SAP AG

SMART GRIDS FOR EUROPE HEADLINE TITLE RUNS HERE AND HERE BENEFITS, CHALLENGES, AND BEST PRACTICES AND HERE
SUBHEADLINE TITLE RUNS HERE AND HERE The SAP Perspective AND HERE
January 25, 2011

FOREWORD

The power of digital information and communications technologies (ICT) continues to grow and transform our world. There are few ICTdriven transformations that are as promising as “Smart Grids” in order to meet the urgent Europe’s energy challenges. The prospective benefits of Smart Grid transformation will extend not just to energy consumers and energy industry participants but also more widely throughout our economies and societies. The priority of energy sector transformation in Europe has been endorsed at the highest political level. In June of 2010, EU heads of state and government adopted the European Commission’s proposed “Europe 2020” strategy for jobs and smart, sustainable and inclusive growth, “starting with innovation and energy policies.” This endorsement is likewise reflected in the growing political priority of energy in most EU Member States, and increasingly around the world as well. This White Paper is addressed to the political leaders in the EU institutions and Member States. At SAP we are deeply committed to a leadership role in the development and application of ICT tools and technologies able to turn the Smart Grid vision into reality, building on our long-standing partnership with SAP customers on both the supply and demand sides of energy markets. This deep involvement with all important actors and stakeholders, gives us a unique position both to assess Europe’s Smart Grid progress and to offer recommendations to European policy-makers for ways to accelerate progress. Europe enters the Smart Grid era in a position of strength. Our energy industries and infrastructures are strong. On the policy side, the European Union offers the political framework for aligning our efforts to take full advantage of our continental scale alongside other major players of similar scale around the world. Provided we do so, Smart Grid transformation promises to be a major European success story. SAP is prepared to help accelerate the transformation. Jim Hagemann Snabe, Co-CEO SAP AG

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Smart Grids for Europe – Benefits, Challenges, and Best Practices

CONTENT

Foreword Introduction 1. Challenges Facing the European Energy Sector 2. What Is a Smart Grid? 3. How Smart Grids Will Benefit Europe 4. Smart Grid Investment Challenges and Opportunities 5. Status of Smart Grid Development in Europe 6. Recommendations

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Annex SAP Engagement in the Energy Sector and in Smart Grids Development Summary of Benefits of Smart Grids Summary of Recommendations

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Smart Grids for Europe – Benefits, Challenges, and Best Practices

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INTRODUCTION

Europe is at the dawn of an historic transformation of our energy sectors and systems, driven by a new constellation of challenges: steadily growing demand, aging infrastructure, Europe’s climate change and related long-term energy policy goals, growing demandside activism, and industry unbundling due to European energy market liberalization. Supportive public policies and initiatives, particularly in the EU framework, will play a decisive role in Europe’s ability to turn these challenges into new drivers of economic and social progress across our continent. The recommendations set out in this White Paper are intended to help stimulate and accelerate the identification, adoption, and implementation of just such measures. Europe’s energy industries and infrastructures have emerged from the 20th century in positions of enviable strength. We are thus well-positioned to lead the transformation of these sectors here in Europe – and around the world – to meet the new challenges. This transformation has become widely known as “Smart Grid” because it will be based on the pervasive application of digital information and communications technologies (ICT). Much is at stake. Smart Grids will not only deliver benefits to the supply and demand sides of energy markets, but they will be vital for Europe’s climate change and energy security goals, as well as the wider

global competitiveness of Europe’s energy and energy-intensive industries. The good news is that multi-stakeholder engagement in Smart Grid development is spreading across Europe at the national level, typically in response to national political leadership. Similar efforts are advancing elsewhere in the world, notably in the US and China. The fundamental policy question for Europe today is whether or not our current policy framework is sufficiently stable and creates incentives sufficient to attract the scale of investment necessary for smart solutions. The dilemma we face at the moment is that the business case may be weak for any one energy sector player to invest in isolation, but strong once many others also do, so that the wider system reaches an attractive level of Smart Grid functionality. Viewed in this light, Europe has yet to take full advantage of the EU framework to ensure that we leverage our continental scale and single-market Smart Grid potential to maintain our historic strength in energy. This is now our most urgent task. Important EU-level Smart Grid processes have been put in place. These now need to be accelerated and brought together with a number of new initiatives in a coherent “EU Road Map for Smart Grids,” together with implementing policy instruments.

This White Paper first sets out the new constellation of challenges driving Smart Grid development, followed by the core elements and benefits of Smart Grids. We then assess the status of European Smart Grid development and end with our recommendations for further EU-level policy action. Our focus here is primarily on electricity because that is the current focus of most Smart Grid development. But Smart Grid solutions will evolve for the energy sector more broadly, notably for natural gas and heating. Our views are rooted in SAP’s long engagement in energy industries as a provider of enterprise software solutions, and thus in Smart Grid development from the beginning. We work on Smart Grid development with customer organizations throughout the value chain and around the globe, advise governments on Smart Grid strategies, and participate actively in EU and Member State research and pilots now underway. As a global ICT industry leader of European origin that has built its historical success on the standardization of business processes in enterprises and whole supply value chains, we are entirely committed to reinforcing the historic strength of European energy industries and infrastructures through European Smart Grid leadership.

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1. CHALLENGES FACING THE EUROPEAN ENERGY SECTOR

Europe’s energy services industries and infrastructures have emerged from the 20th century in positions of enviable strength. The ubiquitous provision of reliable, affordable electric power has been one central pillar of this strength, driving economic, industrial, and social progress across the European continent for more than a century. The electric power sector in Europe (as in most countries around the world) has developed largely through centralized infrastructures in which relatively few high-output power plants sit in the middle of national grid transmission and distribution systems. This supply-side structure reflects not only the evolution of power generation and distribution technologies over the past century but also the long-standing political paradigm of European energy – sovereign states exercising full sovereignty over energy policy, typically also with state ownership of vertically integrated electricity industries. These policies, together with European leadership in the core energy technologies, have served admirably to deliver the corresponding public policy goal over many years – of affordable, secure, and reliable1 supply of electricity within national borders. By the same token, on the demand-side consumers have had until very recently little incentive to consider energy savings and environmental impacts.

Times are changing. The policy goal of affordable, reliable, secure energy remains, but the constellation of political, economic, social, and technological factors underpinning what has long been the paradigm of European energy is evolving rapidly and radically, adding new challenges for European energy policy and energy industries. This is particularly true for electricity: • Growing demand and rising prices: Europe’s electricity consumption continues to grow more quickly than total energy consumption and more quickly than any other major form of energy consumption. This trend is expected to continue, the consequence notably of the attractiveness of electricity as an energy carrier, the growth of Europe’s service sector – a major consumer, and the proliferation of electricity-consuming household equipment.2 The technical ability to “co-generate” heat from electric power plants creates additional demand-side pull. European Commission forecasts indicate that electricity will grow by 38% through 2030.3 At the same time, upward pressures on electricity prices may be expected to intensify in line with growing demand over the longer term, if and as the price of fossil fuels for power generation rise and align with the cost of new sources of renewable power. This trend will in turn give rise to an era

of far more cost-conscious industrial and individual consumers. • Aging infrastructure: Europe’s electric power industries will need to increase overall capacity to meet rising demand while at the same time replacing aging electric utility infrastructure, which in most of Europe (and much of the world) is between 60 and 80 years old.4 The required increase in net generation capacity5 equals 31% of the present generation capacity, or some 227 GW – and more in some Member States. In Germany, for example, the BDI estimates that almost half of the country’s power plant capacity will have to be replaced by 2020.6 • Climate change and sustainability: EU energy policy now incorporates the interrelated goals of reduced greenhouse gas (GHG) emissions, increased energy efficiency, reduced dependence on foreign energy suppliers, and reduced dependence on finite fossil fuels. The European Union is committed to a 20% reduction in total GHG emissions by 2020, with growing pressure to raise the target to 30%, and a 20% increase in energy efficiency.

