678 - $476,190 billion (see 3.1). Policy makers and private sector are investing billions into this emerging sector. Nonetheless, according to the European Commission (2011a) there is still a considerable gap between current and optimal investment in Europe. The worldwide gap between the needed RD&D investments to achieve the BLUE map scenario5 outcomes and current annual RD&D spending remains $5,07 $10,67 billion (Birol et al., 2010). So despite the drivers identified in chapter two (supra p.4), the smart grid rollout is slower than might be desired. The main barriers are: (i) lack of business case demonstrations, (ii) policy and regulation, (iii) technology & standards and (iiii) data privacy & security concerns. 3.3.1 Lack of business case demonstrations

The huge costs needed for a full smart grid deployment, scare many investors away. First of all there is still uncertainty about the smart grid returns on investment, i.e. there is no certainty regarding the net benefits, partly due to political insecurity. Secondly, the network operators are currently not very eager to invest in smart grids as their current business model is not fit for reaping the smart grid benefits. And finally, the consumers are also wary of the distribution of costs and benefits and fear they will have to carry all the costs while the network operators take all the benefits. Despite the more than 219 R&D projects in Europe (Giordano et al., 2011), there is still a lack of clarity about the full economic opportunity of smart grid related investments. The long payback time and the risks inherent to new technologies increase the costs of capital for investors. An important part of the smart grid business case is its capability of dealing with the integration of renewable energy into the grid. However, the economic crisis has weakened member states public finances causing a cutback in green subsidies and support mechanisms. The high cost of capital, insecurity about government support for renewables and low governmental budgets slowing smart grid rollout, are depressing smart grid investments from the standpoint of venture capitalists. The crisis also hit Europes network operators. Although several big network operators have been investing heavily the latest years (figure 7), many had to divest in order to restore their financial position and are still experiencing the effects of the crisis (Capgemini, 2011). But an aspect which is

The BLUE map scenario aims to achieve a 50% reduction in energy-related CO2 emissions by 2050.

45

maybe more important for the network operators is that investing in a smarter grid does not fit in their business model. Investing in energy savings and energy efficiency does not generate revenue in the classic business model illustrated in figure 21. Currently, the network operators provide power, reliability and universal service in return for revenue. According to IBM this will change, transforming DSOs and suppliers into energy service companies (ESCOs), advising on cost savings, working on personalisation and supplying information on environmental impact reduction. The revenue would diversify away from only payments to also consist of e.g. (personal) information and energy produced by consumers. Although this model of ESCO already has considerable success with high-usage clients, a large reduction in electricity sales due to smart grid investments is not desirable for most existing network operators as they fear a loss of income (Valocchi, Juliano & Schurr, 2010). Van der Zanden (2011b) also points out that the unbundled status of most of the European network operators complicates the business case as some savings generated by some investments accrue to an actor other than the investor. For example, smart grid investments by the DSO and TSO reduce imbalance charges and increase power plant efficiency for the electricity producer. Figure 21 Traditional industry value model

Source: Valocchi, Juliano & Schurr, 2010. Consumers are also wary of the smart grid costs and doubt their benefits. Although they are often overlooked or ignored, they are the most important stakeholder, with an opinion. In 2010, a referendum regarding the investment in smart grid technologies went awry because of consumer dissatisfaction with higher bills resulting from meter installation costs (Feinstein, 2010). A recent study in Flanders regarding universal smart meter roll out is regarded with a lot of scepticism due to its 46

costs for consumers (Moens, 2012). Surveys found that the 66% of the Flemish households found a smart meter useful, but only 40% wants to pay something for it (VREG, 2011). Consumer perception is extremely important in gaining smart grid rollout acceptance. In fact, a recent survey among utility executives identified consumer education and awareness (32%) and consumer buy-in (23%) as the biggest problems towards actual deployment (Young, 2011). Some believe that the consumers opposition is merely grounded in a lack of information. However, there is an objective ground for their concerns. This question of who bears the costs is often left unexplored or ignored such as in the study by the Electric Power Research Institute (2011) or by Ernst & Young (2012). It is often portrayed as if the consumers are just misdirected and uninformed. Table 5 shows the research results on the division of benefits of smart grids in the Netherlands. In every scenario the total net benefit is positive. However, a constant across scenarios is that the households have a negative net benefit, footing the bill for the electricity grid transformation. The consumers concerns are thus justified. Table 5 Division of benefits of smart grids in the Netherlands Division of benefits, constant BAU6 value in billion Euro Costs Households Small utilities Big utilities industry Grid operator Producers Society Total 2,7 0,1 0,3 1,4 0,1 0,0 0,0 4,6 Benefits 0,2 0,2 0,1 0,3 2,8 2,9 0,6 7,1 Costs 2,7 0,1 0,3 1,4 0,1 0,0 0,0 4,6 Benefits 0,2 0,1 0,1 0,3 6,3 6,9 0,1 14,1 Costs 2,7 0,1 0,3 1,4 0,1 0,0 0,0 4,6 Benefits 0,5 0,3 0,2 0,6 5,0 5,8 0,1 12,4 K&K6 H&G6

BAU: business as usual; K&K: Coals CCS & nuclear energy; H&G: renewables and gas

47

Source: CE Delft & KEMA, 2012. The question of who bears the costs and who will profit is likely to continue to be one of the main issues around smart grids. The challenge is making a resilient business case assigning costs and benefits in a fair manner with a clear distribution of risks and returns between consumers and utilities. A regulatory framework could help in ensuring a fair benefit accrual, thereby assuring the involvement of customers and investors. 3.3.2 Policy and regulation

