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SMART ENERGY

A VISION FOR EUROPE

SAFER, SMARTER, GREENER


2 SMART ENERGY: A vision for Europe

EXECUTIVE SUMMARY Smart Energy is a very promising concept that offers significant market potential and a wide range of related economic benefits. "Smart”, in the context of Smart Energy, refers to the capability for intelligent monitoring, control, and communication. This can be with devices, customers, and market participants on both the local level (distribution networks) and centrally, with an overarching aspiration of an interactive, fully optimised energy value chain. The main driver for Smart Energy is the transition towards a more renewable and sustainable energy system that is characterised by modernised networks, changing load patterns (caused by e.g. electric vehicles), better management of customer demand and a shift in power generation to more decentralised supply and delivery models. The Smart Energy concept is supported by evidence from positive cost-benefit analyses, many demonstration projects and some good examples of applied smart network technology in the USA. However, when it comes to actual, commercial implementation in Europe, examples of Smart Energy concepts become scarce. Key questions to be addressed include: Why are schemes of this kind not more widespread? Why isn’t there more evidence of regulators and utilities acting similarly? This paper discusses tipping points and barriers that hamper the implementation of Smart Energy concepts in Europe: ¾¾ The lack of smart meter allocation as part of wholesale settlement; ¾¾ The costs of making load flexibility available versus the value of this flexibility; ¾¾ The penetration of solar PV and wind relative to the total national generation capacity. Future Smart Energy developments need to focus on these three elements to capture the full potential of this concept.

Contact Details: contact.energy@dnvgl.com Prepared by: Rob van Gerwen, Alan Aldridge, Hans de Heer, Katrin Spanka


SMART ENERGY: A vision for Europe

CONTENT THE DEVIL IS IN THE DETAILS

4

SMART ENERGY

6

CURRENT MATURITY OF SMART GRIDS

10

THE BENEFITS OF SMART ENERGY

12

USA: ONE STEP AHEAD

14

SMART METER ALLOCATION: MORE THAN THE METER ALONE

16

WHAT'S FLEXIBILITY WORTH?

18

TIPPING THE SCALE OF RENEWABLE GENERATION

22

CONCLUSION 24 ABOUT THE AUTHORS

26

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4 SMART ENERGY: A vision for Europe

THE DEVIL IS IN THE DETAILS “Smart Energy” systems combine the need for improved energy efficiency with the adoption of smart devices into the home and enabling networks that together present tremendous opportunities, and many challenges, to utilities and to participating providers. In this regard, the main issues facing the industry can be summarised as: ¾¾ Modernising networks for better management of consumer demand; ¾¾ The shift in power generation from centralised to decentralised supply and delivery models; ¾¾ The adaptation of the power industry to become more efficient, customer-responsive, and environmentally sustainable. Smart Energy is a very promising concept that offers significant market potential and a wide range of related economic benefits. In a great many cases this assertion is supported by evidence from positive cost-benefit analyses. Nevertheless, the truth is that although the application of smart technology is encouraged and has been incentivised through a number of individually funded schemes and projects, development in Europe generally, has been slow. The UK’s Office of Gas and Electricity Markets (Ofgem)’s Low Carbon Network Fund

(LCNF), designed specifically to incentivise network innovation on a project-by-project basis, is a good example of such an individually funded scheme. Some particularly good examples of applied smart network technology can be found in the USA. A layer of confusion exists where the term ‘smart grid’ has become something of a catch-all for both smart grid concepts and smart metering applications, which, in some states / jurisdictions, has resulted in some slight distortion of the facts; intimating that smart grids are progressing, whereas, upon examination, it becomes clear that only the smart metering dimension has moved forward. Key questions to be addressed include: Why are schemes of this kind not more widespread? Why isn’t there more evidence of regulators and utilities acting similarly? In order to find some answers to these questions, we need to develop a broader appreciation of the issues and focus on details of network technology and that which can be achieved through its application. With this approach we will be able to appreciate more fully the whole prospect of Smart Energy and its associated benefits. This situation could be likened to debris in a freeflowing stream that is holding back the flow of water. By working on removing the right pieces, however


SMART ENERGY: A vision for Europe

small, the flow will increase and the remaining debris may simply be washed away and the stream will clear itself. The challenge for the industry and other participants to ensure that Smart Energy achieves its potential is to identify the key pieces of debris. This paper sets out to identify some of the so called ‘debris’ that may not always be obvious on first inspection, but must be identified in order for the enablement of a smart system and the introduction of Smart Energy in Europe. We look both at the barriers that hamper the introduction of Smart Energy and the tipping points1 that are likely to have a pronounced effect on advancing the progression of behaviour-changing smart system applications and, in turn, giving rise to the future embodiment of applied Smart Energy concepts. The view is that Smart Energy should be regarded as an overarching concept that critically provides the functionality required to manage significant changes in power production and supports the enabling technologies to provide customer-facing products and services. These, in turn, will help in the realisation of the Commission’s targeted energy reductions by 2030, 2050, and beyond.

