How much will a smart grid cost? It’s a question that has gained importance in light of massive cost overruns for one highly touted U.S. project.

The U.S. grid, like almost all national grids, requires expansion and upgrading to serve growing electricity demand, accommodate increased renewable generation sources, improve prevention of and response to outages and security threats, and maximize the efficient transmission of electricity. The cost of improving the grid to meet these goals is high — somewhere in the neighborhood of $65 billion to $165 billion over the next decade or two. The cost of doing nothing is higher.

Take, for example, reliability, which tends to decrease as demand on the grid increases and variable renewable generation increases. A June 2001 Electric Power Research Institute (EPRI) report, "The Cost of Power Disturbances to Industrial & Digital Economy Companies" estimated that the annual direct cost of power outages and power quality disturbances for all sectors (not just those in the survey) was between $120 billion and $188 billion. In its 2003 report, "Grid 2030," the Department of Energy (DOE) noted that "it is estimated that power outages and power quality disturbances cost the economy from $25 [billion] to $180 billion annually."

A more recent 2006 study by Lawrence Berkeley National Laboratory researchers, "Cost of Power Interruptions to Electricity Consumers in the United States," found that, "based on publicly available data and subject to the limitations discussed… the economic cost of power interruptions to U.S. electricity consumers is $79 billion annually." Their caveat: "Our analysis of the uncertainty in this estimate suggests that the costs could be as high as $135 billion or as low as $22 billion based on the particular sensitivity assumptions we employed."

As end users discover new uses for electricity — from iPads to plug-in hybrid electric vehicles to the manufacturing of solar modules — the cost of grid disruptions is likely to move higher. And those are just the direct monetary costs of a less-than-optimal grid.

Minimizing those costs by building a more robust and "smarter" grid seems like a good idea to many people. But even setting aside the gnarly political, regulatory, and jurisdictional issues that make grid projects a nightmare in the U.S. in particular, there’s another big hairy concern: paying for an improved grid.

Not-So-Smart Budgeting for SmartGridCity

As a concept without definitive definition (unlike the molecular description of an element like carbon), the smart grid can mean what its users stipulate that it means in a given context. That’s not necessarily a bad thing nor the sign of a conspiracy. It’s just that the smart grid is even more complex in its entirety than the Internet. But it does mean that policy makers and the public need to be aware that one utility may use "smart grid project" as a way to make business-as-usual transmission and distribution upgrades sound more cutting-edge while another utility may use the phrase to describe an experimental research and development (R&D) project that may or may not deliver the desired results. Xcel Energy’s SmartGridCity is a case in which the implications of large-scale deployment of what is being described as an R&D project are just now coming to light.

Xcel’s SmartGridCity project costs have ballooned from an initial estimate of $15.3 million to $42.1 million. Although the Colorado Public Utilities Commission (PUC) approved a Jan. 1 rate increase affecting all Colorado Xcel customers to cover capital, operation, and maintenance costs of the Boulder, Colo., project (plus a new coal-fired generating plant), it’s still unclear where all $42.1 million are going to come from.

In response to the latest cost news, the PUC has required the utility to file for a post-facto certificate of public convenience and necessity, which would give the PUC authority to regulate the smart grid project. It seems this requirement wasn’t triggered earlier because Xcel initially described the project as being supported by a consortium of technology and service vendor-collaborators. How much skin any of those vendors actually has in the game is still unclear. In the meantime, Xcel neglected to apply for the first round of smart grid funds made available under the American Recovery and Reinvestment Act of 2009 (ARRA) and was left without a Plan B when the DOE cancelled round two of ARRA smart grid funding opportunities.

The Boulder paper, The Daily Camera, cites this explanation for the cost increases from the utility: " ‘The company had to install far more underground fiber than initially projected, substantially increasing the cost…’ Xcel officials wrote in a document filed with the utilities commission last May. ‘We also ran into unexpected construction conditions such as having to drill through granite with diamond-tipped drill bits and remove large boulders with cranes and dump trucks….’"

You read correctly: unexpected "boulders" in "Boulder," which hugs the abrupt uplift of the Rocky Mountains.

The Daily Camera quotes Xcel spokesman Tom Henley as saying, "SmartGridCity has always been a research and development process,… It’s a living and breathing laboratory, and we’ve always said all along that there’s parts that will work and parts that won’t work."

To be fair, that’s true of any new technology. What customers may be less willing to accept is that they, rather than shareholders and project technology partners, are now being asked to cover those experimental R&D costs (Figure 1).

1. Cloudy outlook for smart grid acceptance in SmartGridCity. Boulder, Colorado—which typically enjoys more than 300 sunny days per year—has lately been taking a dimmer view of smart grid project activity and costs than it did when the idea was originally rolled out by Xcel Energy. Though all project implementation costs were expected to be funded by the utility’s vendor partners, costs have begun to be passed on to customers via increased rates.  Courtesy: Gail Reitenbach

A New Approach to Estimating Smart Grid Costs

Though there may never be a way to estimate the full cost of unforeseen circumstances, a new cost estimate framework may help the entities funding projects large and small compare costs and benefits using a common methodology. In January, EPRI released a report, cofunded by EPRI and the DOE, whose goal "is to present a comprehensive set of methods for estimating the benefits and costs of Smart Grid projects."