Policy and regulation can help in furnishing the right market framework but can also be a barrier. For example, in some cases regulatory incentives for DSOs and TSOs stimulate power generation instead of electricity savings. In other cases, suppliers are made responsible for energy efficiency measures or smart meter installation, while this can cut in their revenue and profits (van der Zanden, 2011b). Another issue is the lack of competition. In the smart grid setting it impedes ESCO development by third party vendors focussing on energy efficiency. A smart system needs a free market. Regulated tariffs which still exist in some EU-countries (e.g. Poland) are an insurmountable barrier for customised pricing schemes. Policy is of course not only a barrier; regulation can also help in aligning actors interests with desired policy goals. A pro-active policy could take regulatory initiative towards a clearer division of responsibilities regarding costs and benefits. 3.3.3 Technology and standards

The internet would not exist today without HTML, Internet Protocol (IP) and other open standards. The smart grid also needs such common standards and communication protocols, in order to establish full interoperability for all technology and applications. Applications and ICT systems must for example be able to easily make contact with smart meters. Interoperability is already a problem with the current smart grid hardware. Many of the new technologies are proprietary, lacking agreed-upon standards. They obstruct new market entries and increase investment costs. The European standardisation organisations CEN, CENELEC and ETSI are working on the technical specifications binding e.g. smart meters (EU Commission Task Force for Smart Grids, 2011c). Currently a number of open standards operate along with proprietary systems. The smart grid technologies themselves also need to be developed and demonstrated further. A major barrier is the lack of adequate electricity storage options. A solution would be a major breakthrough for the electricity system. The electric vehicle is often quoted as a possible remedy, but its battery capacity is still very low while there is no demonstrated system to let the battery power feed back into the grid. More RD&D is needed to tackle these issues. 48

Another barrier is the aging workforce, leading to a brain drain in the engineering field. New skills are needed in the field of power electronics, communication and data management (van der Zanden, 2011b). 3.3.4 Data privacy & security concerns

The rollout of smart meters has been delayed in the Netherlands and Germany due to consumer security and privacy concerns (van der Zanden, 2011b). While many considered safety to be a nonissue for the electricity grid, this changed dramatically with the Stuxnet worm discovery in 2010 which confirmed that cyber security is a real concern for the grids stakeholders (Martin, 2011). Tests have revealed that different appliances (e.g. fridge, television and microwave) show unique signatures when their power consumption is measured on a two second interval (which is done be some smart meters). This kind of data can be used to identify when the television is on, when you are home or are away and even when you are sleeping (Wisniewski, 2012). Safety standards guaranteeing the privacy and security of the grids ICT layer are necessary towards wider acceptation.

3.4 Conclusion
Cost-benefit analyses for the U.S., Denmark, Great-Britain and the Netherlands validate the business case for smart grid deployment. However, the studies use radically different methodologies. Smart grid benefits are interconnected, so a clear categorisation of benefits is important. A detailed inspection of the sources of the benefits reveals a generally positive scenario. However, the savings show huge differences in-between studies. Consumers across studies react differently when faced with different price systems (DR) and better electricity usage information. This has a strong effect on the smart grid potential in deferring generation capacity or T&D investments. However, T&D operational savings due to e.g. reduced meter reading costs and operational optimisation seem to be positive across case studies. Safety, reliability and power quality also improve substantially across projects. The environment benefits from lower electricity consumption, grid efficiency improvements and a more efficient integration of renewable energy. And finally, energy security improves due to the lower carbon intensity and a decreased reliance on fossil fuels. Despite these gains, there is still a considerable gap between current and optimal smart grid investment in Europe. The lack of business case demonstrations is an important barrier towards rapid deployment. Policy and regulation can assist in aligning actors interests with the desired policy goals. The smart grid needs open ICT standards but these are still in development with the European standardisation bodies. Another serious technological problem is the lack of adequate electricity storage options. The last element obstructing wider smart grid acceptation is concerns relating to data privacy and security.

49

A Flemish smart grid?

This chapter explores the business case of a smart grid deployment in Flanders. The Flemish electricity market structure is covered first, to quickly move on to the actual cost-benefit analysis. An elucidative overview figure of the costs and benefits of a full smart grid roll supports the claims of a positive business case. Subsequently the business case of every stakeholder is discussed. To conclude there are some critical reflections on the cost-benefit analysis.

4.1 The Flemish electricity system

The Flemish electricity system is regulated by both the Belgian and Flemish level, with an important role for the European level. Figure 22 illustrates the structure of the Flemish electricity system. Figure 22 Flemish electricity system

Source: own work. Although the current electricity system is becoming more circular whereby some electricity is generated by households and smaller electricity plants, often using renewable energy sources, the dominant pattern is still linear. The arrows going down are therefore much larger than the ones going back up. The following paragraphs will detail the structure and workings of every segment within the Flemish electricity market according to the linear pattern laid out above. The tasks of the federal and regional regulators will also be explained to provide a complete picture of the regulatory framework. And finally the cost structure of electricity in the Flanders will be analysed to better understand the functioning of the market.