1 Barriers and tipping points will be discussed further in the section CURRENT MATURITY OF SMART GRIDS.

In this regard, we will look at successes of demand response (DR)2 and demand side management (DSM)3 in the USA, and make an assessment of some of the barriers that exist in Europe and possible tipping points for the realisation of Smart Energy applications. The primary elements of the Smart Energy argument in this paper focus on the electricity grid, the electricity market in general, and the potential that DR offers in relation to this. The electricity grid has very little inherent storage capability (as distinct from a gas grid where storage is an intrinsic part of the system). Balancing supply and demand is therefore a core operational requirement of grid stability. This means that load and generation flexibility have a value than can be realised by a number of key stakeholders. This prime function is explored further in the context of applied 'smartness' and the realisation of that which we are referring to as Smart Energy.

2 Modification of a user load based on an external trigger (e.g. an electricity price). 3 Demand side management includes energy efficiency and demand response.

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6 SMART ENERGY: A vision for Europe

SMART ENERGY So, what do we mean by Smart Energy and what are the key attributes of such a system? "Smart”, in the context of Smart Energy, refers to a capability for intelligent monitoring, control, and communication. This can be with devices, customers, and market participants on both the local level (distribution networks) and centrally, with an overarching aspiration of an interactive, fully optimised energy value chain. Such a system consists of an intelligent (ICT-based) operating layer that supports the transactional dimension of the energy market, the responsive element of interfacing customers, and the operational dimension of the energy grid. It enables producers, consumers, and grid companies, supported by energy service providers (e.g. aggregators), to make more efficient use of their assets and to optimise their operation by providing information and tools for forecasting, balancing, optimisation and control (figure 1). Currently, "smart grids" is used as a common catchall phrase for such structures. However, the inference is that technological advancement and improvement centres on the development of the electricity grid. Whilst this is largely true, broader discussions about smart grids often relate to DSM and integration of renewables that typically have a broader scope than the electricity grid alone. Thus, we consider Smart

Energy as a more precise description, including both the electricity grid and the electricity market. Realisation of a smarter system involves a number of fundamental building blocks. It is an evolutionary journey that builds over time and acquires various combinations of “smartness” in order to achieve the overall aspiration. Typical areas of delivery (Smart Energy topics) intended to add value over time include: ¾¾ The automation of the distribution grid4 (sometimes enabled further by the introduction of smart metering for small energy consumers); ¾¾ Behaviour change by stimulating active participation of small (residential & commercial) consumers into the electricity market mainly through demand side participation and demand response schemes; Automation of distribution grids aims at maintaining the quality and security of supply and allows for

4 See for instance Active Distribution System Management, a key tool for the smooth integration of distributed generation, Eurelectric, 2013.


SMART ENERGY: A vision for Europe

Consumers

Grid Companies

Producers

Energy service providers

Figure 1.  Smartness in the energy system is realised by an exchange based on services and tools.

more efficient grid management, e.g. by better asset monitoring and control, faster fault location, improved voltage control, and the capability for independent operation of parts of the grid (microgrids). We would refer to such a system as "smart grids". Active participation of consumers in the electricity market has a two-fold objective. Firstly, the aim is to improve energy efficiency by encouraging / incentivising customers to change their consumption habits and use patterns; secondly, the aim is to reduce the cost of electricity supply through more efficient use / optimisation of existing generation capacity, thereby decreasing the need for new capacity or power quality equipment (e.g., making the case for high penetration of electric vehicle charging facilities or distributed energy resources). Active participation of this kind (that requires active participation and involvement of energy producers) is representative of that which we see as "smart markets". Clearly there is an important overlap between the network and market dimensions of the Smart Energy concept. The large-scale introduction of renewable generation, heat pumps, electric vehicles, and other significant loads on medium / low voltage

networks touch on both of the Smart Energy topics mentioned. The potential flexibility of demand at customer level, if harnessed, could be used for resolution of localised network constraints and for better management of power flows at grid operating level. This has the potential to lead to an interesting set of circumstances, as conflicting interests may arise when local network issues / constraints may require different / additional load response measures to those dictated by the broader market requirements. A further issue is the methodology for controlling load flexibility; will it be carried out directly by the distribution system operator (DSO) or will the DSO acquire these services from newly created commercial aggregators or equivalent? These are complex questions that require detailed consideration. As they are beyond the intent and general thrust of this paper, we will not dwell on this topic further. At a conceptual level, the smart grid and the smart market (enabled, for example, by an automated metering infrastructure) are not inextricably linked. Distribution grid automation has its own unique benefits, e.g. network optimisation, voltage control, network modelling, fault level management, etc. These do not depend on consumer interaction. Moreover, nodal information that is available at sub-

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8 SMART ENERGY: A vision for Europe

ELECTRICITY GRID

ELECTRICITY MARKET

If small consumers are willing (or incentivised) to participate actively in the electricity market, data collection / billing systems based on market settlement intervals and real-time pricing are necessary and these only seem to be feasible through the uptake of "smart metering".