1. Germany, for example, has the lowest number of power failures in the world. 2. http://sunbird.jrc.it/energyefficiency/pdf/EnEff_Report_2009.pdf The European Commission projects electricity’s share of total final EU-27 energy consumption to grow from slightly over 21% today to close to 30% by 2030. This rising demand is expected to translate on the supply side to a 35% increase in capacity between 2005 and 2030. The required increase in net generation capacity equals 31% of the present generation capacity, or some 227 GW. 3. http://ec.europa.eu/dgs/energy_transport/figures/trends_2030_update_2007/energy_transport_trends_2030_update_2007_en.pdf, page 15. Meanwhile, the IEA predicts in its reference case that world net electricity generation will increase by 87 percent from 18.8 trillion kilowatt hours in 2007 to 25.0 trillion kilowatt hours in 2020 and 35.2 trillion kilowatt hours in 2035. http://www.eia.doe.gov/oiaf/ieo/highlights.html. 4. http://www.abiresearch.com/press/1688-Smart+Grid+Spending+Will+Top+%2445+Billion+by+2015 5. http://ec.europa.eu/dgs/energy_transport/figures/trends_2030_update_2007/energy_transport_trends_2030_update_2007_en.pdf 6. BDI’s report on “Internet of Energy:” http://www.bdi.eu/BDI_english/download_content/Marketing/Brochure_Internet_of_Energy.pdf 6 Smart Grids for Europe – Benefits, Challenges, and Best Practices

“We are at a pivotal point for the entire energy world. The energy transition will hit us much faster and harder than many anticipate, with much more decentralized generation and demanding customers. In order to facilitate the fluid energy market without endangering the security of supply, all market parties in the smart energy ecosystem will need to implement a strong intelligent grid, that enables customer-oriented programs for energy efficiency and intelligent usage of all available energy resources. It is crucial that large market players strongly cooperate here, since this task is too large and far too important for individual actions.”
Dr. Jeroen P. Scheer, Strategy Consultant Smart Grid IT, Alliander N.V.

• Security of supply: Another central goal of European energy policy is enhanced security of supply, meaning reduced dependence on imported energy – particularly fossil fuels – and diversification of energy sources. In practice this will require growing exploitation of indigenous renewable energy sources. This constellation of new challenges is generating enormous pressure for dynamic energy industry restructuring and the search for competitive new business models and services across Europe’s energy industries at all levels. Practical responses to all these challenges will increasingly be rooted in the ability of many more actors to interoperate in decentralized energy systems with many more “moving parts.” The technologies needed to drive this transformation will come largely from the pervasive application of digital information and communications technology throughout our energy systems. But while the pressures driving this evolutionary vision continue to build, there is one fundamental obstacle: today’s technical infrastructure – centralized generators linked to passive consumers by national “one-way” transmission and distribution grids – cannot provide the information, communication, and coordinated actions required across the system at all levels, which is essential to make it work. In a word, our inherited 20th-century electric power systems – strong though they may be – need to become “smart,” which is why this transformation has become collectively known as “Smart Grids.”

Today’s conventional electric power and heat systems already account for 27% of total European GHG emissions – the single largest share7 – and thus pose a particular threat to Europe’s GHG reduction goals as electricity consumption continues to grow. The result of this policy-driven change will be a proliferation of new, decentralized, renewable power entrants on the supply side – especially wind, solar and biomass. At the same time, growing numbers of individual industrial and household consumers will generate or store renewable power for their own use, with surpluses available to sell back into wider systems. Such producer-consumers are often referred to as “prosumers.” • Energy efficiency: At the broader systems level, the EU’s 20% energy efficiency target as well as rising energy prices will put all actors under growing political, regulatory, and economic pressure to improve their energy efficiency, starting on the demand side.

Europe’s energy consuming industries increasingly compete in global markets, where the comparative cost of energy has become a major factor of competitiveness. Individual European consumers are under increasing pressure to cut both the cost and environmental impact of their growing energy consumption. • Energy market liberalization: EU legislation applies the fundamental EU Treaty provisions to introduce competition and the free flow of energy goods and services across single European markets. Today EU regulation requires vertical unbundling of power generation from grid operations, unbundling between transmission and distribution grids, and separation of distribution grids from retail. Grid operators must connect new power generators to the system; consumers may chose their suppliers; and both generators and consumers have the right to transact business across internal EU borders.

7. http://www.energy.eu/publications/THAL08006ENC_002.pdf Smart Grids for Europe – Benefits, Challenges, and Best Practices 7

2. WHAT IS A SMART GRID?

The European Commission Smart Grids Task Force defines a Smart Grid as “an electricity network that can costefficiently integrate the behavior and actions of all users connected to it – generators, consumers, and those that do both – in order to ensure economically an efficient, sustainable power system with low losses and high levels of quality and security of supply and safety.”8 The diagram below shows how a Smart Grid for electric power connects all actors using ICT tools and technologies. Crucially, no single actor can benefit fully from the systemwide network effects unless all other actors are also integral parts of it.

8. http://ec.europa.eu/energy/gas_electricity/smartgrids/doc/expert_group1.pdf

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Smart Grids for Europe – Benefits, Challenges, and Best Practices

Key components of this system include:9 • Smart Meters: Enable remote measuring of real-time consumption and two-way interaction between utilities and consumers. These are a key enabling component for Smart Grids, allowing the individual customer to monitor and control consumption in real time. This will in turn drive development and demand for smart electrical appliances of all kinds downstream from the meter customer premises, while providing the critical information about final consumption and demand to all players back down the supply chain. When implemented on the basis of standards assuring interoperability, smart metering provides information to a wide range of different actors connected to the Smart Grid, enabling improved customer services and systemwide continuous adjustment of supply to demand. Smart Meters can also be controlled remotely by consumers using today’s mobile telephone and Internet infrastructures. • Intelligent grid management: Allows variable power generation, transmission, and active distribution depending on demand, also permitting reverse flows to allow prosumers to sell their own power surpluses (for example, from solar installations or electricity stored in vehicle batteries); these functionalities require the use of digital telecommunications and data storage and processing tools and technologies.

• Software-based added-value services and applications: allow all actors to coordinate and control their behavior on the economic level. • Systemwide oversight and coordination – the “glue” in the system: ensure the efficient coordination and optimum use of the available energy, all individual components from producer to consumer must be integrated into a uniform communication infrastructure to enable realtime, systemwide communication. Many of the ICT tools and technologies needed to deliver these Smart Grid functionalities are available today and are themselves constantly evolving, while new, more powerful ones regularly emerge. The technical Smart Grid challenge is thus primarily systems innovation – the adaptation and integration of these ICT building blocks, many of them in common use today, to create the core Smart Grid functionalities. SAP is involved in all areas of Smart Grid systems innovation because they are all based in one way or another on software programming and software tools. A major common challenge in all these areas is to create systems that can deal with the scale at which these systems will need to operate and interoperate in real time. For example, SAP estimates that Smart Grids will require the storage and processing in real time of up to 100 times the volume of data compared with today’s electricity systems, which in terms of analytics require breakthrough software technologies.

This systems innovation, wherever it takes place in Europe and whoever undertakes it, needs to proceed within a European framework of common open standards, while also ensuring compatibility with other major third-country systems. This is the only way to ensure interoperability on the scale necessary both to bind the entire system together and to create new, competitive, open European and global markets for ICTbased tools and services throughout the system.

9. Ibid BDI, page 13: http://www.bdi.eu/BDI_english/download_content/Marketing/Brochure_Internet_of_Energy.pdf

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3. HOW SMART GRIDS WILL BENEFIT EUROPE

Consumer and Industrial-User Benefits
The truly revolutionary feature of the emerging Smart Grid paradigm is the ability it will give private as well as industrial consumers to monitor and control their own electricity consumption in real time in response to relevant information received, notably price. This will lead to increased transparency and reductions in electricity costs. Consumers will also benefit from the improved reliability of the network and accelerated delivery of new or improved services. For Europe’s energy-intensive industries10 competing in world markets, Smart Grid benefits, especially cost control, may ultimately make the difference between remaining in Europe or migrating elsewhere in search of cheaper power. This is why two utilities in Europe, Electricity of Lubjana and Verbund in Austria, will launch a joint project to significantly reduce the load consumption of industrial users, based on an innovative SAP aggregation software system. At the same time, the cumulative effect of the empowerment of millions of individual electricity consumers will be entirely consistent with the wider character of the emerging digital age: a profound and permanent shift from one-way supply-side communications, control and supply of electric power to demand-side control based on market

transparency and two-way communications. Smart Grid consumers will evolve from passive recipients of a commodity to active power market participants as buyers, technology investors, and even as energy producers. Already today many commercial and industrial users experience some of those benefits since electronic meters for interval measurement have already been installed in most Member States. As for private households, the European Commission reports that where Smart Meters have been installed, consumers have reduced their energy consumption by as much as 10%.11 Reported results of several pilot projects are even more encouraging.12

Supply-Side Benefits
Generators Energy generators are at the starting point of the value chain. Electric power and heat can be produced from fossil fuels (coal or oil), nuclear fuel or renewable energy sources (wind, solar, geothermal, biomass, hydro/tidal). ICT tools connected to Smart Grids can help energy generators improve portfolio and “virtual power plant”13 management as well as overall efficiency while adjusting output to demand fluctuations in real time. In total, ICT could achieve efficiency gains of up to 40% in electricity generation.14 Smart Grids will also enable the large-scale integration of renewables and small decentralized power generators.