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4.1.1

Electricity generation

Electricity is generated by producers, defined as natural or legal persons generating electricity (European Commission 2003). As stipulated in the first and even stronger in the second energy package, production and supply have to be separated from transmission and distribution. The market for electricity generation is Belgian. Electrabel currently owns a 72% market share of the total production, considerably lower than in 2007 (87%) or 2009 (81%). EDF (14%) and E.ON (11%) are the other two main producers. The Herfindahl-Hirschman Index (a commonly accepted measure for market concentration) of the generation market is about 5.380 in 2010. In comparison, a market is considered very concentrated if the Herfindahl-Hirschman Index is equal or higher than 2.000 (CREG, 2010b). Figure 23 Belgian energy mix 2011

Source: CREG, 2011. As illustrated in figure 23, the Belgian energy mix is dominated by the 48,6% share of nuclear energy, followed by natural gas (3,7%), RES (9,1%), coal (4,7%) and other energy sources such as turbojets and diesel engines. In the framework of the European renewable energy target of 20%, Belgium has to increase the share of energy from RES to 13%. The electricity sector will have to outperform the other sectors if Belgium wishes to achieve that target. Belgium has published its plan to increase the RES in electricity to 20.9% by 2020 (CONCERE-ENOVER, 2010). The expected energy mix is illustrated in figure 24. For Flanders the picture is very similar, the most substantial difference is that waterpower is only responsible for 0,1% of all renewable energy produced in Flanders (calculations based on Jespers, Aernouts & Vangeel, 2011). In 2010 the gross share of RES in the Flemish electricity consumption was 5,5%.

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Figure 24 Belgian energy mix 2020

Source: CREG, 2011. Besides the electricity generation dealt with by domestic producers, Belgium also trades with the international electricity market. The situation is very dependent on the economic circumstances. Where Belgium imported a total of 10.620 GWh in 2008, it exported 1.835 GWh in 2009 to stabilise in 2010 on a net import of only 600 GWh (CREG, 2011). 4.1.2 Electricity transmission

Transmission is the transport of electricity on high-voltage interconnected systems with the intention to deliver it to final customers or to distributors, excluding the actual supply to the customer. The company responsible for the transmission system is called the transmission system operator (TSO) and is a natural or legal person responsible for operating, ensuring the maintenance, developing and ensuring the long term ability of the system to meet reasonable demands for the transmission of electricity (European Commission 2003). The third energy package stipulated full ownership unbundling between producers and TSOs. Elia System Operator (referenced as Elia) was instituted as the independent TSO in 2002. Elia is the sole responsible for the Belgian high voltage transmission electricity system of 150 to 380 kV. Elia is a monopoly in the transmission system market, but is heavily controlled by CREG, a government agency. 4.1.3 Electricity distribution

Electricity distribution is the transport of electricity on high-voltage, medium-voltage and low-voltage (but mostly low-voltage, under 15kV and lower) distribution systems to customers into homes and businesses. The distribution system operator (DSO) is a natural or legal person responsible for operating, ensuring the maintenance, developing and ensuring long-term ability of the system to meet reasonable demands for the distribution of electricity. They have to be unbundled both legally and functionally from supply or generation (European Commission 2003). 52

There are many DSOs in Flanders, such as Gaselwest, IMEA, Imewo, Intergem, Ivka, Iverlek, Sibelgas and Elia. The first seven DSOs appeal to Eandis to perform the exploitation tasks for them. In total, Eandis is handling distribution tasks for more than 90% of Flemish communities (Eandis, 2011). Clients cannot choose a DSO as there is only one DSO active per area. 4.1.4 Supply

Supply is the sale, including resale, of electricity to customers. A producer and a supplier can be one legal person, but cannot be part of, or act as a transmission or distribution system operator. The gross demand for electricity is expected to rise further in the NAP coming from below 100 TWh in 2008 to surpassing 115 TWh in 2020, or in the energy efficiency scenario just surpassing 110 TWh. These calculations have been made without taking account of the negative impact on electricity usage of the economic crisis. The CREG estimates the 2020 gross electricity usage to be about 114 TWh (CREG, 2011). 4.1.5 Federal and regional competences and regulators

The competences of the federal government are the distribution and transmission tariffs and the social maximum price. The high voltage electricity system, the production of electricity (with exception of electricity from RES and cogeneration) and nuclear energy are also within the competences of the federal government. The distribution, electricity from RES, cogeneration and rational use of energy fall within the authority of the regions (VREG, 2012). These tasks are in most part outsourced to the regulators. The Commission for the Regulation of the Electricity and Gas markets (CREG) is tasked with supervising the Belgian market and providing policy advice (CREG, 2012). The Flemish Regulator of the Electricity and Gas market (VREG) has a similar job with regard to the Flemish level (VREG, 2012). 4.1.6 Cost structure of electricity

The total electricity price for the final customer is the sum of different components. The energy price itself is determined by the supplier. The transmission cost is the remuneration for the transport of electricity over the transmission system. The distribution cost is the fee received by the DSO. The taxes are determined by the different governments. The VAT on electricity for households is 21%. (VREG, 2012)

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Figure 25 Cost structure Belgian electricity use

Source: Elia, 2012. As can be observed in figure 25, the cost structure for Belgian electricity is very different compared between dissimilar users. Big users do not pay any VAT and they (often) dont have to pay for distribution costs as they are connected to the transmission system. Together with a differentiated pricing structure of the suppliers, this results in a degressivity of the electricity tariffs. In a study comparing the capitals of Belgiums neighbouring countries, the CREG concluded that our final electricity bill for 3.500 kWh (an average household) in June 2010 was the second highest with 741,33, just barely lower than the bill in Berlin of 756,44 (CREG, 2010a). This is substantially higher than in Paris (455,15), London (515,94) or Amsterdam (631,02). Three reasons can be identified. The energy bill is the second highest (295,85), taking up 40% of the total bill. The VAT accounts for 17% of the bill or 128,66 and is the highest compared to Paris, Berlin, Amsterdam and London. The most important cost is however the distribution cost accounting for 97% of the network cost of 279,55 or 38% of the bill. This far exceeds the network costs of any other neighbouring capital. Berlin comes closest after Brussels with a network cost of 182,67. In Flanders the electricity bills are lower, Antwerp for example has a final electricity bill of 615,48. Also in Flanders we can conclude that the tariff components that take up the largest share of the final electricity cost are the energy price, distribution tariffs and energy taxes and VAT (CREG, 2010b).