Centralized Generation *

Already smart

Local Generation

Not smart yet

Large to Medium Consumers

Some smartness

Small Consumers

Almost no smartness

High Voltage

Already smart

Medium Voltage

Starting with grid autmation

Low Voltage

No smartness

The smart meter system (via the enabling communication infrastructure) may also provide gateway functionality to customer premises to support smart market services. In most countries, deployment and operation of smart meters is the responsibility of the grid operator. The data communication infrastructure between backend systems and customer premises provides a unique channel for understanding distributed energy resources on the system. Furthermore, the data channel could be used to investigate how the resources might be optimised and for understanding electric vehicle (dis-) charging strategies and how these might impact the network over time. It is important that smart metering systems are designed with this scope in mind. Figure 2 summarises the discussion so far. During the next decade, smart grids will focus on distribution grid automation at medium voltage (MV) level. At high voltage (HV) grid level, the system is already smart, i.e. equipped with (automated) grid monitoring, dynamic line rating technology / controls and so on. In the medium-term, implementing

*Including industrial and horticultural CHP.

Figure 2.  Position of "smart energy" in the current electricity system.

Smart Market

Smart Market

Smart Grid

SMART ENERGY

station level is wholly adequate for these purposes. Similarly, the active participation of small (residential) consumers is not dependent on distribution grid automation; much of this can be achieved through an automated metering infrastructure, which is quite distinct from an automated distribution network or power / grid system automation. The real value is realised, however, when all the elements come together as an interactive system and leverage the combined benefits of DR, energy efficiency, balancing services, optimised production efficiencies, and network capacity benefits. This is effectively what we see as Smart Energy in action and describes a common target for which we should all be aiming as we consider the various programmes that are currently underway in many EU member states and neighbouring regions.


SMART ENERGY: A vision for Europe

technology upgrades to the low voltage system seems of little purpose when the MV system has not yet been addressed. Furthermore, beyond deployment, the smart meter has a role as a "sensor" in the low voltage grid, which, in itself, is a pre-cursor to applied network smartness at this level. However, despite many pre-deployment smart metering cost-benefit appraisals that factor in network benefits of this kind, we see hardly any evidence that smart meters are being used to leverage network benefits of this kind so far. Large electricity consumers connected to the HVgrid already use their flexibility in bilateral contracts with energy suppliers or the transmission system operators (TSO). In our opinion, medium-sized customers that are connected to the MV grid (next layer down) are being overlooked in the Smart Energy debate and this is causing something of a "blind spot". Medium-sized customers represent a very diverse group and therefore assessment and evaluation is more difficult than for straight industrial or residential customers. Nevertheless, many medium-sized customers are now waking up to the energy issue and taking associated commercial decisions (group aggregation, energy buying clubs, etc.) in relation to their consumption. With technological improvements at both the network and metering level, the same pattern holds good for small commercial customers too. In summary, it seems that current smart grid discussions refer to Smart Energy issues in many ways. This is reflected in the continued smart grid debate (existing and anticipated smartness in the grid) and smart market issues (realising the optimal value of load and generation flexibility).

SMART METERS: STEPPING STONE TO SMART ENERGY Smart grids and smart markets go well beyond smart metering, so what exactly is the role of smart metering within Smart Energy? The smart meter can be regarded as an advanced electricity consumption meter, a sensor in the grid, and a communication channel to the customer. It has the potential to serve both the smart grid and the smart market. The currently installed base is mainly used for revenue assurance and to improve the efficiency of meter reading (Italy and Sweden), but other uses, like allowing remote control of loads and real-time pricing, are emerging (Finland, France). Three aspects currently limit the contribution of smart meters to Smart Energy: ¾¾ Distribution automation currently focuses on the medium voltage (MV) grid. Monitoring at low voltage (LV) level will make a negligible contribution, as monitoring at MV/LV transformer level is sufficient. Also privacy issues arise from monitoring that is based on smart meter data. ¾¾ Main contribution to the smart market is to support dynamic pricing through interval reading. The wholesale settlement in most countries is not yet based on smart meter interval readings, but is based (by design) on synthetic profiles. ¾¾ The function as a fast and reliable communication channel to individual dwellings, needed for demand response, including two-way communication and the ability to monitor and switch individual appliances, is not yet well established throughout Europe.

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10 SMART ENERGY: A vision for Europe

CURRENT MATURITY OF SMART GRIDS A global review of smart grid pilot projects5 identified more than 250 projects, of which over 100 are in Europe. In the USA there is a strong focus on peak load reduction technology and dynamic pricing tariff pilots, whilst in Europe more emphasis is placed on improving energy efficiency by use of smart meters and reducing emissions through integration of more decentralised means of production.

regime. RIIO (Revenue = Incentives + Innovation + Outputs) is Ofgem’s new framework for setting price controls for network companies. It recognises that over the next decade these companies will face an unprecedented challenge in securing significant investments to maintain a reliable and secure network. At the same time, these operators will need to address the changes in demand and generation that will occur in a low carbon future.

For example, in an effort to stimulate technological enhancement in line with smart grid aspirations, Ofgem (UK) has introduced the Low Carbon Network Fund (LCNF). The idea behind this initiative is to incentivise network operators to compete for project funding to bring forward interesting project-based proposals that demonstrate significant levels of network innovation and which, if proven successful, may be repeatable elsewhere. Additionally Ofgem is carrying out modifications to the existing regulatory

Schemes of this kind, and other demonstration projects elsewhere, provide evidence that there is already a significant focus on smart grids and Smart Energy as a solution for future energy issues. However, they also indicate that Smart Energy as a concept is still very much in the demonstration phase.

