Exploring the market value of Smart Grids and interactions with wholesale (TSO) and distribution (DSO) markets

Introduction

The electric power sector is transforming. Throughout the world, enablers and drivers have led toward the vision for a smarter and more integrated grid. This is a vision based in the increasing use of distributed generation across the entire value chain, the deployment of innovative digital technologies integrated by robust, standards-based and interoperable two-way communication and enhancing security and safety of all the key players. Historically, the electric grid has been planned and designed based on a vertically integrated supply model with dispatchable centralized generation and distributed consumption. Power flowed from the generation source to the consumption sink(s). Increasingly, more supply and balancing resources are being installed near the consumption sink in the distribution grid. These include but are not limited to renewables and non-fossil fuel sources, storage, electric vehicles, and demand response.

CIGRE convened the cross discipline Working Group (WG) C5.24 with the purpose to explore, and report on the market-based value of smart grid developments and their net benefits in the context of electricity markets and commercial risk mitigation. The Technical Brochure (TB) documents the research findings through case studies and types of the market-based and strategic values associated with smart grid technologies from concrete demonstration programs and build on previous work in this area ^[1] that provide smart grid program priorities and investment valuation approaches to cost benefit analysis.

Scope and methodology

WG C5.24 proposes to retain the Council of European Energy Regulators ^[2] definition of smart grid with one small addition (underlined):

A smart grid is an electricity network that can cost-efficiently and intelligently integrate the behaviour and actions of all users connected to it – generators, consumers and those that do both – in order to ensure economically efficient, sustainable power systems with low losses and high levels of quality and security of supply and safety.

Smart grid technology, market and customer programs provide value that is largely realized on a local basis and rewarded through wholesale (Transmission System Operator (TSO)/Independent System Operator (ISO)/ or nominated Electricity Market Operators (NEMO)), retail (customer tariffs) and emerging distribution system operator (DSO) markets.

The purpose of the TB is to discuss and draw out best practices for establishing the market value of smart grids while accounting for the nuanced differences of power systems and markets across the globe. While there are several types of benefits and there are various cost-benefit models that have been developed to capture the value, this TB focuses on the benefits that are derived from the programs in the context of the markets, either wholesale power markets or those emerging distribution level. This TB will evaluate and study the link between the smart grid offerings and how the value of smart grid is being realized through market offerings either at the wholesale or distribution level through case studies of smart grid activities in Australia – New South Wales, Brazil, France, Gulf Council Cooperation Countries, Japan, Portugal and USA – California.

Description of the TB

The TB starts with an Introduction and background, purpose and overview of smart grids. Included are primary definitions and drivers of smart grid programs as well as an overview of smart grid characteristics, technologies and functions. Traditional cost benefits analyses are examined, with the purpose of the WG to explore the wholesale and emerging distribution market value perspectives.

The market values are explored in the second part of the TB with case studies of smart grid activities.  These case studies were provided by WG C5.24 expert members, corresponding members and other industry colleagues. Each case study attempts to summarize the country or regional generation capacity, transmission and distribution system and power market structures in a background section. The smart grid program(s) priorities are then described in the next section, along with the interactions with and impacts on or from the wholesale and/or distribution markets as the investment valuation approach. Since these case studies come from countries or regions with varying developments power markets and of smart grids, all of the abovementioned sections may not be present in each case study. Additionally, these case studies are of different length and level of detail, dependent upon the contributor. These case studies provide illustration of best practices and lessons learned from smart grid program implementation.

The case studies illustrate priorities of smart grid programs that influence the value, such as de-carbonization and sustainability, grid resilience, energy security, customer comfort/convenience, powering of economic/industrial zones, diversified investors/owners, optimization of combined heat and power (CHP), district heating and/or cooling, and storage. Each case study attempts to summarize the country or regional generation capacity, transmission and distribution system and power market structures in a background section. The smart grid program(s) priorities are then described along with the interactions with and impacts on or from the wholesale and/or distribution markets as the investment valuation approach.

The Conclusion of the TB attempts to summarize the WG findings from the case studies, link the smart grid programs and/or initiatives to technology, the associated control mechanisms and the corresponding key benefits.  The control mechanisms can then be linked to the wholesale power market mechanisms.

_{Table 1 - Linking program/initiatives to technology, control mechanisms and corresponding key benefits}

Conclusions and Main Follow-up

The smart grid program and technology costs seem to be readily identified, while the monetization of benefits relies largely on the impact of retail tariffs, actual and estimated reliability benefits to consumers and the grid, and wholesale market mechanisms such as energy, capacity, balancing and ancillary/support services. We did not find a consistent methodology to value smart grid developments. Since DSO markets are just beginning to emerge, there are not many defined distribution market mechanisms beyond existing retail tariff structures and avoided capital cost approach.

While the WG explored smart grid developments in a variety of countries and power markets across the globe, there is limited consistency in regards to valuation across these different power systems. The research findings show that the economic value of the smart grid infrastructure depends on the grid nature and on future needs in grid development. In many cases, the avoided capacity expenditures on generation and T&D equipment present the most sought after and highest market value benefits. The value can be monetized through the market mechanisms for capacity, deferred T&D and distribution system demand charges. Voltage regulation and reduction in losses saves energy while flexibility features provide ancillary services benefits.

These traditional remuneration models, including the creation of new businesses by the concessionaires/DSOs, should be revisited. In the absence of robust valuations there will always be a risk of over or under investment in a technology including smart grid technologies. A new remuneration model should encourage, in the most developed metropolitan and urban areas, priority qualified investments in advanced management and optimization technologies of existing electrical systems, including the integration of distributed resources such as new renewable sources, distributed generation, efficient use practices, automation and end-use intelligence, in order to promote right flexibility in the right place. Thus, energy policy and consequent regulation evolutions could be further explored, considering new energy market concepts, including those, where several agents act in disaggregated way and through transparent bilateral transactions, favored by the technological transition. The lessons learned from these smart grid programs, pilots and demonstrations can be used to inform the industry with examples of market valuation components while making smart investments decisions.