Smart Grids and Small Utilities

A Preliminary Analysis on the Contribution of Utility Size to Successful Smart Grid

Deployment

Kristina Tajchman

Community & Regional Planning, University of Texas, University Station, Austin, Texas, U.S.A.

Keywords: Smart Grid, Infrastructure, Electricity, Grid Modernization, Utility Size, Small Utilities.

Abstract: Modernizing the electric grid and turning the smart grid vision into reality is a complex and multi-decade

undertaking presenting significant challenges for utility companies. This paper highlights the particular

challenge smaller utilities face as they consider smart grid initiatives. Six key barriers to smart grid

implementation are selected and presented here in a qualitative assessment including 1) the need for

individually tailored solutions, 2) a questionable value proposition, 3) the lack of communication and

information technology (IT) infrastructure, 4) mixed consumer engagement, 5) an aging workforce, and 6)

an awkward progression of regulations and standard development. The objective of this effort is to stress

the missed opportunity that may exist to promote the early engagement of smaller utilities in national smart

grid deployment efforts.

1 INTRODUCTION

Implementation of the smart grid vision promises

advancements in the areas of energy efficiency,

customer visibility, cost savings, reliability, and

congestion among many others. Despite these

benefits, only small subsets of utilities are

implementing smart grid projects to modernize their

electric infrastructure. According to the Smart Grid

Information Clearinghouse, a project funded by the

U.S. Department of Energy (DOE) to populate and

maintain a list of smart grid projects, there are only

174 smart grid projects in the country (SGIC, 2012).

When compared to the existence of over 3,000

utility companies, this ratio is disappointingly low.

These numbers are especially disappointing in

consideration of the efforts made by the federal

government to promote investment in the smart grid.

A condensed list of these efforts includes 1) creation

of the Smart Grid Advisory Committee, the Smart

Grid Task Force, the Smart Grid Systems Report,

and the Smart Grid Interoperability Framework

through the Energy Independence and Security Act,

and 2) funding the Smart Grid Investment Program

(SGIG), the Smart Grid Demonstration Program

(SGDP), the Smart Grid Information Clearinghouse,

and the Smartgrid.gov website through the American

Reinvestment and Recovery Act (ARRA) funds.

Together these efforts represent billions of dollars

spent encouraging states and utility companies to

begin successful smart grid deployment.

Admittedly, electric grid modernization is

expected to be a work in progress that will take 40-

50 years and immediate nation-wide results are

unrealistic. The heavy reluctance of the majority of

utilities to initiate smart grid projects, however, is

worth evaluating. Fundamentally, this reluctance is

a reflection of multiple barriers of implementation.

Not only do smart grid projects require individually

tailored solutions and have a questionable value

proposition that discourages investment, but also

there is a lack of communication and IT

infrastructure in the industry, a lack of consumer

engagement, an aging workforce, and a difficult

progression of regulation and standard development

which all contribute to slow progress.

The concern presented in this paper is that while

these barriers present significant challenges for the

major utilities, smaller utilities are especially

discouraged. Operating with a smaller customer

base, these utilities have limited resources which

lead to their reduced ability to explore emerging

technology options, improve cost effectiveness, and

promote customer engagement. Consequently, the

small utilities may be least successful in attempts to

Tajchman K..

Smart Grids and Small Utilities - A Preliminary Analysis on the Contribution of Utility Size to Successful Smart Grid Deployment.

DOI: 10.5220/0004398600710076

In Proceedings of the 2nd International Conference on Smart Grids and Green IT Systems (SMARTGREENS-2013), pages 71-76

ISBN: 978-989-8565-55-6

 2013 SCITEPRESS (Science and Technology Publications, Lda.)

engage in smart grid initiatives and may be among

the last to move in this direction.

Existing literature pertaining to the progression

of smart grid objectives under-recognizes the lack of

progress by these stakeholders and overlooks the

opportunity there may be to better promote their

inclusion in nationwide modernization movements.

The objective of this effort is to bring attention to

this problem and promote debate that may generate

ideas and initiate action to foster the engagement of

smart grid projects by the smaller utilities.

To accomplish this objective, six key barriers to

implementation are qualitatively accessed and

highlighted against the particular disadvantages

small utilities face to mitigate each barrier. This list

is not exhaustive and additional barriers are left for

consideration in future work. Additionally,

systematic studies of each barrier against well-

defined utility sizes are suggested for future research

on this topic.

2 BARRIERS

OF IMPLEMENTATION

The following sections individually describe barriers

to implementation commonly found in existing

smart grid literature and relate them to small

utilities. For a more detailed description of the

technical, business, and financial challenges facing

utilities readers are directed to the DOE Smart Grid

System Report to Congress in 2012 (USDOE, 2012).