5 Global Inventory and Analysis of Smart Grid Demonstration Projects, DNV KEMA, 22 October 2012.

In our work to date we have identified both barriers to, and tipping points for, the commercial introduction of Smart Energy concepts. Barriers can be removed and can be influenced. Typically, these barriers tend to be lack of regulation, adverse regulation, absence of knowledge in the market,


SMART ENERGY: A vision for Europe

lack of technology, uneven allocation of costs and benefits to different stakeholders, etc. These barriers can be eliminated by introducing suitable action plans and incentives, similar to the LCNF scheme, and by regulatory adjustments of the kind described. The need for innovation is accelerated by increased penetration of solar and wind generation; heat pumps and electric vehicles may also create the tipping points needed to stimulate investment and bring about the required changes to existing regulatory regimes. Solar and wind generation are intermittent generation that can be predicted (within certain limits) and curtailed, but cannot be controlled like a conventional power plant. Electric heat pumps and electric vehicles have common characteristics also, in that the power required is high compared with the power needs of an average household. On an aggregate level, multiple loads will occur simultaneously (particularly in winter and / or when residents return home and begin charging their vehicles). In the case of renewables, the general assumption is that above a critical level of penetration, the current electricity system is unable to manage what is produced. This means that there is a need to constrain off tranches of renewable production that cannot be controlled (ramping up and down) in the traditional way. These barriers and tipping points are the previously mentioned ‘debris’ that must be removed respectively reached in order to create a more rapid flow of ideas and innovative project initiatives. These,

in turn, are necessary in order to bring about the changes that are required to realise fully the smart, technology-enhanced networks of the future. The challenge is to identify those that will bring about the most immediate change and determine how they can be best addressed. In our opinion, legislative and regulatory issues are the most important barriers. These legislative barriers include: ¾¾ Lack of smart meter allocation (as part of wholesale settlement); ¾¾ Lack of local capacity / balancing markets; ¾¾ Costs and benefits are distributed unevenly (especially relevant for unbundled utilities); ¾¾ Structured funding / who raises the money and how is it distributed? In this paper further reference is made to an issue that we consider to be a very important barrier to progress: the lack of smart meter allocation in many EU member states. Tipping points discussed in the next section of this paper are the balance between the value and cost of flexibility, and the penetration of solar and wind generation. Before we elaborate further on this legislative barrier and these two tipping points, we will underpin our statement that there is an apparent positive business case for Smart Energy by presenting some evidence from Smart Energy potential estimates and an evaluation of the success of DSM in the USA.

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12 SMART ENERGY: A vision for Europe

THE BENEFITS OF SMART ENERGY Identifying the potential benefits that flow from Smart Energy applications is a challenge, not because there is a lack, but because of their variety and diversity. A structured approach towards identifying assets, functionalities, and benefits of smart grids and smart markets is summarised in the Joint Research Centre Guidelines for conducting a cost-benefit analysis of smart grid / smart market projects6. Benefits are both market-related and gridrelated, and include: reductions in generator and grid capacity investments, lower grid management costs, greater grid reliability, decreases in electricity losses and theft, lower electricity costs, and lower energy-related emissions. Potential benefits are high. An EU Commission staff working document7 summarising the results

6 Guidelines for conducting a cost-benefit analysis of Smart Grid projects, Joint Research Centre, report EUR 25246 EN, 2012. 7 Incorporating demand side flexibility, in particular demand response, in electricity markets, Commission staff working document SWD (2013) 442 final, 5 November 2013.

of some studies and demonstration projects, shows that DR may reduce the energy bill of residential and industrial customers by up to 10 %. The EU potential of controllable load is at least 60 GW, allowing a reduction in peak-generation needs in the EU of 10 %. Potential savings by 2020 are in the order of tens of billions of euros. A comprehensive smart grid cost-benefit analysis for the Netherlands (figure 3) shows that even for a business-as-usual scenario, there is a positive business case for the introduction of Smart Energy. The actual value depends on the energy mix. The main benefits result from lower grid investments and a decrease in generation capacity investments. In a scenario with generation predominantly based


SMART ENERGY: A vision for Europe

16 Dominant coal & nuclear generation scenario 14

Dominant renewable and gas generation scenario

Net Present Value (billion euro)

12

10

8

“Business-as-usual” scenario

6 7.9 billion euro

9.5 billion euro

4

2

2.5 billion euro

0 Benefits

Costs

Benefits

Costs

Benefits

Costs

Figure 3.  Cost and benefits for the introduction of smart grids (smart energy) in the Netherlands for three year-2050 scenarios (source: CE Delft and DNV GL – Energy).

on renewables and gas, a reduction in imbalance costs also makes a significant contribution. Grid savings occur mainly in the MV grid level. Remarkably, the scenario with predominantly nuclear and coal generation apparently provides higher benefits than when generation is mainly gas and renewables. This is related to the cost of necessary flexible power. These sample results suggest that Smart Energy can provide significant value to the relevant stakeholders. This study does not consider the possible conflict in positions between smart grid benefits and smart market benefits. This is an interesting topic that deserves further attention, but will not be discussed within the scope of this paper.