It’s important to note that "Methodological Approach for Estimating the Benefits and Costs of Smart Grid Demonstration Projects" does not itself offer a new estimate for total U.S. smart grid costs. The closest it comes to a grand total is its citation of a 2004 EPRI report that estimated smart grid costs over 20 years at $165 billion.

But if $165 billion sounds like a lot, consider that the 2008 report citing that now-six-year-old figure (S. Pullins, "Smart Grid: Enabling the 21st Century Economy") pegged the value of smart grid benefits over 20 years at $638 billion to $802 billion. Not a bad return on investment (ROI).

Also note that this proposed framework is for estimating the benefits and costs of "Smart Grid Demonstration Projects." It is tackling cost and benefit projections for small parts of that elephantine "smart grid" that no single U.S. entity can create on its own.

The meat of the report focuses "on the definition of benefits and a sequential, logical process for estimating them. Beginning with the Smart Grid technologies and functions of a project, it maps these functions to the benefits they produce." The goal is that "The methods developed in this study will help improve future estimates — both retrospective and prospective — of the benefits of Smart Grid investments. These benefits, including those to consumers, society in general, and utilities, can then be weighed against the investments. Such methods would be useful in total resource cost tests and in societal versions of such tests. As such, the report will be of interest not only to electric utilities, but also to a broad constituency of stakeholders."

Until this or some other cost/benefit calculation method becomes standard, it will be difficult to compare the ROI of any two proposed or implemented projects for customers (aka, the ultimate cost-bearers), utilities, government grants, or the environment.

The EPRI report identifies four categories of benefits: economic, reliability and power quality, environmental, and security and safety. Here are some of the benefits that would accrue to power generators in particular:

  • "Optimized Generator Operation: Better forecasting and monitoring of load and grid performance would enable grid operators to dispatch a more efficient mix of generation that could be optimized to reduce cost.

  • Reduced Generation Capacity Investments: Utilities and grid operators ensure that generation capacity can serve the maximum amount of load that planning and operations forecasts indicate. The trouble is, this capacity is only required for very short periods each year, when demand peaks. Reducing peak demand and flattening the load curve should reduce the generation capacity required to service load, and lead to cheaper electricity for customers.

  • Reduced Ancillary Service Cost: Ancillary services including spinning reserve and frequency regulation could be reduced if generators could more closely follow load. Ancillary services are necessary to ensure the reliable and efficient operation of the grid. The level of ancillary services required at any point in time is determined by the grid operator and/or energy market rules. The functions that provide this benefit reduce ancillary cost through improving the information available to grid operators."

It will be interesting to see how quickly the use of this approach is adopted and whether or not the DOE uses it to hold grant recipients accountable.

Governments Pouring Money into Smart Grids

The U.S. government isn’t the only one lending a hand to "smart" national grid projects. According to a Jan. 27 report by Zpryme, China is already outspending the U.S. in terms of federal dollars devoted to smart grid projects. Here’s its ranking of 2010 investments (in US$ millions):

  1. China: $7,323

  2. U.S.: $7,092

  3. Japan: $849

  4. South Korea: $824

  5. Spain: $807

  6. Germany: $397

  7. Australia: $360

  8. UK: $290

  9. France: $265

  10. Brazil: $204

Granted, China is starting with a blank slate in many respects, whereas the U.S. has a head start. The flip side of that dynamic: The very presence of any existing transmission and distribution infrastructure creates a larger hurdle for grid improvements because it can create a false sense that the status quo is just fine.

Meanwhile, U.S. companies are taking note of where R&D and project implementation opportunities lie — beyond U.S. borders. Zpryme notes that "Just recently, GE aligned itself with Yangzhou, China to construct a smart grid demonstration center. Similar steps forward are being echoed from industry-leading players such as Cisco, Accenture, Hewlett-Packard, ABB, Westinghouse, and Oracle — which are buying into a generous stake of China’s smart grid market. What’s more, Business Week recently reported that IBM expects at least $400 million in smart-grid revenues in China over the next four years. Fitting testimony as IBM remains the only corporation that provides hardware, software and consulting for smart grid infrastructure projects in China."

Demonstrated Benefits of Smart Grid Costs

For details about costs and benefits of one of the most comprehensive smart grid rollouts, in Italy, see this February interview with Livio Gallo, director of Enel’s Infrastructure and Networks Division: Enel invested €2 billion (roughly US$2.7 billion) in its six-year deployment of 32 million electronic meters. Among the benefits to date: a 62% reduction in minutes of service interruption per customer and a 61% reduction in distributor meter management costs per customer.

A November 2009 BusinessWeek story reported that the Italian utility is saving $750 million per year as a result of the project. Furthermore, "improved data on consumers’ electricity habits permit Enel to run its power plants more efficiently."

Needless to say, this story is far from the final word on smart grid costs. Stay tuned.

—Gail Reitenbach, PhD is POWER’s managing editor.