4.2 Cost-benefit analysis of a Flemish smart grid

The listing of costs and benefits clarifies that there are considerable differences between cost-benefit analyses considering fully functional smart grids. A key question is which cost and benefits factors to include. Some choose to exclude investments in transmission and distribution networks as they are often needed irrespective of the move towards a smarter electricity grid, an option chosen by van der Zanden (2011b). Other studies integrate electric 54

vehicles as a storage option, while not including it as a smart grid cost, an option chosen by Electric Power Research Institute (2011). As has been demonstrated before (supra p.37), the costs and benefits vary immensely in between case studies. Particularly U.S. studies cannot be extrapolated to the EU without adjustment as the U.S. has a less efficient and less costly electricity market. This thesis opts to include all of the major costs and benefits, including investments in transmission and distribution. The reasoning is that all studies agree that it is incorrect to isolate a certain technology, cost or benefit because these are all interconnected (supra p.35). This makes for a more encompassing study. Regarding EV and RES, the choice here has been to opt for factual Flemish data (Synergrid, 2010) and prognoses (CREG, 2011), therefore estimates regarding electric vehicle deployment are not included in this study as there are no Flemish (or Belgian) targets or estimates regarding its 2020 numbers. On the topic of uncertainty, the cost and benefit parameters are derived from studies and demonstrated projects, taking account of the possibility of large differences in between smart grid experiences. When studies are inconclusive regarding the margin of error, a standard margin of error of 10% is applied. The format of the analysis is heavily inspired by the work of van der Zanden (2011b), the only European study based on macro-economic figures combined with change parameters from case studies. The current understanding of smart grid costs and benefits is applied to the Flemish electricity market situation with challenging premises. Benefits are compared to the baseline scenario of no smart-grid roll out while maintaining RES growth expectations. Taking 2015 as a realistic starting point of smart meter (and AMI) roll out and DA deployment, the model analyses the annualised costs and benefits over a five year period (2015-2020)7. The arguments to set 2020 as end date for the cost-benefit analysis are twofold. First of all it creates a very challenging business case in which Enel succeeded with its Telegestore project, generating a positive AMI investment balance over a 5 year period. Secondly 2020 is the end date for the EU 20/20/20 targets. The electricity prices and quantities will be those of 2010 which further depresses smart grid potential as higher prices positively affect consumers participation in DR programmes and energy efficiency efforts. Partly compensating for this handicap (the smart grid potential is higher with more intermittent energy sources) and as a point of reference, the renewable energy 2020 target is chosen which foresees that 20,9% of electricity will be generated by renewable energy.

To avoid complexity while none the less providing an adequate overview, the choice has been to not work with the present value of the annualised costs and benefits.

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The total annual Flemish electricity use is 35,440 TWh for households and SMEs (Synergrid, 2010), with an average cost of 0,215/kWh (CREG, 2010b). Industrial electricity use is 17,0976 TWh (Synergrid, 2010), with an average cost of 0,120 per kWh (CREG, 2010b). Calculations indicate a fully rolled-out smart grid will generate annualised net benefits of 0,39171,9463 billion. The total present value over 5 years is 3,7975 billion, given an interest rate of 10%8. Figure 26 provides an overview of the total Flemish smart grid cost-benefit analysis.

Due to the uncertainty regarding business case, technology and consumer involvement, together with the current uncertain economic context, a 10% interest is justified compared to the normally advised 5% (Giordano et al., 2012)

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Figure 26 Flemish smart grid cost-benefit analysis 1,5

Societal business case

reduced CO2

reduced electricity use

0,5

reduced electricity bill (DR)

integrating RES

Billions Euros

0
apex AMI opex AMI
Operational reduction savings T&D reduced conservation automationT&D losses voltage

Reduction peak load

-0,5

-1

T&D business case

-1,5

Columns

10

11

Source: own work

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4.2.1 I.

Costs

Capital expenditure (capex) AMI

Based on Faruqui et al. (2009), the total cost of a complete AMI rollout in Belgium is 1,132 billion. Flanders is responsible for 62,4% of energy consumption (Synergrid, 2010), bringing the estimated Flemish annualised AMI cost to 0,1413 billion (see figure 26 column 1). Faruqui et al (2009) presume a cost of 120 per household meter and 450 per non-household meter based on the Irish and Italian experience. This cost/meter is substantially more than the 100/meter found in the Giordano et al. (2011) study. II. Operational expenditure (opex) AMI