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14 SMART ENERGY: A vision for Europe

USA: ONE STEP AHEAD With respect to Smart Energy, the USA is clearly ahead of Europe. DSM, an important Smart Energy concept, has apparently been implemented successfully in the USA, and distribution grid automation, energy efficiency programmes, and DR programmes are fairly common. The US Federal Energy Regulatory Commission (FERC) has identified more than 14 different types of DR programmes that are currently running. The Energy Independence and Security Act (EISA) from 2007 demonstrates a strong regulatory push towards DR, resulting in, for example, the National Action Plan on Demand response.

programmes. This is the potential load reduction available, rather than the actual load reduction. By the end of 2012 the total potential exceeded 70 GW, more than 9 % of the summer peak load. The contribution of residential customers to this potential is approximately 12 %, of commercial customers 43 %, and of industrial customers 45 %.

Energy utilities in the USA are obliged to offer / facilitate energy efficiency and DR programmes. Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) facilitate DR through, for instance, a capacity market mechanism. DR is often technically realised by using equipment built for energy efficiency purposes, thus decreasing the cost of implementing DR.

¾¾ A different regulatory framework. In the USA, energy efficiency and DR programmes are obligatory. The effect of this is twofold. The obvious effect is the development of DR programmes. The other effect is that through the implementation of energy efficiency programmes, energy efficiency equipment (measurement, control, and communication) is introduced. This equipment is also used for DR and, in many cases, makes this economically feasible. In the EU the approach is fundamentally different and

Figure 4 shows the development of the potential DR resource contribution from all US DR

The situation in the USA differs significantly from that in Europe, and success in the USA is no guarantee for the same occurring in the EU. However, we can learn from the differences. We have identified two key disparities between the USA and the EU:


SMART ENERGY: A vision for Europe

80 70 7.6 %

9.2 %

DR Potential (GW)

60 5.8 %

50 5.0 % 40 30 20 10 0

2006

2007

2008

2009

2010

2011

2012

Figure 4.  Potential demand response resource contribution in America in absolute terms (GW) and as percentage of the summer peak load (source: FERC*). * Federald Energy Regulatory Commission, Assessment of Demand Response & Advanced Metering, periodical staff reports 2006-2013.

energy efficiency is basically incentivised by energy taxes (except for the mandatory roll-out of smart meters). The current national regulatory frameworks in EU member states do not incentivise DR; sometimes they even hamper it. žž A higher necessity. Due to air conditioner demand, the USA suffers from a high summer peak load. Furthermore, there are reliability issues due to ageing grid and generation assets, difficulties in building new power plants, and the lack of a strong interconnected transmission grid. In the EU the situation is generally different, with a strong, interconnected grid, sufficient reliable generation capacity, and a less pronounced (summer) peak demand. Consequently, the necessity for DR related to the summer peak is lower.

Although the requirement for DR is lower in Europe, this does not mean that it can't be a viable option. On the contrary, with the onset of a higher proportion of renewables in the energy mix, in our opinion it is and will become an increasingly viable option. We conclude that the regulatory framework is of major importance for the development of smart markets and, as a potential obstacle, will probably need to be adjusted on the road towards realising a Smart Energy future in Europe.

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16 SMART ENERGY: A vision for Europe

SMART METER ALLOCATION: MORE THAN THE METER ALONE Smart meters are generally capable of supplying interval values for net consumption and net production. This functional element is often seen as the key feature of smart metering as it enables the introduction of time-of-use (ToU) pricing, real-time pricing (RTP) and / or other flexible tariff configurations. However, this is not sufficient, because tariff arrangements such as these require an alternative approach regarding the allocation (or wholesale settlement) of electricity generation and consumption in line with the allocation of large commercial and industrial customers. Assume a grid area that is controlled by a single Distribution System Operator (DSO) that serves multiple consumers and generators. These consumers and generators are represented by Balance Responsible Parties (BRPs). A BRP is responsible for predicting the aggregated load pattern (interval values) of the consumers and producers in a specific portfolio and vouching for it in an electricity programme (nomination).

The actual load pattern is determined by several factors: the measured import into and export from the grid area; the actual measured load and consumption from consumers and producers with telemetric reading; the predicted load from unmeasured consumption (predominantly public lighting); the estimated grid technical losses; and the predicted load from producers / consumers without telemetric reading. The last category includes residential customers. The estimated load pattern of these customers is based on a standardised load profile and the electricity consumption measurements from the previous year. Allocation of electricity consumption of these customers to the BRPs is based on these load profiles. This brings us to the core of the problem; as long as residential customer electricity use is allocated (thus settled) based on standardised load profiles, there is no incentive for BRPs to apply DR on a residential level.


SMART ENERGY: A vision for Europe

Household

Household

Household

Retailers Company Retail Market

Wholesale Market OTC* and Exchange

Traders

Company Balancing Market

Producer

*Over the Counter

Transmission

Figure 5.  Currently retail consumers do not have access to wholesale markets.