Transmission and Distribution Transmission Systems Operators (TSOs) and Distribution Systems Operators (DSOs) plan, build, and operate the grids that deliver electric power from generators to consumers. They are responsible for the stability of the grid and security of supply. They also typically manage and operate the meter devices on the customer premises. Smart Grids will significantly improve virtual power plant monitoring, power flow management, predictive maintenance, capacity planning, and energy data management. This new transparency and functionality will lead to improved grid efficiency, longer infrastructure life span, higher network capacity, and a reduction in distribution losses and operating costs. Peak load can be shaved by 50% through more efficient peak energy management.15 Efficiency gains will also be realized through remote reading enabled by Smart Meters. For example, in early 2010, SAP started a Smart Metering pilot project with the EKZ, the utility of the region Zürich in Switzerland. EKZ estimates that it will save 25,000 working hours annually simply because meter reading can be done remotely without visiting customer premises. One recent study concludes that the efficiency of transport and distribution of electricity can be increased by 10% through the effective use of ICT.16

10. The European Alliance of Energy Intensive industries reports an aggregated annual turnover of over €1000 billion, with direct employment of over 3 million people, and stresses that manufacturing is closely interlinked with Europe’s entire economic fabric, downstream processing, R&D, and innovation. 11. European Commission: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/393 12. In the UK, the AlertMe project allows customers to turn off appliances by Web interface or mobile, and in 8 months residents have saved roughly 40% of their electricity. In the US was Smart Grid City, a pilot project to understand the potential impacts of a range of Smart Grid technologies including OpenGrid software, which allowed two-way communications on the grid and led to a 90% reduction in voltage problems that in turn reduced overall power requirements by 3-5% in a city of 100,000 people. 13. A “virtual power plant” is a network of many small, decentralized producers functioning as a single producer. 14. “ICT for a Low Carbon Economy – Smart Electricity Distribution Networks”, July 2009, page 13; http://ec.europa.eu/information_society/activities/sustainable_growth/docs/sb_publications/pub_smart_edn_web.pdf 15. Ibid, page 9. 16. Ibid, page 13. 10 Smart Grids for Europe – Benefits, Challenges, and Best Practices

“A low-carbon energy system must not only offer an attractive business model for renewable generators but, moreover, also for grid operators. In order to optimize the use of renewables and harvest energy efficiency potentials, future grids must be capable of managing huge numbers of generation access points, volatile production sources and the alternating demands of smart consumers.
Dr. Marianne Moscoso-Osterkorn, Director General REEEP (Renewable Energy & Energy Efficiency Partnership)

Retailers Energy retailers are at the final stage of the supply-side value chain and the point of contact with the customers for energy supply contracts, switching requests and invoicing. They are typically focused on selling energy and related services to private households as well as industrial consumers. Smart Grids will help improve retailers’ ability to understand and respond to individual customer requirements through better data and the tailored bundling of products and services. Standard procedures can also be improved – such as more detailed and accurate accounting on the retailer side and billing on the customer side. At the same time, more efficient forecasting and smart portfolio management will allow the retailer to reduce the risk of peak electricity purchasing. New Entrants and New Business Models17 Smart Grid functionalities will create pressure on existing players to adapt their business models and will facilitate the market entry of new players. Grid operators may offer in addition to energy transmission services valuable information packages for power generators and retailers leveraging the data flow in their Smart Grids. Institutionalized Europeanwide energy trading, which currently involves only a small number of market players, will in the future be accessible all the way to the prosumer. New wholesale traders may enter the market that buy energy capacity from different sources and resell customized products to retailers or large end users. It is also expected that new entrants will provide innovative services such as the optimi-

zation of a customer’s energy consumption or the management of decentralized generation capacities including parked electrical vehicles. Overall, Smart Grids will enhance competition and will drive the transformation of the energy sector into a service-driven industry. In the future competing firms will offer carefully crafted consumer services and products to differentiate themselves from rivals. These may include bundles of services for the household (and automobile) including choice of power source, home appliance management, or the ability to feed-in a consumer’s own energy production. Prosumers will choose their individual levels of investment in the smartness of the powersupply services they purchase, in view of the cost and convenience benefits they offer.

electricity consumption continues to grow. Smart Grids will reduce systemwide GHG emissions in two ways: the integration of renewable energy and improved energy efficiency throughout the system. • Renewable energy: To help achieve the EU’s 20% emissions reduction target, EU policy sets a renewable energy target of 20% of total EU energy consumption by 2020. Much of that 20% will have to come from renewable electric power generation. One authoritative baseline projection foresees renewables rising from 15% of Europe’s electricity in 2000 to over 23% by 2030.20 Some projections foresee renewables providing 50% or more of Europe’s electricity by 2050, with onshore and offshore wind a major contributor (depending also on the future contribution of nuclear power). Smart Grids are essential for largescale integration of renewable power generation – notably wind and solar. These sources are typically remote, smaller than conventional power plants, and intermittent – that is, their output is largely uncontrollable (albeit increasingly predictable) at any given moment. Only a smart, decentralized transmission grid network can integrate growing numbers of such power sources in a single system still anchored on central, large-scale generators, while balancing the overall system in real time in response to constantly fluctuating supply and demand.

Achieving EU Greenhouse Gas Emissions Targets
Smart Grids are the key for driving reductions of GHG emissions from the generation, transmission, and consumption of electricity. A recent estimate concluded that over 7% of total worldwide emissions could be saved by the global uptake of Smart Grid systems.18 The European Union is committed to a 20% reduction of total GHG emissions by 2020 (compared to 1990), with growing pressure to raise the target to 30%. Today’s conventional electric power and heat systems already account for 27% of total European GHG emissions – the single largest share19 – and thus pose a particular threat to Europe’s GHG reduction goals as

17. For a detailed discussion, see BDI’s report on “Internet of Energy”; http://www.bdi.eu/BDI_english/download_content/Marketing/Brochure_Internet_of_Energy.pdf, page 22 ff. 18. http://www.theclimategroup.org/publications/2008/6/19/smart2020-enabling-the-low-carbon-economy-in-the-information-age: potential savings from “smart grid” (2.03 Giga-tons) and “smart buildings” (1.68 G-t). 19. http://www.energy.eu/publications/THAL08006ENC_002.pdf 20. http://ec.europa.eu/dgs/energy_transport/figures/trends_2030_update_2007/energy_transport_trends_2030_update_2007_en.pdf Smart Grids for Europe – Benefits, Challenges, and Best Practices 11

As a result of the evolution towards fuels with zero or low carbon content (renewables and gas), CO2 emissions from power generation (+6%) are expected to grow much more slowly than electricity production (+35%) by 2030.21 • Improved energy efficiencies throughout the system: EU climate change policy calls for a 20% improvement in Europe’s overall energy efficiency (compared to 1990). The energy sector will need to make a major contribution to this goal. In the words of the European Environment Agency, “Due to the high level of efficiency losses involved in both the production and transmission of electricity, particularly from conventional thermal generation, the rise in electricity consumption is of particular concern for the environment.”22 The continuous communication and aggregation of individual consumer cost-saving choices through Smart Grids will drive the supply side (generation, transmission, distribution, and retail) to continuously adapt and respond in the most efficient way, with corresponding reductions in GHG and other emissions.

of future renewable power penetration in Europe vary widely depending on assumptions about the cost of fossil fuel alternatives and public support for renewables. But there is no doubt at all that renewables can only benefit from the economies of scale necessary to become competitive without subsidy if the Smart Grid infrastructure is in place to connect them to wider systems.

Job Creation
Smart Grid transformation in Europe and the related service industries that will emerge have the potential to create a significant number of new and highly skilled jobs. The European Commission estimates that our low-carbon energy industry today has produced 1.4 million jobs, and this figure could double by 2020 if Europe makes the necessary investment decisions.24 Much of this job creation will come in the form of increased demand across the system for skilled personnel from electrical engineering and computer sciences, with a special focus on dual qualifications. At the same time, there will be greater demand for electricians, mechatronic engineers, and plumbers with the electrotechnical and ICT skills to install and maintain complex components such as electronic meters and home automation solutions. And there will be wider demand for IT specialists with good knowledge of the energy sector.25

Liberalized Power Markets of Continental Scale
EU policy seeks to increase electricity market competition in two ways: 1) by requiring vertical unbundling of power generation, transmission, and distribution, and 2) by extending competition across internal EU borders. It has been estimated that fully functioning liberalized electricity markets of continental scale could reduce European electricity prices by up to 13%, with total savings of tens of billions of Euro.23 As a result of this policy-driven dual market liberalization, many new and newly unbundled players in these markets will have to communicate in new ways with each other both “vertically” and “horizontally” if the market is to function. New Smart Grid functionalities will facilitate market entry of new players and enrich all such marketenabling communications, thereby greatly facilitating and accelerating single EU market integration and the creation of a fully-functioning European retail market.