The maintenance and operational expenditures of AMI are estimated around 2,5% (DECC, 2010). This annual cost component totals 0,0176592 billion (see figure 26 column 2). III. Transmission and distribution (T&D) automation Grid optimisation and T&D automation entail the installation of information and communication hardware throughout the system and using suited software to process this data. Ultimately it will provide grid operators with complete digital control over the electricity network and full automation options. It is already quite developed in Europe and therefore offers less perspective for improvement compared to the U.S. However, studies such as the Dutch CE Delft & KEMA (2012) do indicate there are still substantial gains to be made (cfr. Infra p.59) and is worth the cost. The challenge is finding a sturdy cost calculation method to apply the same method on the Flemish situation. Investments in hardware are e.g. head-end feeder reclosers and relays ($50.000/unit), remotely controlled witches ($50-75.000/unit) and Voltage & VAR control on feeders ($258.000/feeder). Investments are also needed in a software programme capable of dealing with all the data. The Electric Power Research Institute (2011) costs are calculated based on e.g. kilometres of transmission and distribution lines, number of substations and feeders, etc. Unfortunately there is not enough Flemish data publicly available regarding these numbers or the smartness of current materiel. The CE Delft & KEMA (2012) would also be an interesting study to calculate costs from as it is based on the Dutch situation. However, the calculations behind their analysis are not published. A general trend is that in the U.S. the transmission and distribution automation costs far outweigh those for AMI investments. Europe on the other hand already has more up to date systems, reducing the need for investment. Based on Leeds (2010), Fox, Gohn & Wheelock (2009), the Electric Power Research Institute (2011) and the increasing investments in European transmission networks (figure 7), I estimate the annualised investment costs of smartening the transmission and distribution networks to be about equal to the capital expenditures for AMI roll out.

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The T&D automation investment needs are estimated to be 0,7065 billion or annualised over a period of five years, 0,1413 billion annually. Reflecting the fact that many U.S. reports indicate higher costs, with some estimating it three times higher than the AMI capex (Electric Power Research Institute, 2011), the confidence interval has been extended to a maximum cost of 0,4239 billion annually or 2,1195 billion in total (see figure 26 column 3). 4.2.2 Benefits.

IV. Reduced T&D (transmission and distribution) losses Variable, fixed and commercial losses increase the discrepancy between the energy produced and energy sold to end customers, i.e. T&D losses. The decrease in losses is realised mainly due to a decrease in theft, equipment malfunction and unbalanced feeder lines due to voltage and VAR control on feeders. Electricity theft alone accounts for 0,5-3,5% of annual gross revenues while realised savings due to automation have proved to be substantial (supra p.39). A 25% reduction9 in T&D losses from 4,92% to 3,67% results in a 0,1213 billion annual T&D loss reduction (see figure 26 column 4). V. Reduction in conservation voltage Improving a networks efficiency can enable a reduction in conservation voltage. As discussed before (supra p.38), the U.S. voltage reduction potential is 2%, corresponding with a 1-2% energy consumption reduction. Van der Zanden (2011b) posits a 1-2% voltage reduction potential in Europe. Flanders is even more densely populated, reducing the distance electricity has to travel, so voltage reduction is already being pushed to its limits. This paper estimates the savings potential in Flanders to be 0,5% to 1% resulting in 0,0485-0,0971 billion savings annually (see figure 26 column 5). VI. Operational savings These savings accrue from (supra p.39) the elimination of the need of physical meter reading, faster detection and subsequent repair of power outages (i.e. a self-healing grid), lower help centre costs, better management of bad payers etc. Enel has been exemplary in delivering operational benefits from their AMI investment with benefits up to 50-80% (Faruqui, Hledik & Davis, 2009) and savings of 25% of investment cost each year, mainly originating from operational benefits (Borghese, 2010). A less ambitious target is an annual ROR of 10% of investment cost in terms of operational savings (van der Zanden, 2011b). For the Flemish market this translates into an annual benefit of 0,0141 billion or 5,4 per household (see figure 26 column 6).

Based on van der Zanden (2011b)

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VII. Reduction of peak load Demand fluctuates widely over the day, demand response systems try to even up this consumption pattern (supra p.21). Certainly with a rising electricity demand and new challenges such as the EVs, such measures could prove very beneficial. The evening is already a very busy period in terms of electricity demand. In fact, in most EU countries 5-8% of installed capacity is only used about 1% of the time as illustrated in figure 27. Figure 27 Top 15% of the French load duration curve, 2008

Source: Faruqui, Hledik & Davis, 2009. Depending on the pricing scheme, consumers are reported to shift their demand 5-37% (supra p.37). For Europe, every 1% of peak load reduction achieved through demand response saves around 0,6 billion per year, with an 87/kW-year cost of capacity. Generally it is presumed that DR can reduce peak load in Europe by 5% to 15% (van der Zanden, 2011b). In Flanders the savings potential is 45-135 million (see figure 26 column 7).10 Of course this variable is very dependent on the actual consumer participation in the DR programme. VIII.Integrating RES Countries with the highest RES, also have the highest peak loads and vice-versa (Capgemini, 2011). Electricity prices will rise in response to the higher costs of integrating intermittent RES and high peak

10

1% reduction in peak load: 0,6 billion*52,5 (Flemish electricity consumption) /3500 (Europes electricity consumption in study)