One solution would be to enter all residential customers into the process of telemetric reading, but this would mean an enormous increase in data handling requirements that are difficult for current systems to handle. This may form a serious barrier for smart meter allocation. However, this barrier is not insurmountable. In Finland smart meters are mandatory for most residential customers, and 80 % penetration by 2014 has been mandated by law8. Hourly meter reading, to allow for advanced tariff systems, is also mandated for smart meters. Smart meter specifications include two-way communication options and the ability to control residential appliances (e.g. electric heating). Hourly data must be available to both the energy supplier and the consumer the day after (day +1) actual consumption. This Finnish example shows that solutions are possible, although the volume of smart meter data

8 European Smart Metering Landscape Report 2012 – update May 2013, www. smartregions.net.

is limited (hourly data, relatively small population from a metering point of view). For larger countries, aggregation of consumption data early in the allocation chain seems a viable option. Thus, it is not only the smart meter, but also incorporation of smart meter data into the wholesale settlement processes, that represent a barrier in terms of the introduction of Smart Energy concepts. If the smart meter data allocation issue is resolved, a further barrier remains to be overcome. This is the cost of making flexible load available to the market, and this subject is discussed in the next section.

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18 SMART ENERGY: A vision for Europe

WHAT'S FLEXIBILITY WORTH? An important part of Smart Energy focuses on providing flexibility in the electricity system (both consumption and generation, predominantly on low and medium voltage level) through DR. This is a principal market question of supply and demand. What is the value of flexibility in the market? And what are the costs to make this flexibility available? If the costs are lower than the value, then the effect is positive. This is a tipping point for the introduction of Smart Energy. Flexibility has many aspects. It is not only the ability to supply, demand, or vary demand in relation to a certain amount of electricity; reliability, response time, and duration are also important. Generally, the lower the response time and the higher the duration and reliability, then the higher the value. This means that determining the value of a kW of flexible power is not straightforward. We can make an attempt by considering the different ways of supplying a flexible kW to the electricity system:

¾¾ Buying it on the market (value of changing load); ¾¾ Adding generation capacity; ¾¾ Adding grid capacity.

This is obviously an oversimplification, as not every flexible kW is suitable for every situation. However, it does provide some relevant insights. Figure 6 shows the annual (levelised) cost of a kW of flexibility for various electricity systems. The market costs are based on actual data from selected markets in various countries and provide a broad range. Costs are generally higher in the USA than in Europe and it is clear that a decreased response time (primary control, emergency demand response) increases the value. The capacity price for frequency restoration reserves (imbalance markets, tertiary control) is significantly lower, but in these markets an energy fee (per MWh delivered or reduced) is also provided that is more advantageous than the wholesale electricity price. This fee is not included in the figure, as the graph reflects only the cost of keeping capacity available, not the cost of using it. Levelised generation capacity costs are based on the capital expenditure (CAPEX) and operational expenditure (OPEX) of the various generation technologies, but do not include fuel cost. It is solely the discounted annual cost for keeping this generating capacity available. Operational availability is not included in the cost calculation, otherwise solar and wind capacity would rate very differently. Gas-fired capacity provides the most costeffective flexibility.


SMART ENERGY: A vision for Europe

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20 SMART ENERGY: A vision for Europe

Semi-automated Demand Response (USA) Automated Demand Response (USA)

Market based

Emergency Demand Response (USA)

Generation based

Capacity price imbalance market (ES)

Grid based

Capacity price imbalance market (UK) Capacity price tertiary control (DE) Average capacity price primary control (DE)

Gas Turbine Benchmark

Natural gas-fired Gas Turbine Natural gas-fired Combined Cycle Natural gas-fired Gas Engine Pulverized coal unit Solar PV Wind turbine Nuclear power unit High voltage grid capacity (NL) Medium voltage grid capacity (NL) Low voltage grid capacity (NL) High voltage grid capacity (DE) Medium voltage grid capacity (DE) Low voltage grid capacity (DE) 0

100

200

300

400

(Levelized) Capacity cost (EUR/kW/year)

Figure 6.  Various (levelised) capacity costs for a flexible kW of power for the electricity system.

Capacity costs for grids are also based on a CAPEX / OPEX evaluation from Dutch9 and German10 data. These show the levelised costs are of the same order of magnitude. The differences between Germany and the Netherlands need more elaboration, but this falls beyond the scope of this paper. From figure 6 we can estimate that a ‘pure’ capacity price (without an added energy component) may vary between 40 euro/kW for the medium voltage grid up to 360 euro/kW for a nuclear power plant. As a benchmark for assessing the cost of making load flexibility available, we propose the capacity

9 The social costs and benefits of smart grids, CE Delft and DNV KEMA, 2012 (http://www.cedelft.eu). 10 Extension of the German electricity grid in Germany till 2030, 2012 German Energy Agency (DENA).

price for a natural gas-fired turbine. This is a typical peak load unit and therefore our benchmark price for flexible capacity is based on 80 euro/kW. The other side of the coin is the cost of making load flexibility available to the market. For this we estimated the costs of making industrial, commercial, and residential loads available. The actual eligible load is based on an average European dwelling, commercial building, or industry complex. The availability of the loads (primarily for cooling and heating) is included. Seasonal effects are not included. The cost per flexible kW is based on the assumed equipment cost and the available flexible load. Combining costs and available loads leads to the results shown in figure 7. However, this gives an average picture and will vary between situations; for instance, a dwelling with a night storage heater will give a different result. Not surprisingly, residential loads are most expensive and industrial loads least