2.1 Individually Tailored Solutions

The first barrier that emphasises the challenge small

utilities face to deploy smart grid projects is that by

nature smart grid projects require individually

tailored solutions. The existing electric

infrastructure is a patchwork of interconnected

transmission and distribution lines that incorporate

multiple sources of energy, include widely varying

ages, conditions, capacities, and cross multiple

regulatory environments (EDRG, 2011). As a result,

there is no one size fits all smart grid solution.

In this respect, each utility must consider its own

infrastructure and evaluate the emerging

technologies that meet their specific needs.

Unfortunately, this makes the effort more time

consuming and less affordable during a time that

research and development (R&D) efforts have

significantly declined in the industry. Before the

functional unbundling of the electric industry in the

1990’s there may have been funds available for this

purpose, however, R&D became the favorite cost-

cutting target as the industry became more

competitive. As a result, fewer utilities are investing

in long-term projects, especially where those utilities

are privately owned (Sterlacchini, 2010).

For this reason, smaller utilities have an

incentive to delay their efforts and let the larger

utilities go first. Not only do the larger utilities have

more resources to research and develop smart grid

technologies, but their efforts are much more likely

to develop a market for those technologies. The

result is that small utilities can then take advantage

of these cost reductions as they evaluate the

solutions that are most appropriate for their service

area. As noted by a manager from a small utility in

the state of Massachusetts, “It’s cheaper if you’re

one year behind the curve,” (Clamp, 2012).

Herein lays the opportunity for the federal

government to make a significant difference in the

number of utilities engaged in smart grid projects.

By providing general guidance, such as lessons

learned, technical and financial analysis on the value

of smart grid investments, and communicating

information openly across the industry, the R&D

burden utilities face may be reduced. For small

utilities reducing this burden may be enough to

counteract their current tendency to delay initiation

of these projects.

2.2 Questionable Value Proposition

In light of the individually tailored solutions

challenge, the cost effectiveness of a smart grid

project is a major hurdle. This is primarily because

some of the greatest benefits are to the society at

large and are not specific to the utility owner or their

investors. Societal benefits may include downward

pressure on energy prices, the integration of cleaner

distributed generation, and the associated

environmental benefits. As energy use during peak

demand is reduced by load-shifting designs, for

example, the need to build new peak power

generation plants and new transmission lines is

reduced along with the associated environmental

impact of new infrastructure. Unfortunately,

measuring these benefits and allocating them to

specific benefactors is extremely difficult and they

are not likely to be reflected in cost-benefit analysis

as companies evaluate smart grid options.

Adding to this problem is that the ability to

secure credit is also an issue. Depending on whether

or not a utility is in a regulated or unregulated

market, investors face a trade-off between funding

SMARTGREENS2013-2ndInternationalConferenceonSmartGridsandGreenITSystems

projects in regulated markets with greater certainty

but a reduced incentive to sell less energy, and

unregulated markets with greater risk that costs will

exceed benefits (SGCR, 2012). Investors are

further deterred due to the moving set of possibilities

as technology, energy mixes and energy policies are

in a constant state of flux, and the cost-benefit

analysis are primarily based on research instead of

historical or on the ground performance (SGCR,

2012). As mentioned previously, with limited

resources small utilities are less able to fund

research to support a cost-benefit analysis. Without

a well-documented justification, their ability to be

issued credit and secure funding is further reduced.

Another consideration is that utility types range

from investor-owned, to municipalities,

cooperatives, river authorities, aggregators,

transmission and distribution, retail, and power

generation companies each with their own

organizational structure and authority. The

difference between these types is important.

According to a report by the National Science and

Technology Council (NSTC) on the 21

Century

Grid, a utility company’s motivation to engage in

smart grid efforts is impacted by their business

model and their level of incentive to sell less energy

more efficiently.

Investor-owned utilities (IOU), for example, are

profit making enterprises that exist to make a return

on investment for their stockholders. Thus an IOU

has a strong interest in selling more power and is

likely to view smart grid technology less favourably

unless it can help avoid building new peaking plants

(NSTC, 2011). Rural cooperatives, on the other

hand, provide service to their own members and

return profits to them directly. These types of

utilities are likely to have a greater interest in selling

less energy more efficiently and may be particularly

attracted to smart grid investments.