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demand of EVs. A smart grid is hailed as the solution to efficiently integrate EVs and intermittent RES, moderating those additional price increases. It is one of the key functions of a smart grid. It performs them by automated load following (scheduling, appliance & equipment timers & process control) and allowing for multiple storage options. As there are no concrete EV targets for Flanders, the benefits arising from EV integration are left out. The focus here is on RES utilisation optimisation which already is the prime contributor to increases in peak loads. RES will generate about 20,9% of the Flemish electricity generation by 2020 (supra p.51). In Flanders 11,4% of electricity generation11 will be intermittent RES (solar panels and wind turbines) producing 3,416 GW.12 With an 87/kW-year cost of capacity (supra p.60), the annual savings are 0,2665 billion (King, 2012) (see figure 26 column 8). IX. Reduced electricity bill demand response (DR) Demand response programmes have proven to lower electricity prices by shifting loads to off-peak moments (supra, p.37). According to van der Zanden (2011b) the typical European DR effect is a 2% to 10% reduction in electricity bills which average 216/MWh for households.13 Due to the relatively high electricity prices in Flanders, we can expect higher DR participation. 35443200MWh was used by end-users of the distribution network. Potential annual savings are 0,1531- 0,4593 billion (see figure 26 column 9). X. Reduced electricity use Providing customers with adequate and up to date information regarding their electricity use has proven to deliver substantial electricity consumption reductions (supra, p.37). Based on the improved quality of the information, consumers invest more in energy efficiency and consume less. In Enels Telegestore project in Italy this resulted in energy consumption savings of 5% to 10% (McGregor et al., 2012). Due to the relatively high electricity prices in Flanders, we can expect considerable interest from the consumers. In Flanders this would mean a electricity bill reduction of 0,3828 -0,7656 billion annually (see figure 26 column 10). XI. Reduced CO2 emissions A smart grid stimulates peak load reductions, energy efficiency and energy consumption cuts. Furthermore it enables a more efficient integration of RES in the electricity grid. Given the current information, it is only possible here to calculate CO2 emissions reductions from the energy

11 12

Estimates for 2020. 5985 GWh /(0,2*8760)= 3,416 Gw (0,2 as a low but safe load factor) 13 The effects of DR in Europe are smaller than in the U.S. as European consumption is smaller and prices are already higher in comparison to the U.S.

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consumption decrease. However, it is safe to presume that peak load generation has a high CO2 content. The current carbon price is 6,65/t CO2 (European Commission, 2012b). The Flemish carbon intensity is about 291 kg CO2/MWh (VBO, 2010). Reflecting the 5%-10% cut in electricity consumption, the CO2 reduction would be worth about 5,144 million (see figure 26 column 11). XII. Reduced outages Outages are already very limited to 2207-2730 (VREG, 2010). Due to its limited relevance and lack of data regarding the costs of outages in Flanders, this smart grid benefit has been left out.

4.3 Stakeholders business case

Based on the cost-benefit analysis there is a huge potential for a complete smart grid roll out investment with a payback of less than five years. The annual investment costs are huge with estimates ranging from 265,95 to 602,89 million every year. Nevertheless, the societal business case is positive with a present value net benefit of 3,7975 billion. Also T&D operators and consumers stand to gain from a smart grid deployment, as can be deduced from Table 6. How costs will be shared among stakeholders remains to be determined, but the estimated individual benefits of both T&D operators as well as consumers surpass estimated costs. Table 6 Overview annual costs and benefits main actors In billion costs benefit T&D operators consumer benefit environmental benefit total Source: own work The electricity producers stand to lose from a smart grid roll out. DR programmes stimulate load shifting, improve asset utilisation and defer capital investment in generation capacity. Combined with a decrease in energy consumption (figure 26 column 10), the producers are likely to lose revenue compared to the baseline scenario of no smart grid roll out. However, considering the Flemish situation this will most likely benefit society. The CREG expects shortages in supply by 2015 when several nuclear energy plants will be closed (CREG, 2011). Considering the fact that smart grids lower 62 estimated 0,3002064 0,56471788 1,03352371 0,005143629 1,30317882 minimum 0,602885088 0,455299344 0,53590118 0,003429086 0,39174453 maximum 0,265947552 0,674225456 1,53114624 0,006858172 1,94628232

the need for generation capacity, it may help to reduce the need for new electricity generation. We can also expect the Herfindahl-Hirschman Index to fall at that time as the relative importance of Electrabel will have declined. Higher competition in the Flemish electricity generation market will contribute to relatively lower electricity prices. The benefits accruing to the T&D operators total 455,3 to 674, 23 million every year. These benefits originate from reduced T&D losses, lower conservation voltages, operational savings, reductions in peak load and integrating RES. However, as mentioned above (supra p.45), the business case for DSOs and TSOs is not that straightforward. The cost for distribution automation can swell up to three times the estimated cost, pushing costs above T&D benefits. Also, reductions in peak load capacity are extremely dependent on consumer involvement in DR programmes and their reaction to new pricing schemes and new technologies. Another element increasing uncertainty and therefore depressing the utilities business case is the decrease in electricity demand in response to better information via their smart meter and DR (figure 26 respectively column 9 and 10). Lower electricity bills and electricity consumption cause hesitation with network operators wishing to make profit on investment. Substantial uncertainty about the business case will remain without regulatory support or certainty the benefits of smart grid investments will accrue to them (supra p.45). This is all the more true in Flanders where DSOs (i.e. mainly Eandis) and the TSO (i.e. Elia) are fully unbundled.14 Eandis would have to cover for most of the costs while the distribution costs already constitute about 38% of the final electricity costs and are higher than in any of Belgiums neighbouring countries (supra p.54). Elia would benefit from smart grid improvements without the need of making serious investments. The regulatory situation in Belgium with two different agencies (CREG and VREG) responsible for the Flemish electricity market also does not stimulate an active regulatory investment policy (supra p.53). Consumers stand to gain 535,9 to 1,53 million annually from relative reductions in their electricity bills and reduced electricity use. Relative to the expected price increases without complete smart grid roll out (supra p.8), consumers can expect lower electricity bills when participating in demand response programmes. Considering the high and rising electricity prices in Flanders, consumers are likely to become more active in managing their electricity consumption patterns (supra p.53). Better information regarding their energy consumption will defer electricity use and inspire to invest in energy efficiency.

14

With the exception of Elia which is in limited capacity also a DSO.

