Despite the consensus on a call of smart technologies in the electricity sector, there is lacking a clear message on how and through whom to integrate the disruptive changes into our traditional power system. Smart Grid, which extends ICT (Information Communications Technology) to the bulk power system, could provide us a new perspective on the integration of technology transformation.
Lacking a unanimous roadmap to the development of Smart Grid, it is crucial for utilities and regulators to plan for the future based on country-specific regulatory frameworks. To exploit the benefits from the Smart Grid system with minimum social and financial costs, extensive regulatory inputs will be needed to reorganize the delegation of agents, update the tariff structure for consumers and provide incentives for new business models.
How smart is a Smart Grid?
A Smart Grid, by definition, refers to a modernization of the electricity delivery system so that it monitors, protects, and automatically optimizes the operation of its interconnected elements. That being said, the main difference of a smart grid and the traditional one will be the incorporation of new technologies, from the end-user hardware as sensors and batteries, design of substation software platforms, to the application of data science branches. In reality, with the boost from technology maturity, the Smart Grid is expected to improve grid reliability by (i) blurring the line of consumers and producers, subsequently power supply and demand, via encouraging “prosumers” of all generation and storage types and (ii) increasing multi-way real-time communications, finally automation, to reduce the lag and asymmetry of information.
|Figure 1: Traditional Power System||Figure 2: Smart Grid|
Source: EPRI, Estimating the Costs and Benefits of the Smart Grid, 2011
However, are these “benefits” truly beneficial to us? The short answer will be Yes, especially for the long term. As electricity consumers, with Smart Grid they can enter directly into the power market. They will be well informed and able to influence the system at the same time. As utilities, the Smart Grid will facilitate and extend their business chain in multiple ways. Generation firms will be able to include more renewable generation capacity; Transmission firms will have leverage to expand the transmission lines through automation; Distribution firms will push to expand intelligence at the downstream side of the network.
Source: IDB elaboration on EPRI (2011)
|In terms of the dimensions of benefits ensuing from a Smart Grid, reliability and cost reduction seem to outweigh other factors, namely environment, quality, and security etc. According to the DOE/EPRI framework, which made an attempt to monetarize all benefits expected form a fully interactive power system in the U.S., the estimated gains in net worth ($ billion) will total more than 1294 billion dollars (lower bound in Figure 4) until the year 2030.
Moreover, for the sake of long term planning, Smart Grid will act as a media for the fully utilization of each individual technologies, i.e. Electric Vehicles, Smart Meters, Energy Storage etc., together forming into an advanced and automated network which pose a challenge to our century-old power system.
Where are we now?
With all the expected benefits from Smart Grid, a straightforward and relevant concern will be what is our progress till now. Smart grids include an Advanced Metering Infrastructure (AMI), a high level of automation of the grid, distributed generation, storage and an information technology infrastructure. The learning curve of each of the 4 crucial components is presented in Figure 1, where each development owing to the corresponding sectoral cost reduction and regulatory incentives. But let’s start from the side of end-users first: Smart Meters (AMI) and distributed generation.
All being said, the overall market maturity of the Smart Grid, especially the deployment in the Latin American and Caribbean region, is still in the beginner stage where most scaling and optimization are happening. It is time to assess the investment feasibility and the regulatory framework that shall facilitate the transformation process.
Does Smart Grid yield promising returns now?
Lack of proper information disclosure plus the difficulty to standardize various pilot programs add on to the efforts needed to evaluate returns of the Smart Grid. Nevertheless, though a systematic criterion has not been reached, there have been different attempts (mostly theoretical) addressing different aspects of return with the presence of the Smart Grid in the future.
As an empirical stepping stone for all other innovations related the Smart Grid, Faruqui (2012) found that consumers do respond to dynamic pricing through 126 pricing experiments conducted across North America, Europe, Australia and New Zealand. The peak reduction, as a direct outcome of price responsiveness, reaches 58% at most, with all projects showing reduction impacts in peak periods. Beyond physical returns on the network, Castro and Dutra (2013) assessed the financial outcomes by deducing a weakly decrease on generators’ profits assuming the current regulatory framework. Specifically, by assessing the U.S. network with the Smart Grid, EPRI (2011) concluded a 2.8 to 6.0 Benefit-to-Cost Ratio, with possible higher returns ensuing from the expected cost reductions in the incoming years.