European Energy Industry Exports Competitiveness in World Smart Grid Markets
Europe is not alone in our drive to realize the Smart Grid vision. Governments and industry players in many parts of the world are moving – some rapidly in this direction. Provided we move at least as rapidly to build on the relative strength of our established energy industries and systems – and provided third country markets are open to competition – the emergence of dynamic

Greater European Energy Security
By enabling the integration into the wider system of decentralized power generation from indigenous renewable energy sources, Smart Grids will also reduce Europe’s dependence on finite – largely imported – fossil fuels. Forecasts

21. http://ec.europa.eu/dgs/energy_transport/figures/trends_2030_update_2007/energy_transport_trends_2030_update_2007_en.pdf 22. http://www.eea.europa.eu/data-and-maps/indicators/en18-electricity-consumption 23. http://ec.europa.eu/energy/electricity/package_2007/doc/2007_09_19_impact_assessment_en.pdf 24. Fabrizio Barbaso, Deputy Director General DG Energy, European Strategic Energy Technology Plan (SET-Plan) Summit Conference, Madrid , 3-4 June 2010. 25. BDI, http://www.bdi.eu/BDI_english/download_content/Marketing/Brochure_Internet_of_Energy.pdf

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Smart Grids for Europe – Benefits, Challenges, and Best Practices

“Reaching for a sustainable and reliable energy supply for society requires a totally new electricity grid, to deliver the energy services for transport, industrial, commercial, and residential application. A smart system will be the result offering new services in a market where the consumer is at the center of a GHG-free energy system.”
Ronnie Belmans, Professor at the Catholic University in Leuven, Chairman ETP Smart Grid

Smart Grid markets around the world will provide a vast new opportunity for European providers of proven Smart Grid tools, systems, and services. To cite only a few indicators of global market potential: • One recent study26 indicates that worldwide investments in Smart Grid infrastructure will amount to some $200 billion between 2008 and 2015 alone. • The US has moved rapidly to modernize its energy infrastructure and introduce Smart Grids.27 In November

2009 as part of its economic stimulus package, the Obama administration launched a 100 Smart Grid Investment Grant Program with funding totalling $3.4 billion. This program builds on $4.7 billion in commitments from private companies, utilities, cities, and other partners. • China, responsible for 75% of the global rise in demand for energy,28 has rapidly recognized the strategic importance of Smart Grids. The Chinese government is also investing in Smart Grid projects and has so far earmarked $7.3 billion for stimulus

loans and grants in 2010. China has fixed the target of non-fossil primary energy to be 15% by 2020 and to cut CO2 emissions by 40% to 45% in 2020 (compared to 2005). • Australia and New Zealand are opening their energy markets to competition in order to attract private capital for Smart Grid transformation.

26. Free for use: Pike Research Executive Summary: http://www.qualenergia.it/UserFiles/Files/SGT-09-Executive-Summary.pdf 27. Roland Berger Strategy Consultants, “Smart energy-Development paths for energy in the future,” July 2010. 28. Roland Berger Strategy Consultants, “Smart energy-Development paths for energy in the future,” July 2010.

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4. SMART GRID INVESTMENT CHALLENGES AND OPPORTUNITIES

“ICT is at the heart of the Smart Grid concepts emerging today. It is for the ICT industry to ensure their interoperability at the European level and that the carbon costs and benefits are quantifiable[1]. This is a must to guarantee a European Smart Grid market and that the significant investments over the coming years will be made on truly sustainable solutions.”
Robert Madelin, Director-General DG Information Society, European Commission

1. Uncertainty over the regulatory framework, especially whether price regulation will allow for a reasonable return on investment. 2. Short-term vs. long-term: investments have to be undertaken now, while uptake by customers is still uncertain and full benefits will only occur in the long-run. This issue is especially important in energy markets that are already open to competition. 3. Lack of European standards that provide certainty, reduce the costs of technology through economies of scale, and ensure interoperability 4. Investment inertia: the full benefits of Smart Grids will only be realized if all market players invest at the same time, which is difficult to coordinate; everybody is waiting for anyone else to take the first step. 5. Free riders: while the benefits of Smart Grids will be spread over the whole energy value chain, the investment burden lies on just a few players. The fundamental policy question therefore is whether or not the current policy framework will overcome these disincentives. Addressing this question is urgent because Europe must exploit this unique opportunity to fund Smart Grid innovation and deployment as a core component of all electric power systems infrastructure investment going forward. Our need for large-scale investment to ensure an adequate, sustainable future electricity supply will not wait, so neither must our transformational investment in Smart Grids innovation.

As noted previously, much of Europe’s aging electric power infrastructure will need to be replaced over the coming decade. The scale of the investment required for this compressed renewal cycle creates a unique opportunity to build Smart Grid functionality directly into the next generation of Europe’s power systems. Eurelectric, representing Europe’s power generation industry, estimates that the sector needs to invest €1.8 trillion (£1.7 trillion) between now and 2030 to replace aging plants, develop Smart Grids, meet surging demand and deliver

on environmental targets.29 It is further estimated that over the same period utilities will need to double their ICT spending to reach some €352 billion to realize the Smart Grid transformation,30 with roughly 15% for smart metering deployment and 85% to upgrade the rest of the system. Public policy has a vital and urgent role to play in creating an investment environment in Europe able to attract Smart Grid investment on this scale. Current disincentives that need to be overcome include:

29. http://www.guardian.co.uk/environment/2009/mar/19/europe-energy-power-climate 30. http://ec.europa.eu/information_society/activities/sustainable_growth/docs/sb_publications/pub_smart_edn_web.pdf

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Smart Grids for Europe – Benefits, Challenges, and Best Practices

5. STATUS OF SMART GRID DEVELOPMENT IN EUROPE
“Smart Grids are central to the development of sustainable electricity networks that are at the heart of the internal market for energy. With this view in mind, the Commission launched in November 2009 the European Task Force for Smart Grids to assess further regulation directions and to coordinate first steps towards the implementation of Smart Grids under the provisions of the Third Energy Package. During 2011 the Commission will launch a standardisation mandate and analyse what further initiatives at EU level are necessary” Heinz Hilbrecht, Director for Security of Supply and Energy Markets. European Commission, DG Energy

There is a multiplicity of national Smart Grid initiatives currently underway across Europe: • In several Member States energy ministries and regulators are moving to develop national policies and even concrete plans for the rollout of Smart Grids. The U.K., Belgium, Germany, Austria, Italy, France, and the Nordic region are examples for establishing comprehensive Smart Grids policies. • Sweden and Italy have already achieved world-leading smart meter penetration – 90% to 100% – in different ways. In 2003 the Swedish government decided to have monthly billing based on actual meter readings in place by 2009. Accordingly, the government instructed all utilities in Sweden to install Smart Meters. The universal rollout was completed in June 2009. The smart meter deployment in Italy was commercially driven.

Already in 2001, Enel, the largest utility in Italy, started a €2 billion investment program to replace traditional meters with modern devices. By 2006 all of Enel’s 32 million customers were equipped with smart devices, initially for one-way communication. Interestingly, both Enel and the Swedish utilities have now decided to invest in Smart Meters in other markets, following the positive experiences in Italy and Sweden. Enel, for example, plans to install 13 million Smart Meters in Spain by 2015. France and the UK are also gearing up for major efforts to introduce smart metering. • European grid operators and IT companies increasingly pool their resources in collaborative Smart Grid research projects and pilots, which in many cases are partially funded by Member States. Germany’s program to create model E-Energy

regions (see Box 1) or the planned Smart Meter Hub in the UK (see Box 2) may be regarded as best practices in this context. In total, there are approximately 200 Smart Grid pilots running in Europe. All of these efforts are vital and promising. However, overall progress on Smart Grids deployment in Europe has been rather slow. In most Member States the development of Smart Grid policies is at a very early stage. While electronic meters for interval measurement have been already installed for commercial and industrial users in most Member States, the penetration of Smart Meters in private households is still fairly low. And, if investments in Smart Meters or Grids including smart metering take place, they are usually based on proprietary technologies so that the potential of Smart Grids is not fully exploited.