The questionable value proposition is magnified

for a smaller utility whose lower customer base

reduces the cost effectiveness of expensive capital

equipment. Some types of smart grid technologies,

such as smart meters and transmission line sensors,

may be correlated to the number of customers in a

service area. Communication and IT infrastructure

necessary to collect, maintain, and aggregate data

from these systems, however, are a necessary

component regardless if utilities are serving a few

thousand customers or a hundred thousand

customers. Thus smaller utilities with fewer

customers are less able to justify the heavy capital

investment.

With these concerns, lawmakers may need to

consider more targeted incentive programs.

Encouraging investors to fund smart grid projects in

specific utility demographics, such as, size or

ownership type may help balance the additional

funding challenges those utilities face as a result of

their customer base and organizational structure.

2.3 Lack of Communication and IT

Infrastructure

Unfortunately, with a few exceptions by large

utilities, the collective electric infrastructure has not

been kept up to date with modern technology in the

way that other industries such as banking or

telecommunications have. As a result, the third

barrier to smart grid implementation is the enormous

amount of new communications and IT

infrastructure required to support smart grid

operations with data collection, aggregation,

maintenance, and communication.

The Electric Power Research Institute (EPRI)

describes, for example, that although many

transmission and distribution substations are already

equipped with sensors, there is limited bandwidth

connecting substations to the enterprise. This means

that even if new smart grid sensors are deployed,

there is a limited ability to transmit their data back to

the utility. As a result, estimates range from

$50,000 - $70,000 per substation just to build upon

communication and IT infrastructure of existing

platforms, and these estimates are not including the

additional need to build new substations (EPRI,

2011). On the distribution side, costs run over

$500,000 per feeder to incorporate the necessary

communications (EPRI, 2011).

Thus although smart meters with demand

response, running approximately $940 per customer

(EPRI, 2011), are considered the basic building

block of the smart grid (EEI, 2011), funding the

smart meter itself is not the only cost. Depending on

the legacy system, synchronizing new technology

with existing systems may be problematic and may

delay deployment.

In this manner, the advantages of smart meters

can only be fully realized when the communication

network incorporates all appliances and devices in

the distribution and metering chain, (Depuru, 2011).

The result is that smaller utilities may deploy smart

meters without the ability to take full advantage of

their capabilities. Unfortunately, this further

contributes to the reduced value proposition

discussed above and provides additional justification

for governments to target incentive programs to

smaller utilities and their investors.

SmartGridsandSmallUtilities-APreliminaryAnalysisontheContributionofUtilitySizetoSuccessfulSmartGrid

Deployment

2.4 Consumer Engagement

Despite advantages in increased visibility of energy

use and the associated ability to reduce or shift

energy loads and lower energy bills, consumer

perceptions and attitudes towards smart grid projects

vary. The fourth barrier facing utilities then is the

level of customer engagement or opposition.

Depending on regional or personal experiences with

energy or environmental issues, customer

willingness to adopt smart grid technology varies by

region (Horst, 2011).

Some areas of the United States, for instance,

have experienced significant consumer opposition to

smart meters and advanced metering infrastructure

(AMI). In the state of Texas the Public Utility

Commission (PUC) is considering opt-out rules for

customers who are against the installment of smart

meters for potential health hazard and privacy

concerns (Llorca, 2012). This means that utilities

may have to maintain two systems at an additional

cost if some of their customers are allowed to opt-

out of using a smart meter.

Again, this contributes to the cost-benefit

analysis utilities conduct to weigh the pros and cons

of initiating a project. In areas where utilities need

to mitigate customer opposition, smaller utilities

may be much more likely reject smart grid projects

that already have minimal direct financial incentive.

This is important because a report by The Edison

Foundation concludes that individual, utility, and

societal benefits could significantly increase with

increased investment and focus on consumer

education and engagement (EEI, 2011).

Consequently, this is one area where state or

regional level education or initiatives to promote

customer engagement may be especially beneficial

to smaller utilities in their efforts to deploy smart

grid initiatives.

2.5 Aging Workforce

The fifth barrier to smart grid implementation is that

as an industry, electric utilities are facing imminent

retirement of much of their workforce without the

security of adequate numbers of mid-career level

personnel with on-the-job training and experience,

or future graduates and professors to fill their

positions (Sen, 2012). This is especially challenging

as smart grid initiatives have greater demands for

personnel with specialized skills. A report from the

National Energy Technology Laboratory (NETL)

and the Office of Electricity Delivery and Energy

Reliability cautions that rebuilding staff reductions

and attracting technical talent back to the field is a

valid barrier to realizing smart grid initiatives such

as AMI deployments (NETL, 2008).