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Suppliers are on an interesting link between the network operators and consumers. Suppliers such as the Flemish Electrabel are already trying to step into the market of energy management systems (supra p.19). Suppliers could evolve towards energy service companies (supra p.45), supplying not only electricity but also services regarding e.g. cost savings, personalised pricing schemes and energy efficiency tools. Finally, the direct benefit for the environment is rather small with 5,144 million. Including other factors such as deferred emissions due to e.g. load shifting, automated load following and reduction in conservation voltage might improve the environmental smart grid business case. However, the extremely low carbon price holds environmental benefits down to low values.

4.4 Critical remarks

KEMA wrote a cost-benefit analysis of smart meters in Flanders from the societal perspective commissioned by VREG (Schrijner, Mulder & Koenis, 2012). Contrary to their 2008 study they found a positive business case for smart meter roll out in Flanders (Schrijner et al., 2008). With a smart meter roll out of five years and a lifespan of 15 years, they found a positive net present value of 144 million over 30 years with a payback time of 24 years. The DSO stands to lose more than 1 billion, while consumers gain almost 1 billion. Suppliers and the environment are the other two main beneficiaries from smart meter roll out. These benefits are substantially lower than those calculated above in figure 26 where consumers accrued annual estimated benefits of slightly more than 1 billion, mainly due to smart meter improvements (the same cost saving parameters as the KEMA study and thus results should be comparable). This might indicate that the calculations above are based on studies which are overenthusiastic about the positive effects of smart benefits. Furthermore, studies based on macro-economic variables which are not tested in real life clearly overlook the subtle differences in consumption patterns across countries. For example, Schrijner et al. (2012) point out the importance of differences in consumer profiles. While prosumers15, SMEs and bigger residential consumers (>3.500 kWh) shift and save enough electricity to cause benefits to surpass costs, smaller residential consumers (>3.500 kWh) do not. Another reason why this study finds higher net benefits than the KEMA study might be the issue of interconnecting benefits. They themselves draw attention to the fact that shorter roll outs create better

15

Consumers which are also producers, f.e. households with solar panels.

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business cases. The main reason for this is that a complete roll out allows for interdependency between benefits, resulting in a more profitable business case than when only the most profitable segments are installed. We can also see this mutually reinforcing mechanism with smart grids (Table 3). But although DA might indeed boost AMI, the huge discrepancy between the KEMA study and the costbenefit analysis indicates an overestimation of benefits and/or an underestimation of costs. The cost benefit analysis calculations in figure 26 thus not only point towards a positive business case. It is also a warning to be very critical towards smart grid studies based on macro-economic variables. There might be substantial benefits, but much depends on the local market structure. More field tests are required to fully understand the costs and benefits of a smart grid deployment in Flanders.

4.5 Conclusion
Although the Flemish electricity system is fully unbundled, there is still a lack of competition in the electricity-generation market. Together with the current and expected climb of the share of renewable energy in the total energy mix, this pushes up electricity prices. Higher prices result in higher benefits from lower electricity consumption, which is important for the cost-benefit analysis of a full smart grid deployment in Flanders The analysis is performed using the current understanding of smart grid costs and benefits. Challenging premises are used to enhance the models robustness. Despite this, calculations indicate there is a very positive societal business case for a full smart grid roll out. The annual net benefits are over the five year period are 0,3917-1,9463 billion. The total present value over 5 years is 3,7975 billion. The capital investment in smart meters and the transmission and distribution automation are the two most important costs. The main benefits for the network operators are (i) reducing transmission and distribution losses, (i) lowering peak load and, in large part, (iii) efficiently integrating electric vehicles and renewable energy sources into the grid. All stakeholders involved realise a positive business case. However, if distribution and transmission automation costs expand up to their maximum, network operators might lose 147,59 million annually over five years.16 Consumers have a huge potential in savings, but these benefits strongly depend on consumer participation.

16

Including interest costs

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This study contradicts the KEMA cost-benefit analysis of smart meter roll-out in Flanders. The KEMA study found a much lower net benefit of smart meter benefits (Schrijner et al., 2012). This undermines the business case for consumers and points to the fact that there are considerable differences in consumer profiles between regions and countries. Macro-economic variables might not be suitable for this analysis. This cost-benefit analysis thus not only concludes with a positive smart grid business case, but also inspires to be critical towards smart grid analyses based on macro-economic variables. Such analyses are very dependent on the particular local market structure. Studies might also be biased towards smart grids, exaggerating the business case while ignoring negative research results. And finally there might be an overlap between benefits which is difficult to test for without field studies.

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General conclusion
The electricity grid plays a crucial role in enabling the energy transition towards a low-carbon economy. The share of renewable energy sources such as wind and solar power in the total electricity consumption is booming. When there is no sun or wind, the traditional grid fires up fossil fuel power plants to guarantee supply. This is a very polluting solution and pushes up electricity prices. Despite these rising prices, Europe increasingly relies on electricity for its energy consumption. Demand has been rising and is expected to continue doing so with the introduction of the electric vehicle. A smart grid uses information and communication technologies to upgrade the traditional grid infrastructure. This new system would improve overall operational and investment productivity, efficiently integrate renewable energy, enable rising demand from electric vehicles and consumers would gain more power over their electricity bills. This thesis made an economic analysis of the costs and benefits of a smart grid. Several national smart grid studies were scrutinised and a full analysis was made of the most important estimated and demonstrated benefits, taken from case studies in the U.S. and Europe. After examining the inhibiting factors for the development of a smart grid, a quantitative assessment was made of the costs and benefits of a full smart grid deployment in Flanders, based on previous findings. The research clarified that much is still unknown about smart grids. Although the general technology framework is well-recognized, there are still important technological gaps. The main problems are the lack of storage options, notably the lack of RD&D in electric vehicle to grid electricity flow, and the absence of universal open standards for smart grid data communication. The inquiry into the smart grid costs and benefits revealed a great deal of uncertainty among researchers. Most to all national studies analysing a smart grid roll out conclude with a positive societal business case, but they often use very challenging premises and different methods. Besides the need for better guidelines for smart grid cost-benefit analyses, more RD&D is warranted to reduce the differences in research results in between studies, or at least get a better grip on the geographical distribution of benefits. The main issue is how consumers react when faced with different price systems and better electricity usage information. This has a big impact on the smart grid potential, not only does it affect consumer benefits, it also influences the network operators business case. There are also some relatively stable benefits across case studies, transmission and distribution operational savings due to e.g. reduced meter reading costs and operational optimisation are positive across case studies. Safety, reliability and power quality also improve substantially across projects. The environment benefits from lower electricity consumption, grid efficiency improvements and a