Box 1: E-Energy Model Regions, Germany
The German Federal Ministry of Economics and Technology (BMWi) has, in collaboration with the German Federal Environment Ministry (BMU), initiated a unique “E-Energy technology program,” which runs for a 4-year term and has received an overall budget of some €140 million. Individual test scenarios for an “Internet of energy” were set up in each of the six model regions. The objective is to create a smart electricity system, which will to a large extent control itself and in which all energy-sector processes are optimally adapted to one another. It is hoped that the solutions will trigger follow-up investments. One example is “MeRegio”– a minimum emission project in the model region of Baden-Württemberg, in which SAP participates. The E-Energy MeRegio model house generates power on the roof or using a mini–combined heat and power plant (CHP) in the basement. The household appliances are interlinked via communication technology and connected to a smart system platform. The electric vehicle is parked in the garage: the vehicle battery is charged when the mini-CHP produces more electricity than the grid can take. If necessary, the electricity from the battery can also be fed into the grid. As a partner of the electricity provider, the consumer can view the processes in the system via an Internet portal and play an active role in market activities. http://www.e-energy.de/en/32.php

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Box 2: UK Smart Metering Initiative
In December 2009 the UK Department of Energy and Climate Change (DECC) launched a comprehensive, government-initiated smart meter implementation program. The program foresees the mandatory rollout of electricity and gas Smart Meters across Great Britain in over 27 million homes and over 2 million non-domestic premises starting in mid 2012. The government estimates that the economic savings will be between £2.5 billion and £3.6 billion over the next 20 years. The plans are part of a revamp of Britain’s climate strategy. In the 1st phase of the program, a smart metering “Prospectus” has been developed jointly with industry, including SAP, which defines the overall objectives and measures of the rollout. In the 2nd phase a regulatory framework to facilitate an efficient smart metering rollout will be developed, which then needs to be implemented in phase three. In the 4th phase Smart Meters will be operational throughout the UK. Of particular interest in this context is the proposed creation of a Smart Metering hub, the “DataCommsCo” (DCC). DCC will be a licensed entity and will operate a data center that will be accessible for all market players in the energy value chain. The DCC will receive data from the various metering companies and will process them for the needs of retailers, especially for billing purposes. Participants expect that the DCC will yield major cost savings. The new entity may also provide value-added information services in the future. DCC will respect the highest standards for data security and privacy that will be developed by a specific working group. DCC services should be available as of autumn 2013. http://www.ofgem.gov.uk/e-serve/sm/Documentation/Documents1/Smart%20metering%20-%20Prospectus.pdf

Furthermore, the existing efforts remain largely national. They take place at different speeds with little coordination among them. There is a risk that by preserving what has been the predominantly national organization of Europe’s power industry, Europe will be unable to reap the full advantage of Smart Grid transformation. We still lack a common EU policy framework for Smart Grids that will ensure interoperability across networks and borders to realize the economies of continentalscale markets for energy and energy services. That said, ongoing efforts within the EU framework create the basis to move farther, faster.

• EU Legislative Framework: The third EU energy package of 2009 as well as the recent European Commission Communications on energy strategy 2020 and energy infrastructure priorities for 2020 and beyond all stress the importance of Smart Grids. The third EU energy package includes a non-binding target for Member States of 80% penetration of Smart Meters by 2020. Member States are also asked to prepare a cost/benefit analysis of smart metering by September 2012. In mid 2011 the European Commission might propose a legislative framework for Smart Grids to be adopted not before the end of 2012. Implementation in EU Member States would probably take until the end of 2014.

• The European Technology Platform (ETP) Smart Grids, founded in 2005, is looking into the development of European electricity networks for 2020 and beyond. The ETP already adopted a Vision Paper in 2006, a Strategic Research Agenda in 2007 and a Strategic Deployment Document in 2009. Under the umbrella of the ETP, the European Electricity Grid Initiative (EEGI) has been created, in which network operators, network equipment suppliers, the ICT industry, Member States representatives and other stakeholders are represented. EEGI has presented a nine-year European research, development and demonstration program to accelerate the development of next-generation electricity networks in Europe.31

31. A promising proposal from Europe’s transmission and distribution operators for a nine-year €2 billion research, development, and demonstration program, “European Electricity Grid Initiative” (EEGI) involves about 22 individual projects and envisages a rolling timetable for project completion with many key projects reaching completion within 5 years, assuming the necessary finance materializes – by no means a foregone conclusion. 16 Smart Grids for Europe – Benefits, Challenges, and Best Practices

• Under the 7th R&D Framework Program (FP7, 2007 – 2013), the first European research projects on Smart Grids have started – both in the energy theme32 and the ICT theme.33 However, so far it has not been a major priority. Approximately €140 million were contracted for research for Smart Electricity Grids in the energy theme in the years (2005–2010).34 Joint activities between the ICT and energy Themes on Smart Electricity Distribution Networks totalled €20 million.35 • A few European Smart Grid pilots and thematic networks, co-funded by the European Commission, have been launched:

– ADDRESS (Active Distribution network with full integration of Demand and distributed energy REourceS) is a large-scale project that started in 2008 and is designed to advance the “prosumer” concept, i.e. the integration of small industrial and private consumer power generators into the overall energy system. – TWENTIES (Transmission system operation with large penetration of wind and other renewable electricity sources in networks by means of innovative tools and integrated energy solutions) is one of Europe’s largest industrial energy initiatives. The objective is to test the widespread integration and use of wind power in Europe.36

– The SmartHouse/SmartGrid project led by SAP develops a holistic concept and a road map for the mass adoption of smart energy devices in homes.37 – The objective of the “Thematic Network ICT4SMARTDG”, in which SAP participates, elaborates the effective use of ICT in decentralized local power generation.38 – Similarly, the Thematic Network SEESGEN-ICT (Supporting Energy Efficiency in Smart Generation Grids through ICT) led by ERSE, in which SAP acts as the technical coordinator, exchanges best practices for the large-scale integration of distributed energy resources, monitoring of energy efficiency, and demand-side management.39

Box 3: US Smart Services Learning Center
In 2008 the US utility Consumer Energy in Michigan created a “Smart Services Learning Center” (SSLC). The center has two main functions: First, it is a laboratory to test and evaluate the performance and end-to-end interoperability of Smart Grid technologies and devices before they are actually integrated into the network. To this end the 2,500 squarefoot facility features a home setting, a Smart Grid station, an energy storage device, smart appliances, and other technologies. The lab also expands onto the campus to include real grid elements like transmission and distribution lines. This means that in the SSLC virtually any Smart Grid technology will be tested not only individually but also in the real live process. The individual tests are necessary to confirm functionality, compliance and safety. Second, the center is designed as a living lab in order to demonstrate the benefits of Smart Grids to consumers. More than 2,000 people have visited the center since its creation. They can experience the devices in action, for example, the dryer activates once the price drops to a user-defined level or the air conditioner stops when a critical peak event is issued. SAP has been involved in the activities of SSLC since the beginning and is using the facility to test current and future software applications. http://www.consumersenergy.com/content.aspx?id=1507

32. FP7 Cooperation: Energy: http://ec.europa.eu/research/fp7/index_en.cfm?pg=energy 33. FP7 Cooperation: ICT: http://cordis.europa.eu/fp7/ict 34. EU policy objectives and European research on Smart Grids, European Commission, DG Research, Henrik Dam, Research Programme Officer, ADDRESS international workshop – Paris 9th June 2010. 35. Work Programme 2009-2010 Cooperation Theme ICT Objective ICT-2009.6.5 36 http://www.addressfp7.org/ + http://www.twenties-project.eu/ 37. www.smarthouse-smartgrid.eu 38. http://www.ict4smartdg.eutc.org 39. http://seesgen-ict.cesiricerca.it Smart Grids for Europe – Benefits, Challenges, and Best Practices 17

• Standardization: In 2009 the European Commission launched a Smart Meters standardization mandate for the relevant European Standardization Organizations (ESO): CEN, CENELEC and ETSI. A set of European standards for Smart Meters is expected in 2012. A new mandate for the ESOs to develop standards for Smart Grids will be adopted by the Commission in early 2011. Proven standards for Smart Grids are expected in late 2014.40 Furthermore, a joint working group has been established among those bodies to better coordinate the various standardization efforts.

• In November 2009 the European Commission created a Task Force on Smart Grids, composed of experts from 25 European associations. The Task Force mandate is to advise the Commission on policy and regulatory measures for the development of Smart Grids in the 2020 framework. The Task Force is focused on defining functionalities of Smart Grids, evaluating data protection implications, analyzing roles of different actors in the value chain and assessing relevant standardization activities. It will also offer a policy view on collaborative research at EU level, including the efforts of the ETP Smart Grids and the EEGI. Initial reports of the three experts groups of the Task Force were delivered in July 2010. The final report is due in May 2011.