SMART ENERGY: A vision for Europe

160

System cost (EUR/kW/year)

140 120 100 Gas Turbine Benchmark 80 60 40 20 0

Residential

Residential with smart meter channel

Commercial

Commercial with BEMS

Industrial

Industrial with FEMS

Figure 7.  Estimated cost to make a kW of load flexibility available to the electricity system (BEMS: building energy management system, FEMS: factory energy management system).

expensive because the controllable load increases per site. Intelligence that is already available (smart meter communication channels, building energy management systems, factory energy management systems) will significantly reduce the cost per kW. The availability of a smart meter with switching ability will further decrease the cost per kW. Given a benchmark capacity value of 80 euro per kW per year, it is clear that, on average, industrial and commercial load flexibility offer a positive value proposition. Residential load flexibility does not produce a similar result, and is unlikely to do so. However, this may change if the costs of smart grid equipment decrease over time or can be shared across other related initiatives / projects (e.g. energy efficiency schemes, smart metering deployment, etc.) and other participating players. The cost of making residential load flexibility available to the market is an important tipping

point. A valid question is whether it is needed to make residential load available to the market, given the availability and lower cost of commercial and industrial load flexibility. This depends on the nature of the required flexibility. When capacity constraints emerge at low voltage level, residential load flexibility might become a feasible, or even necessary, option. Small commercial customers might provide a better source of load flexibility but are currently not the focus of Smart Energy discussions.

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22 SMART ENERGY: A vision for Europe

TIPPING THE SCALE OF RENEWABLE GENERATION The ability to dispatch renewable generation (solar and wind) is limited to curtailing generation during periods of overcapacity. The predictability of wind and solar generation is limited (although improving) and therefore a high penetration of solar and wind power is generally perceived to require additional measures in order to keep the grid stable. Smart Energy is often seen as the most viable solution (compared with storage for example, which still incurs high costs). Nevertheless, some countries with high penetration of solar and wind generation (Germany, Spain, Denmark, and Ireland) are apparently able to cope with these high penetration rates, although problems are reported. So where is the tipping point? In order to provide a numerical measure for this tipping point, we analysed imbalance data (the difference between schedule generation and actual generation) from Germany, Spain, and the Netherlands. The rate of penetration of renewables in Germany and Spain is high, but is low in in the Netherlands. Germany is divided into four control areas, three of which had separate imbalance data available. Thus, a total imbalance analysis was conducted for five control areas for the past 4 to 10 years. The relative imbalance (yearly average compared with the total load in the given control

period) is related to the share of renewable capacity (compared with the total average capacity). The results of this analysis are shown in figure 8. This graph suggests a tipping point of 20-25 % of renewable generation. Below this percentage, there is no evidence of a significant correlation between installed renewable capacity and imbalance. The current system appears able to absorb the load fluctuations due to the availability of renewable generation. Above the tipping point, the graph suggests a linear correlation, more than doubling the imbalance when the share of renewables increases from 25 % to 45 %. The relatively low average imbalance share for the Netherlands is explained by the fact that the Dutch TSO, TenneT, provides an on-line, real-time balancing signal that allows market parties to contribute passively (without bidding) as a means of managing the imbalance position. The German case shows that this does not lead to immediate problems. This is partly due to the fact that the imbalance control area increased in 2008 when three German TSOs started to manage their imbalance together, and again in 2010 when the 4th German TSO joined (German Grid Control Cooperation). So imbalance can be solved over a larger area resulting in less dispatch of


SMART ENERGY: A vision for Europe

50 Hertz

Red Electrica de Espana

TenneT DE

Amprion

TenneT NL

14%

Average imbalance share

12% 10% 8% 6% 4% 2% 0% 5%

10%

15%

20%

25%

30%

35%

40%

45%

Installed solar and wind capacity share Figure 8.  Relative size of required imbalance power related to the share of renewables in a given control area (source: DNV GL Energy and Utrecht University, the Netherlands*). * The impact of high shares of wind and solar generation on imbalance management, R.M. Bal, R.J.F. van Gerwen, W.G.J.H.M. van Sark, Energy Policy, under submission.

reserve capacity. This cooperation has expanded internationally, leading to the International Grid Control Cooperation. In October 2011 the Danish TSO, Energinet.dk, joined, in February 2012 the Dutch TSO, TenneT, and in March 2012 the Swiss TSO, Swissgrid11. Expectations are that imbalance control areas in Europe will expand over time, crossing national borders and thus limiting the need for reserve capacity and balancing the effect of the increasing penetration of renewables. This cooperation is, however, limited by the available cross-border capacity and makes the tipping point for renewables uncertain. However, we can safely state that a penetration of up to 20-25 % will not result in (immediate) problems on a national level.

Press release German TSOs, 12 February 2012.