How should we facilitate?
Farhangi (2014) provides an initial conceptual roadmap of different technologies and capabilities in Figure 6.
What is agreed on by utilities, through the rollouts of new metering devices, is the starting point of one-way automated meter reading (AMR) and two-way advanced metering infrastructure (AMI). Although some suggest that return on investment (ROI) will be more palatable if distribution substations were automated first, and others believe in upgrading the utility’s enterprise applications in the back office before attempting to invest at the bottom of the chain, the majority of investment is emphasized on the protocols, topologies, and architecture of AMI systems.
Apart from the what should invest question, who should invest also appears as our major concern. This specific question will need extensive regulatory inputs to reorganize the delegation of agents, with efforts combined to update the tariff structure for consumers and provide incentives for new business models.
For instance, in a typical European setting of high-powered incentive regulatory framework, decentralized organization is recognized with higher social cost in terms of lower probability to invest jointly than completely regulated system (Agrell et al, 2011). Furthermore, among different levels of decentralization, the case where DSO (Distribution System Operator) and DER (Distributed Energy Resources) are integrated yield higher gain in social welfare than the case where both agents contract directly with the regulator and where fully decentralized. To sum up, a rethinking of the organization and delegation of market agents will be necessary to the progress of innovations in network.
Complementing on the reorganization of agents, adjustments are also needed at the very end of the network chain. The uncertainties on the obsolescence of new technologies as well as consumers’ subtle changes on price elasticity and willingness to pay together call for a new structure of electricity tariff. This problem should be treated with extra attention since the severity of inequality in developing countries, where cross subsidies from the poor to rich tend to occur when high-income households have more leverage to obtain distributed assets. To deal with the relevant issues, utilities will also need to redefine the concept of Capex and Opex in order to maintain cost recovery under the era of Smart Grid.
The blog is part fo the Innovations in the Electricity Sector Blog Series —- II. ICT
Amin, S.M. and Wollenberg, B.F. 2005. “Towards a Smart Grid.” Power and Energy Magazine, IEEE 3 (october): 34–41. doi:10.1109/MPAE.2005.1507024.
Agrell, Per J., Peter Bogetoft, and Misja Mikkers. 2013. “Smart-Grid Investments, Regulation and Organization.” Energy Policy 52 (January): 656–66. doi:10.1016/j.enpol.2012.10.026.
De Castro, Luciano, and Joisa Dutra. 2013. “Paying for the Smart Grid.” Energy Economics 40 (December). doi:10.1016/j.eneco.2013.09.016.
Farhangi, Hassan. 2014. “A Road Map to Integration: Perspectives on Smart Grid Development.” IEEE Power and Energy Magazine 12 (3). Institute of Electrical and Electronics Engineers Inc.: 52–66. doi:10.1109/MPE.2014.2301515.
Fox-Penner, Peter. 2010. “Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities.” OIslandpress, 327. http://www.amazon.com/Smart-Power-Climate-Electric-Utilities/dp/1597267066.
Joskow, P., Tirole, J., 2007. Reliability and competitive electricity markets. RAND J. Econ. 38 (1), 60–84.
EPRI, “Estimating the Costs and Benefits of the Smart Grid.” 2011.
Faruqui, “Time-Varying and Dynamic Pricing,” RAP, 2012
 See the definition from EPRI (2011) report, Estimating the Costs and Benefits of the Smart Grid.
 Developed by the U.S. DOE and Electric Power Research institute (EPRI), under the operation EPRI-1020342.
 See Amin and Wollenberg (2005); Fox-Penner (2010)
 Faruqui, Time-Varying and Dynamic Pricing, RAP, 2012
 De Castro, Luciano, and Joisa Dutra. 2013. “Paying for the Smart Grid.”
 Hassan Farhangi, A Road Map to Integration, IEEE Power & Energy Magazine, 2014
 Agrell, Per J., Peter Bogetoft, and Misja Mikkers. 2013. “Smart-Grid Investments, Regulation and Organization.”
Photo of Medellin by Joel Duncan in Unsplash.