SAP fully supports these efforts at EU level and actively participates in most of them. However, we are concerned that the pace of transformation may not be fast enough to compete worldwide for the next generation of Smart Grid services and technologies. A “first-tomarket” advantage will apply to all aspects of Smart Grids, be it renewable technologies, smart electrical equipment, power electronics, control and monitoring systems or Smart Meters and systems software. Equally important, at a macroeconomic level any delay in European Smart Grid rollout will harm the competitiveness of European industry that in the future will more than ever depend on an efficient energy infrastructure.

40. This also applies to the list of standards set out in the report by Expert Group 3 of the Smart Grid Task Force.

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6. RECOMMENDATIONS

For the reasons set out in the previous sections, SAP believes that Smart Grid transformation is the essential tool for building on Europe’s established energysector strengths to address the new challenges of the 21st century. However, to exploit this opportunity, progress needs to accelerate. European policymakers, industry, and other relevant stakeholders now need to work more closely together – within an EU framework – and take decisive actions. In our view the priorities must be: • Creating sufficient incentives for Smart Grid investment • Demonstrating the benefits to consumers • Developing a framework for a truly functioning internal market for Smart Grids To this end SAP puts forward the following recommendations:

1. Develop an EU Legislative Framework for Smart Grids
SAP believes that an EU legislative framework for Smart Grids is needed and should be adopted as soon as possible, in particular to overcome bottlenecks for investments, address consumer concerns and to harmonize national legislation and approaches to create an internal market for Smart Grid equipment and services. Among the issues that need to be addressed are the lack of standardization, security and data protection rules, minimum functionalities of Smart Grid components and the clear definition of roles and responsibilities in the Smart Grid supply value chain. The framework should also provide guidance for Member

States on public funding and other incentives to foster the rollout of Smart Meters and investments in future energy networks. According to SAP experience, grid operators, retailers, equipment providers and metering companies will simply not undertake the large investments in Smart Grids in Europe unless these issues have been addressed within a stable legislative framework. The EU Task Force on Smart Grids will in May 2011 submit its final report with recommendations on legislative and regulatory measures to foster the rollout of Smart Grids in Europe, which should provide valuable input for the EU legislative lramework.

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2. An EU Road Map for Smart Grid Deployment
The European Commission should develop jointly with Member States and relevant stakeholders a comprehensive road map for the rollout of Smart Grids until 2020, defining mandatory targets, as well as specific milestones and measures to achieve them. The EU road map should accommodate differing member-state circumstances. Each Member State should therefore develop its own national plan for Smart Grids to be compatible and consistent with the agreed objectives and requirements of the European plan. The cost/ benefit analysis of Smart Meters that each Member States will prepare by 2012 should be a major input to the roadmap. Overall, SAP believes that by 2020 all Member States could reach 80% coverage of Smart Meters. Similarly, 65% of the necessary Smart Grids infrastructure and functionalities could be in place in all Member States by 2020. The EU road map should also contain measurable key performance indicators (KPIs) in order to assess progress that has been achieved. The European Commission should also establish a governance structure that would assist it in reviewing progress and further adapting the road map for future needs. To this end the Commission could establish an EU Smart Grids Forum that would encompass Member States, regulators, standardization bodies, industry and other stakeholders that have a stake in the implementation of the road map. This Forum could meet annually to review progress and take additional measures for advancing Smart Grids in Europe in areas such as standardization or R&D. The existing EEGI could provide a basis for the Forum since it already involves the European Commission,

Member States as well as industry representatives and other stakeholders. The Forum could also be a platform for the exchange of best practices. In this regard SAP welcomes a recent proposal by the European Commission to set up a “Smart Grids transparency and information platform” to enable best practice exchange among Member States. SAP welcomes that the European Commission has started to conduct an inventory and a solid evaluation of the more than 200 Smart Grids pilots in Europe in order to extract best practices and develop general guidelines for the deployment in all Member States. ICT tools can help develop and execute the EU road map. An IT management system could be established with a portfolio of all projects and measures related to the road map. The IT system that could be managed by the European Commission, would be open to all relevant stakeholders, and could include a management tool for energy regulators to better understand the systemic impacts of regulatory options. The system could also ensure the transparency that is needed to coordinate all activities and measure progress based on agreed KPIs.

rollout of smart metering services including a demand response management. SAP believes that European policymakers and industry should take firm actions to accelerate the rollout of Smart Meters: • Smart Meters are still too costly for their wide adoption. Total Smart Meter installation costs currently range between €200 and €250, whereas the cost for the smart meter device itself is around €100. Common European standards and the related economies of scale could reduce the cost for Smart Meter devices to about €40.41 • The large costs of the rollout and operation of smart metering could be further reduced through the creation of smart metering hubs or data aggregation centers, as envisaged in the UK, in which the various players in the energy supply chain pool their resources for common benefits. • In the initial phase, Member States should consider providing financial incentives to utilities and to home owners in order to foster the rollout and uptake of Smart Meters, similar to the tax relief and subsidies widely available for double glazing or solar energy. • Early adoption of Smart Meters by public administrations, schools, and universities would show the way and could lead to a breakthrough for their universal rollout. These programs could be supported by the EU’s Cohesion Policy and its Structural Funds. Member States may consider making Smart Meter installation mandatory in public administrations.

3. Incentives for Investments in Smart Grids
Rollout of Smart Meters The rollout of Smart Meters should be an important element of an EU legislative framework for Smart Grids. While it is true that a number of functionalities of Smart Grids such as the integration of renewables can be realized without initial smart metering deployment, the paradigm shift to Smart Grids in which the demand side drives energy efficiency cannot happen without a universal

41. SAP estimate based on a few benchmarks, experiences and discussions with utilities and partners. 20 Smart Grids for Europe – Benefits, Challenges, and Best Practices

Investment Incentives for Smart Grids Infrastructure The lack of incentives for grid operators to invest in the ICT-based transformation of their networks is clearly one of the major bottlenecks for the deployment of Smart Grids. European policy-makers can help overcome this investment dilemma by providing incentives in a number of ways: • Regulatory incentives: The operators of transmission and distribution grids are regulated entities. Investment decisions therefore depend to a large extent on the regulatory framework. European and national regulators should leverage their competences and provide regulatory incentives for utilities to invest in Smart Grids. In particular, price regulation should ensure a reasonable return on investments in R&D, pilots, and innovation related to Smart Grids.42 • EU Funds such as the Trans-European Networks for Energy Program (TEN-E) should provide financial support for the single-market, cross-border dimension of Europe’s Smart Grids transformation. The proposed launch of a new EU fund named “Energy Security and Infrastructure Instrument Fund” could provide additional financial support.43 SAP welcomes the inclusion of Smart Grids as one of the new fund’s priorities. While EU funds should focus on the cross-border dimension of Smart Grids, individual Member States will continue to

be responsible for transformation of their national energy infrastructures. National public funding should be increased and be coordinated at EU level. • The European Investment Bank (EIB) already provides financing for energy efficiency either directly through its own programs or through collaboration with EU R&D framework programs such as the European Green Car Initiative, which covers funding for the development of Smart Grid interfaces with electric vehicles. The EIB’s own programs include ELENA (European Local Energy Assistance), which supports local initiatives that promote energy efficiency and renewable energies, as well as Smart Grids and infrastructure for recharging electrically powered cars. SAP would welcome an even stronger engagement of the EIB to support Smart Grid projects. • SAP recommends conducting a pan-European value engineering study to calculate the investments and return on investments related to Smart Grid. The study could also look into the cost savings that could be realized in cross-border projects. SAP estimates that Smart Grid investments could be reduced by 30-50% if utilities pooled their resources to develop the common ITC platforms they will all need for implementing Smart Grid solutions.44

4. European Standards
Common European standards for Smart Grids are needed both to realize economies of scale in a European internal market and to ensure adequate levels of interoperability across the network. SAP fully supports the ongoing Smart Grid standardization efforts in European Standardization Organizations. We believe that the existing standardization mandate for Smart Meters and the draft mandate for Smart Grids address the core needs. However, there is still a risk of divergent national approaches that could lead to a highly fragmented market in Europe. Political leadership and commitment by industry is required to speed up the standardization process and ensure actual implementation of future European standards by all stakeholders across the Union. To this end the EU legislative framework should endorse European standards on Smart Grids and Smart Meters that have or will be developed by ESOs. Member States should also consider making European standards for Smart Grids and Smart Meters mandatory in public procurement. In addition, we encourage ESOs to work closely with standardization bodies in other markets to agree on global standards for Smart Grids. Open global standards will be an essential condition for a level playing field and free trade with Smart Grid equipment, applications and services.