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more efficient integration of renewable energy. And finally, energy security improves due to the lower carbon intensity and a decreased reliance on fossil fuels. The research into the actual size of the benefits is limited by a number of factors. The market structure varies in e.g. size, price level, level of consumption and consumption pattern. The pilot studies on price systems and consumer benefits were performed in dissimilar geographical locations, different socio-economic contexts, and had different sample sizes, types of households, feedback mechanisms and incentive schemes. Business results after operational savings are heavily dependent on e.g. the condition of the network, prevalence of theft, the increase over time of renewable energy and parallel management improvements. Despite these uncertainties, smart grid benefits are substantial. However, there is a considerable gap between current and optimal smart grid investment in Europe. The main barrier inhibiting a rapid smart grid deployment is the lack of business case demonstrations. The uncertainty regarding returns on investment, scare many investors away. The business model of network operators is also not fit for reaping the smart grid benefits after making investments in e.g. energy efficiency. Consumers do not believe in their business case, afraid they will have to carry all the costs while other stakeholders profit. Policy and regulation can assist in aligning actors interests with the desired policy goals and overcoming this tragedy of the anticommons. Technological challenges and concerns relating to data privacy and security constitute the other two barriers to progress. The findings from projects and studies regarding smart grid costs and benefits were subsequently applied on a cost-benefit analysis of a full smart grid deployment in Flanders. Challenging premises were used to enhance the models robustness. Calculations showed that the annual net benefits total 0,3917-1,9463 billion and the total net present value over 5 years is 3,7975 billion. The conclusion is that there is a very positive societal business case for a full smart grid roll out. The capital investment in smart meters and the transmission and distribution automation are the two most important costs. The main benefits for the network operators are (i) reducing transmission and distribution losses, (i) lowering peak load and, in large part, (iii) efficiently integrating renewable energy sources into the grid. All stakeholders involved realise a positive business case. However, if distribution and transmission automation costs expand up to their maximum, network operators might lose 147,59 million annually over five years. Consumers have a huge potential in savings, but these benefits strongly depend on consumer participation in energy efficiency and demand response systems. The research into the Flemish business case was limited by a number of factors. In order to calculate a more precise cost estimate, more information was needed regarding the condition and current 68

smartness of the grid which unfortunately was not publicly available. The obtain more reliable benefit estimates, the results from a still on-going pilot study on consumer participation in energy efficiency and demand response systems, would have been very useful, as consumer profiles differ across countries. A recent cost-benefit analysis of smart meter roll-out in Flanders questions the extremely positive business case scenario for consumers obtained in this thesis (Schrijner et al., 2012). As this is a strong indication that macro-economic variables might not be suited for such detailed analysis dependent on consumer behaviour, this thesis also inspires to be critical towards smart grid analyses based on macro-economic variables. Further research could refine the macro-economic method by exploring in more detail the drivers behind consumers participation in energy efficiency and demand response systems. It would be particularly useful to have an estimation tool based on e.g. electricity prices and consumption level, approximating the consumers benefits of a smart grid roll-out.

69

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APPENDIX A

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Table 7 International comparison of reliability indices (2007) Country/City Tokyo Netherlands Germany Denmark France Austria UK Italy Spain Unites States Source: Van der Zanden, 2011b. Table 8 National overall targets for the share of energy from renewable sources in gross final consumption of energy in 2020 Share of energy from Share of energy from Target for share of energy from sources in renewable sources in gross final renewable sources in gross renewable SAIDI 2 33 23 24 62 72 90 58 104 240 SAIFI 0.05 0.3 0.5 0.5 1.0 0.9 0.8 2.2 2.2 1.5

final consumption of energy, gross final consumption consumption of energy, 2020 2005 Austria Belgium Bulgaria Cyprus Czech Rep Denmark Estonia Finland France Germany Greece Hungary Ireland Italy 23,3 2,2 9,4 2,9 6,1 17 18 28,5 10,3 5,8 6,9 4,3 3,1 5,2 of energy, 2009 29.2 3.8 11.5 3.8 8.5 19.7 22.7 29.8 12.4 9.7 7.9 9.5 5.1 7.8 34 13 16 13 13 30 25 38 23 18 18 13 16 17 81

Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovak Rep Slovenia Spain Sweden UK Austria EU 27

32,6 15 0,9 0 2,4 7,2 20,5 17,8 6,7 16 8,7 39,8 1,3 23,3

36.8 16.9 2.8 0.7 4.2 9.4 25.7 21.6 10 17.5 13 50.2 2.9 29.2 11.6

40 23 11 10 14 15 31 24 14 25 20 49 15 34 20%

Source: European Commission, 2009b; European Commission 2009e.

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