11

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24 SMART ENERGY: A vision for Europe

CONCLUSION In this paper we have discussed the concept of Smart Energy and tried to demonstrate that it is a realistic prospect with the potential to benefit all stakeholders in the overall energy mix. Furthermore, it has been shown to be viable (if not an absolute necessity) in various operating regions / states in the USA. In our opinion, the cases from the USA suggest that there should also be a long-term viable case in Europe. However, the questions remain: when will it happen and what will drive it? We identified the various national regulatory frameworks as important barriers. With certain exceptions, they do not incentivise progress; indeed they probably hamper the introduction of Smart Energy on the basis that has been discussed. The costs of Smart Energy solutions also represent an important tipping point. Smart Energy solutions should be less costly than conventional solutions. This paper shows that in the short- to medium-term, it is, on average, likely to be too costly to encourage residential customers to respond to DR signals in sufficient numbers (aggregated demand response) to have a substantial and reliable impact on system operation and demand flexibility. We believe that this will change when capacity constraints arise at low voltage levels and suitable incentives, with matching technological solutions, are introduced (advanced metering infrastructure (AMI)-enabled). The value of flexibility (related to the cost to reinforce or build new low-voltage capacity) then increases significantly.

Simultaneously, we expect the costs of making residential load flexibility available to decrease over time if intelligent systems (e.g. home energy management systems, smart appliances, or smart meters with appropriate functionality) are installed for other purposes such as energy awareness / efficiency, electric vehicles, micro-generation, etc. However, the competition from (small) commercial and industrial flexibility still remains. The penetration of renewables provides the final tipping point. The tipping point for suitable penetration of solar and wind generation is about 20 – 25 % of total generating capacity. This boundary has not yet been reached in most European countries. Higher penetration rates do not necessarily lead to immediate operating issues. Growing levels of renewable energy, as is required of EU member states over time, will however, place more emphasis on regulators and operators raising their game in relation to smarter system solutions and, in turn, smarter operations. Thus, the importance of joined-up industry solutions, in which participants collaborate closely to achieve common production, network, and supply side goals, will be of paramount importance in the realisation of a shared Smart Energy vision.


26 SMART ENERGY: A vision for Europe

ABOUT THE AUTHORS Rob van Gerwen, Senior Consultant Smart Energy Rob van Gerwen has more than 20 year experience in the electricity sector. He has a broad knowledge of (decentralised) energy generation and distribution, and is specialised in smart metering, smart grids and demand response. He was responsible for the national societal cost-benefit analysis for the introduction of smart meters in the Netherlands. He is involved in multiple national and international smart meter and smart grid projects. He holds a Master of Science degree in Physics from the University of Eindhoven in the Netherlands.

Alan Aldridge, Principal Consultant Operational Excellence Alan Aldridge has worked in the energy industry for over 30 years. During this time his responsibilities have spanned the whole value chain, including: electricity production, wholesale gas and electricity trading, electricity retail, transmission and distribution network operation and management, smart metering, smart grids, and electricity regulation. He has been working with the Commission for Energy Regulation (CER) in Ireland, on the National Smart Metering Programme, to finalise design functionality, operational responsibilities, and procurement priorities. He remains associated with the programme and has a number of other international smart metering interests and responsibilities. Alan has spent most of his professional life in the UK Supply Industry, joining DNV GL in September 2007.


SMART ENERGY: A vision for Europe

Hans de Heer, Principal Consultant Smart Energy Hans de Heer is an international expert in business process (re)design, system development and implementation in the utilities sector. Focusing on business objectives and processes, and based on his extensive technical experience, he is able to translate business needs into viable business models and implementations. He has an extensive background in smart metering, smart grids, and electric mobility, in the area of market design, market analyses, market processes, business cases, business process design, implementation, IT architecture and standardisation. Hans holds a Master of Science degree in Mathematics from the University of Eindhoven.

Katrin Spanka, Consultant Market and Policy Development Within DNV GL, Katrin has focused on smart grid related projects and conducted a study for the association of municipal utilities that addressed assessment of smart grid investment needs and prepared a cost-benefit analysis on communication and controlling modules. Recently she also worked on projects dedicated to developing new business models within demand response, as well as virtual CHP plants. Katrin holds a diploma degree (equivalent to Master’s degree) in Business Administration. In addition, she also studies energy management giving her the support of a solid technical background.

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28 SMART ENERGY: A vision for Europe

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DNV GL AS NO-1322 Høvik, Norway Tel: +47 67 57 99 00 www.dnvgl.com

DNV GL Driven by its purpose of safeguarding life, property and the environment, DNV GL enables organisations to advance the safety and sustainability of their business. DNV GL provides classification and technical assurance along with software and independent expert advisory services to the maritime, oil & gas and energy industries. It also provides certification services to customers across a wide range of industries. Combining leading technical and operational expertise, risk methodology and in-depth industry knowledge, DNV GL empowers its customers’ decisions and actions with trust and confidence. The company continuously invests in research and collaborative innovation to provide customers and society with operational and technological foresight. DNV GL, whose origins go back to 1864, operates globally in more than 100 countries with its 16,000 professionals dedicated to helping their customers make the world safer, smarter and greener. DNV GL Strategic Research & Innovation The objective of strategic research is through new knowledge and services to enable long term innovation and business growth in support of the overall strategy of DNV GL. Such research is carried out in selected areas that are believed to be of particular significance for DNV GL in the future. A Position Paper from DNV GL Strategic Research & Innovation is intended to highlight findings from our research programmes.

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A vision for Europe