42. Smart Grids Task Force: Expert Group 3 on Roles & Responsibilities of Actors Involved in Smart Grids Deployment: http://ec.europa.eu/energy/gas_electricity/smartgrids/doc/expert_group3.pdf 43. Energy infrastructure policy, page 2: ec.europa.eu/energy/infrastructure/events/doc/2010/2010_05_28_madrid_conference_commission_discussion_paper.pdf 44. For example, SAP works with 7 DSOs representing 60% of European electricity distribution on 12 ICT projects common to all of them, and similarly with 9 utilities in the United States. Smart Grids for Europe – Benefits, Challenges, and Best Practices 21

5. Ensuring Privacy, Security, and Trust in a Smart Grids Environment
Ensuring both high levels of data privacy and digital network security against fraud and malicious attack will be essential for the acceptance and uptake of Smart Grid applications and services. Data privacy and network security should be a key element of an EU legislative framework for Smart Grids.45 Privacy: The transmission of sensitive private data among various players in Smart Grids has indeed raised data privacy concerns. Therefore, addressing these concerns while in parallel unleashing the potential of Smart Meters to empower Smart Grids must be carefully coordinated and implemented. Industry should join forces with data protection officers, consumer groups and other relevant stakeholders to agree on basic principles and implementing instruments to ensure that existing high European standards for data privacy are being adhered to in a Smart Grid environment. These industry-driven efforts could lead to a Code of Conduct that could be endorsed by the EU legislative framework. Measures and principles should certainly include limiting data collection and processing to the necessary minimum; aggregation and anonymization of data (including encrypted processing); clear distinctions between personal and non-personal data; maximum transparency about type and usage of collected

data; clear definition of roles and responsibilities for the collection, ownership, and processing amongst Smart Grids actors; integration of privacy and security requirements in the design of IT systems. Security: The standardization and common interfaces that are necessary for the exchange of data and balanced flows of electricity increase the transparency around the electricity market. At the same time this heightens the susceptibility of these key infrastructures to cyber attacks46 and fraud. Like user privacy, trust in services and security must be a priority, notably with regard to access authorization. Smart Grids should benefit from the ongoing work within the EU on the protection of critical infrastructure prompted by the growing threat of cyber attacks on key infrastructure, be it transport, financial or energy. Based on SAP’s experience in other sectors with high privacy and security requirements – notably financial services – we are confident that effective, industry-wide solutions can be developed to guarantee the availability and integrity of the information needed to exploit the full potential of Smart Grids for all participants, while protecting individual privacy and overall system security at all times.

6. Creation of a European Smart Grid Knowledge Center
SAP proposes the creation of a European Smart Grid Knowledge Center to develop and disseminate best practice technology hardware and software solutions for the rollout of Smart Grids in Europe. This facility could also establish a laboratory, in which utilities and technology vendors would test the performance and interoperability of their products and solutions under realistic conditions. The center could be used to test European standards for Smart Grids at an early stage. Special attention should be attributed to addressing privacy and security concerns as well as to solutions for the integration of renewables and the collaboration of various market players in a deregulated energy market. The availability of best practice standard solutions could lead not only to cost savings but could also significantly accelerate the deployment of Smart Grids. Even large Member States could rapidly deploy at least 60% smart meter penetration, if not 80%, if based on existing standard best practice solutions.47 SAP already supports the Smart Grid test lab by Consumers Energy in the US (see Box 3) and is willing to actively contribute to the creation of a European Smart Grid Knowledge Center. The European Center should be industry driven, but could be financially supported by EU funds.

45. Smart Grids Task Force: Expert Group 2 on Regulatory Recommendations for Data Safety, Data Handling and Data Protection: http://ec.europa.eu/energy/gas_electricity/smartgrids/doc/expert_group2.pdf 46. The World Economic Forum estimated in 2008 that there is a 10-20% probability of a major CII breakdown in the next 10 years, with a potential global economic cost of approximately US$250 billion. From the Tallinn Ministerial Declaration of April 2009: http://www.tallinnciip.eu/doc/discussion_paper_-_tallinn_ciip_conference.pdf 47. SAP estimate based on experience and discussions with utilities and partners.

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7. EU Research Agenda and Lighthouse Pilots for Smart Grids
SAP fully supports the research agenda on Smart Grids that has been developed by the ETP and the EEGI. However, research on Smart Grids is still in its infancy. Continued and reinforced research will be needed to address the challenges of Smart Grids and to realize their potential benefits. Smart energy networks research, development and demonstration have been supported in FP7 but should receive a higher priority in the remainder of FP7 and the upcoming FP8. The strengthened joint effort is needed to reinforce the foundation of the future energy networks such as security, safety, and risk concepts and an adequate architecture for a future Internetbased energy market. Smart Grids will undoubtedly make use of the nextgeneration mobile Internet to deliver the services built into it. Therefore an interoperability framework will be an essential part of the architecture and will need to be developed to enable interoperability of interfaces and systems that will inevitably result from a highly decentralized energy sector in Europe.

New, highly distributed business processes will need to be established to accommodate the coming market evolutions. Service architectures, platforms, methods, and tools focusing on a network-centered approach will need to be developed. Understanding and managing the complexity of such critical system-of-systems infrastructure are crucial and imply systemic risk analysis, resilient distributed information and process control frameworks. The foremost success factor will be the close cooperation between the ICT and energy sectors in these research projects. SAP is undertaking significant research and development in Smart Grids and related innovative energy services and is participating in six European and five national collaborative energy research projects with a total budget of around €100 million. More than 200 Smart Grid pilots at national and EU level are running in Europe. SAP is participating in many of those projects. However, while these pilots yield valid information, they are often too small to adequately test Smart Grid technologies. Therefore, SAP supports the current ETP Smart Grid agenda that foresees a pooling to existing resources and establishing large-scale Smart Grid lighthouse projects in Europe.

The perfect candidates for these lighthouse projects are Member States that have already established the technical infrastructure for Smart Grids, including a high penetration of Smart Meters. The next step should be to establish large-scale pilots in those early-mover countries to test innovative Smart Grid equipment, applications, and services. Other Member States would certainly benefit from lessons learned in such Smart Grid lighthouse projects. These projects would in particular test certain technical standards and the interoperability of different devices as well as the fundamental IT architectures for the storage and distribution of high volumes of data within such a complex environment. In addition, SAP proposes to create European lighthouse projects to realize synergies and to test cross-border Smart Grid technologies, applications, and innovative services for business and citizen. The Nordic countries could be a suitable region to establish a cross-border Smart Grid pilot, given the advanced rollout of Smart Meters, strong interest in innovative energy services and energy efficiency, open markets and the integrated Nordic grid. The Smart Grid lighthouse projects should be a cornerstone of the proposed EU road map for Smart Grids, and supported by EU and Member State funding.

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8. Smart Grids Consumer Awareness Campaigns
Smart Grids will certainly yield tremendous benefits to consumers. In this respect it should be stressed that Smart Grids will be service driven, that is, the new technologies will allow for fully customized energy services that respond to consumer needs. However, consumers can only be brought on board by industry actively demonstrating and raising awareness of the concrete and immediate benefits of Smart Grids in terms of greater reliability, the opportunity to bring more green power into their homes, greater energy efficiency, and in the end lower costs. Consumers must also be convinced that their privacy and security concerns have been adequately addressed.48 Utilities especially in early mover countries have already started comprehensive energy efficiency programs and services for consumers, as part of their Smart Meter rollout strategy. Moreover, the various Smart Grid pilots that have been established across Europe are used to test innovative services and demonstrate the benefits of Smart Grids to consumers. The model regions for E-Energy in Germany are prime reference cases in this respect (see Box 1). Another example is the West Orange Project in Amsterdam, which is part of the Smart City Program Amsterdam. Within this project 500 households will be equipped with smart energy technologies free of charge. The objective is to reduce energy consumption by at least 14%.

The project is run by NUON and other partners and is partially funded by the government. Another interesting case is the Smart Grids living lab that has been established by Consumers Energy in the US to showcase smart energy services. More than 2,000 consumers have visited the lab since 2008. In April 2011 SAP will open its own Future Energy Center in Karlsruhe. The living lab will showcase innovative energy applications in Smart Homes, Smart Factories, as well as for future eMobility and virtual power management scenarios.