This barrier is especially important to small

utilities in rural versus suburban areas, as they are

less likely to attract technical staff or new college

graduates. While some movement of college

graduates has been tracked increasingly to the

suburbs of metropolitan areas (Forbes, 2011),

college graduates still tend to migrate to cities of

greater density than rural areas. Thus smaller

utilities in outlying and rural areas may be especially

vulnerable to the ability to attract the technical talent

they need to deploy and maintain new smart grid

systems.

Again, this may be an opportunity for state or

federal initiatives to balance the greater challenges

facing small utilities. Governments, utilities, and

universities are already taking action to increase

participation in the energy industry (Sen, 2012), thus

it is likely that there is an opportunity to add to this

effort through additional incentives for technical

graduates to seek employment in lower density

areas. In doing so they may promote a faster

deployment of smart grid efforts by small utilities

that will help broad policy initiatives to improve

energy efficiency and realize the smart grid vision.

2.6 Regulation and Standard

Development

Finally, the sixth key challenge facing utilities is the

uneven progression of regulations and standards in

an industry that is not fully regulated, nor fully

deregulated. While developing regulations that

encourage interoperability, cyber, reliability, and

interconnection standards, policy-makers struggle to

balance the need to provide a lower risk

environment for investors while allowing for

flexibility that may promote innovation in the new

energy market (SGSR, 2012). Monitoring the action

of government authorities to move in this direction,

however, is especially tough for small utilities with

less staff to keep track of regulatory change.

Additionally, small utilities by design have less

ability to influence these regulatory changes. Not

only are they more restricted by their influence from

the perspective of their smaller customer base and

fewer resources for lobbying, but as discussed above

they are moving slower than their larger counterparts

towards smart grid deployment. This means they are

less likely to identify and vocalize their preferences

to decision-makers in time to pre-empt or confront

the preferences larger utilities have already

SMARTGREENS2013-2ndInternationalConferenceonSmartGridsandGreenITSystems

promoted in the path forward to standards

development.

To balance these challenges, federal authorities

should take deliberate care to better communicate

the status of regulatory change, and assist states in

developing and implementing their policies with

greater confidence and fewer delays. Furthermore,

both authority levels are encouraged to specifically

solicit input from small utilities in public workshops

as they weigh pros and cons of various regulatory

options.

3 CONCLUSIONS

Exploring the vast array of smart grid technical

solutions, analyzing cost-effectiveness, evaluating

cost-recovery options, securing funding, and

gauging customer support are challenging steps for

any utility. Conducting these steps on a limited

budget, with limited staff, limited credit, and a small

customer base, the effort may be overwhelming.

The intent of this paper is to show how specific

barriers to smart grid integration are particularly

challenging for smaller utilities and explain why

targeted government efforts are needed to promote

their involvement.

First, the high cost of individually tailored

solutions driven by the complexity of the electric

infrastructure is especially problematic for small

utilities that have fewer resources committed to

R&D. These costs may be mitigated by government

efforts to provide general guidance, technical and

financial analysis and improve communication

across the industry, thereby alleviating some of the

R&D burden.

Second, the questionable value proposition of

smart grid projects is exacerbated for small utilities

with reduced abilities to secure funding and fewer

customers to spread out costs of expensive capital

equipment. This is especially true considering the

lack of existing communication and IT infrastructure

common across the industry. Targeting incentives

for investment in small utility smart grid projects

may balance the additional challenges they face to

improve affordability.

Next, regional and local consumer opposition to

smart grid projects is especially troublesome for

small utilities due to their reduced ability to fund

consumer education programs. Thus by increasing

awareness of societal and individual benefits of the

smart grid vision, federal or state level consumer

education programs may be especially helpful to

smaller utilities.

Additionally, in the face of a national aging

energy workforce, smaller utilities are more

vulnerable due to their locations in areas of less

population which typically receive fewer college

graduates. Thus federal level programs that

encourage energy and electric technical

professionals and college graduates to migrate to

areas of less dense populations may reduce the

impact on smaller utilities located in these areas.

Finally, the awkward progression of federal level

regulation and standard development is more

troublesome for smaller utilities with less ability to

monitor and influence these requirements. To

improve their participation federal efforts to engage

diverse stakeholders from all utility types and sizes

in public workshops may improve the participation

rate of these utilities.

In conclusion, by exploring each barrier to smart

grid implementation this paper seeks to highlight the

particular susceptibility of small utilities. By

suggesting additional federal or state level

involvement specifically targeted to promoting their

engagement and fostering debate on measures that

may be taken to dampen these obstacles, the final

objective is to achieve a greater ratio of utilities

initiating smart grid projects.

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Deployment

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SMARTGREENS2013-2ndInternationalConferenceonSmartGridsandGreenITSystems