10. Economic Study on Benefits of Smart Grids
It is striking that the economic benefits of Smart Grids are often overlooked in the political debate in Europe. This is at least partly due to the lack of solid economic studies on Smart Grids. Therefore, SAP encourages the European Commission to launch an economic study that provides a comprehensive analysis of the benefits of Smart Grids for Europe. As a starting point, such a study should analyze the benefits of Smart Grids for consumers and industry users. Moreover, the supply-side benefits of investments in Smart Grids for all players along the energy value chain must be pointed out. The study should also look into the economies of scale that will be related to an internal market for Smart Grid technologies and services, in contrast to national markets. The report would then qualify and quantify the macroeconomic benefits of Smart Grids in terms of CO2 reduction, energy efficiency, and enhancing the competitiveness of European user industries. The study should also quantify the opportunities for growth and job creation, especially by taking into account export opportunities and the emergence of a new energy services industry. The study could also undertake a benchmark analysis comparing Smart Grid developments in Europe with those in the US and other regions. Finally, it could develop recommendations on how to provide sufficient incentives for market players to invest in Smart Grids. SAP is committed to contributing its experience and know-how to the successful completion of such a study.

9. Market Access in Third Countries
The emerging global market for Smart Grid technologies and services provides huge business opportunities for European industry, be it for manufacturers of smart meter devices, IT and software vendors, or utilities that intend to enter foreign markets. Therefore, the European Commission should ensure that third countries provide an open and non-discriminatory access to their markets, especially through open standards and in public procurement. To this end the Commission should enter into a close dialogue with its trading partners and engage in the WTO and other forums to guarantee a level playing field and free trade for Smart Grid equipment and services.

48. See Joint BEUC/ANEC Position Paper: “Smart Energy Systems for Empowered Consumers”: http://www.anec.org/attachments/ANEC-PT-2010-AHSMG-005final.pdf

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Smart Grids for Europe – Benefits, Challenges, and Best Practices

ANNEX SAP ENGAGEMENT IN THE ENERGY SECTOR AND IN SMART GRIDS DEVELOPMENT

SAP is the world market leader for business software solutions. Since 1989 we are offering industry-specific software solutions for the energy sector. More than 1600 utilities in 70 countries around the globe use SAP for Utilities solutions. The solutions support all business processes along the increasingly complex supply value chain from generation, transmission, and distribution to metering and retail. The billing for more than 650 million energy customers by utilities worldwide is provided by SAP software. Recently, SAP has been named the 2010 Smart Grid Integrator of the Year by the readers of the New Economy - World News Media. SAP is constantly working with its customers to enhance its software solutions. To this end we have initiated the Advisory Customer Council for Utilities (ACCU), in which 20 leading utilities exchange best practices, identify future trends and work with SAP on new solutions. ACCU has become instrumental in developing new software solutions for a Smart Grids environment that SAP introduced in 2007. The solution has been implemented already by a number of utilities in Europe, the US, Australia and Asia. SAP is undertaking significant research and development in Smart Grids and related innovative energy services. In Europe alone we are participating in six European and five national collaborative energy research projects with a total budget of around €100 million. SAP has become a trusted advisor for governments and regulators on Smart Grid policies around the globe. We are especially committed to contributing to the development of a common European Smart Grids policy. Dr. Maher Chebbo, Vice President, Head of European Utilities and Services Industries at SAP, is a co-founder of the ETP Smart Grids, member of its Advisory Council, and Chairman of its Working Group 3 “Demand, Metering & Retail.” He is a founding member of the EEGI (European Electricity Grid Initiative) and also member of the EU Smart Grid Task Force. Dr. Chebbo, who contributed to the ETP Wind and who is a member of the Governing Board of REEEP (Renewable Energy and Energy Efficiency Partnership) also co-chaired the ICT for Energy Efficiency Consultation group on Smart Grids for the European Commission in 2008 and is currently the technical advisor to the European Thematic Network SEESGEN-ICT. He is a member of the recently founded CEN/CENELEC standardization group on Smart Grid.

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ANNEX SUMMARY OF SMART GRID BENEFITS

Consumer and Industrial User Benefits The truly revolutionary feature of the emerging Smart Grid paradigm is its ability to let private as well as industrial consumers monitor and control their own electricity consumption in real time in response to relevant information received, notably price. The European Commission reports that when installed, Smart Meters have allowed customers to reduce their energy consumption by 10%. Supply Side Benefits • Generators: Information and communications technologies (ICT) could achieve efficiency gains of up to 40% in electricity generation and will enable the large-scale integration of renewables and small decentralized power generation. • Transmission and distribution: Smart Grids will improve virtual power plant monitoring, power flow management, predictive maintenance capacity planning, and energy data management. • Retailers: Smart Grids will help improve retailers’ ability to understand and respond to individual customer requirements through better data and the tailored bundling of products and services.

Achieving EU Greenhouse Gas Emissions Targets Estimates indicate that over 7% of total worldwide emissions could be saved by the global uptake of Smart Grid systems due to the combination of smoother and large-scale integration of renewable energies and improved energy efficiency throughout the system. Greater European Energy Security By enabling the integration of renewables, Smart Grids will reduce Europe’s dependence on finite and largely imported fossil fuels. Liberalized Power Markets of Continental Scale • According to the European Commission a fully-functioning liberalized electricity market could reduce electricity prices in Europe by 13% with total savings worth billions. Smart Grids will facilitate the creation of an internal market for energy services. • Smart Grids will also facilitate market entry of new players.

Job Creation Smart Grids can contribute to the creation of new future-oriented jobs – potentially approaching 3 million – as a result of increased demand across the system for skilled personnel, especially with dual qualifications involving electrical engineering and computer sciences. European Competitiveness in World Smart Grid Markets Provided that Europe moves as rapidly as our competitors to realize Smart Grids and that global Smart Grid markets remain open, these markets represent an enormous opportunity: worldwide investments in Smart Grid infrastructure will amount to some US$200 billion between 2008 and 2015. As just one example, the Chinese government is investing in Smart Grid projects and has so far earmarked $7.3 billion for loans and grants.

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Smart Grids for Europe – Benefits, Challenges, and Best Practices

ANNEX SUMMARY OF RECOMMENDATIONS FOR EU POLICY-MAKERS

1. Develop an EU Legislative Framework for Smart Grids A comprehensive legislative framework is necessary to overcome bottlenecks for investments, align the business models of the different electricity stakeholders, address consumer concerns and channel national initiatives to create an internal EU market for Smart Grid equipment and services. 2. An EU Road Map for Smart Grid Deployment To keep it on track, Europe needs a road map for the rollout of Smart Grids including ambitious but realistic targets linked to specific key performance indicators, milestones and measures to achieve them. 3. Incentives for Investments in Smart Grid Infrastructure • Rollout of Smart Meters: Member States must commit to mandatory targets and measurable objectives for rollout. To ensure lower prices, the EU must ensure the promotion of European standards to allow economies of scale and consider establishing smart metering hubs to further reduce the cost. • Investment in Smart Grid Infrastructure: Lack of incentives for grid operators and suppliers represents a major obstacle to the deployment of Smart Grids. The EU must introduce regulatory incentives and expand funding from the Trans-European Networks, the European Investment Bank (EIB), and Member States.

4. European Standards Economies of scale and adequate levels of interoperability to build pan-European Smart Grids require European-level standardization. Political leadership and commitment by industry are required to accelerate, endorse, and implement the common standards currently in development in European standardization bodies. 5. Ensure Privacy, Security, and Trust in a Smart Grid Environment • Europe needs to develop robust rules to ensure both high levels of data privacy and digital network security to protect against fraud and malicious attacks. • Industry should work together with data privacy officers, consumer associations, and other relevant stakeholders to develop a Code of Conduct to ensure high standards of data privacy in a Smart Grid environment. 6. Creation of a European Smart Grids Knowledge Center Such a center would disseminate best practice technology hardware and software solutions for the rollout of Smart Grids; it would also establish a laboratory for utilities and technology vendors to test the performance and interoperability of products and solutions. 7. EU Research Agenda and Lighthouse Projects for Smart Grids • Smart Grids must be a top priority of FP7 and especially the upcoming FP8 in order to ensure the development of the appropriate security, safety and risk concepts and architecture.

• The EU should launch large-scale lighthouse projects possibly taking the existing technical “standardlike” infrastructure in early mover countries as a starting point. 8. Smart Grid Consumer Awareness Campaigns Consumer buy-in will require industry to actively demonstrate and raise awareness about the benefits of Smart Grids in terms of greater reliability, greener energy, and cost savings, while demonstrating that smart technologies, especially Smart Meters, provide high levels of data protection and security. 9. Market Access in Third Countries The Commission must ensure that third countries provide open and non-discriminatory access to their markets especially through open standards and open public procurement. 10. Economic Study on the Benefits of Smart Grids To fully understand the economic impact of Smart Grids, there is a need for a study that not only qualifies and quantifies the benefits in the energy sector and for consumers, but also analyses the broader impact on the European economy as a whole including sustainable growth, job creation, and competitiveness.

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