Benefit-Cost Analysis for Utility-Facing Grid Modernization Investments

1. Synapse Energy Economics, Inc. Benefit-Cost Analysis for Utility-Facing Grid Modernization Investments Tim Woolf, Synapse Energy Economics NASUCA Annual Meeting November 11, 2018

2. Outline of Presentation • Overview of benefit-cost analysis (BCA) in general • Key challenges of grid modernization (grid mod) BCA • Review of recent utility grid mod proposals • Focus on utility-facing grid mod • Using Advanced Distribution Management Systems (ADMS) as an example • How to address key challenges of grid mod BCAs • References for additional information • Lots of Q&A throughout

3. Overview of BCA & Key Challenges of Grid Mod BCA

4. The Role of Benefit-Cost Analysis • Case: Utility seeking approval of costs before spending • Typically in a case dedicated to review proposed investments • Utility often asks for pre-approval • Allows for focused review of proposal • Utility can be held accountable to cost forecasts • Costs can be reduced or rejected before incurred • Case: Utility seeking approval of costs after spending • Typically in a rate case • Allows for review in context of other costs • Grid mod issues might be one of many contentious issues • Difficult to modify, reduce, or disallow costs

5. Benefit-Cost Analysis – Key Steps BCA is used to assess a project by comparing multiple costs with multiple benefits over the long term. Key steps include: • Define a reference case/scenario (without the project). • Define an alternative case/scenario (with the project). • Decide which costs and benefits to include (which test(s) to use). • Define all relevant costs and benefits (clarify metrics). • Determine appropriate time frame and discount rates. • Develop assumptions and input data. • Conduct scenario and sensitivity analyses. • Present, document, and justify results.

6. Benefit-Cost Analysis – Key Principles Sources: NESP 2017, DOE 2017, NY PSC 2016.

7. Grid Mod BCAs – Key Challenges

8. Overview of Utility-Facing Grid Modernization Proposals Using advanced distribution management system (ADMS) as an example

9. Grid Modernization: Customer Facing • Energy Efficiency • Demand Response • Distributed Generation • Storage • Electric Vehicles • Advanced Meters • Third Party Access • Customer Data • Cybersecurity

10. Grid Modernization: Utility-Facing These are referred to here as “components” • Advanced distribution management system (ADMS) • Geographic information system (GIS) • Distribution system supervisory control and data acquisition (DSCADA) • Outage management system (OMS) • Distributed energy resource management system (DERMS) • Fault location, isolation, & service restoration (FLISR) a/k/a/ dist. automation • Volt-var optimization (VVO) • Advanced metering infrastructure (AMI) • Network monitoring: • Substation devices • Field (feeder) level devices See Appendix for definitions

11. Advanced Distribution Management Systems (ADMS) Definition of ADMS A software platform that: • Integrates several operational components, such as • Outage Management System (OMS) • Geographic Information System (GIS) • Supervisory Control and Data Acquisition (SCADA) • Distribution Energy Resource Management (DERMS) • Enables advanced components such as • Automated fault location, isolation, and service restoration (FLISR) • Volt-var optimization (VVO) • Distribution State System Estimation (DSSE) • Allows for centralized decision-making • Optimizes distribution grid performance

12. ADMS Integrates and Enables Many Components ADMS integrates several grid mod components: Detailed network topology Monitor, control, optimize and predict operations Monitor and Operate the Distribution Network Core DMS Applications + Optional Applications e.g., FLISR VVO DSCADA Outage-Related Restoration Activities OMS Two-way communication between customer and utilities Manage a variety of interconnected DER Assets DERMS AMI GIS

13. ADMS Not Always Used With Other Components Utilities that have installed ADMS and use, or plan to use, other components: Source: Newton-Evans 2017. Based on survey of 29/68 surveyed North American utilities that reported either having or intending to acquire DMS/ADMS in the near future. Not all utilities use all ADMS functions

14. Key Purported Benefits of ADMS (as claimed in utility filings) • Increased Reliability • FLISR allows for faster restoration times and enables reduced outage duration and outage frequency • Distribution O&M Cost Savings • FLISR reduces labor cost through reduced call volumes, reduced truck rolls, and reduced field crew hours • VVO reduces asset maintenance costs through reduced capacitor switching • DER Integration • Increased hosting capacity to accommodate additional DERs; better management of DER resources • Energy and Capacity Cost Savings • VVO flattens the voltage profile, which enables energy savings, reduces energy losses, and reduces peak demand—thereby reducing need for generation and T&D capacity infrastructure • Increased DER Integration can avoid both energy and capacity related costs • Improved Distribution System Planning • DSSE and Advanced Power Flows provide visibility into the grid and allow for better distribution system planning

15. Additional Benefits of ADMS (as claimed in utility filings) • Increased Customer Satisfaction • Through reduced outage duration and frequency • Increased Safety • Through reduced exposure of field crew due to reduced outages and increased automation • Environmental Benefits • Primarily from increased DER integration • Improved Power Quality • Through reduced voltage sags and swells due to more accurate grid optimization • Improved Resilience • Through reduced vulnerability to storm outages • Economic Development and Job Creation • From reduced customer bills as a result of utility cost savings

16. Review of Sample Utility-Facing Grid Modernization Proposals

17. Recent Grid Mod Proposals Including ADMS We reviewed 22 grid modernization proposals. Of those, 17 proposals included ADMS.

18. High-Level Trends in Utility-Facing Grid Mod Proposals • Wide variety in grid mod components proposed • Almost all proposals include monetary estimates of costs • All proposals claim qualitative benefits • Few proposals offer methodologies for how to account for qualitative benefits • In the absence of qualitative benefits, some proposals are not cost-effective • Few proposals provide monetized results for grid mod components in isolation • Including ADMS in isolation • Few proposals even provide monetized results for portfolios

19. Deployment, Enhancement, & Integration of Components These results are based upon a brief review of utility proposals, and are meant for illustrative purposes only. In certain cases, it was not clear whether the technology has already been implemented or the degree of integration proposed. This table includes components that ADMS can help integrate.

20. Deployment, Enhancement, & Integration of Components These results are based upon a brief review of utility proposals, and are meant for illustrative purposes only. In certain cases, it was not clear whether the technology has already been implemented or the degree of integration proposed. This table includes components that ADMS can help enable.

21. Frequency of Claimed Grid Mod Benefits Frequency of benefits related to ADMS, including monetized and non-monetized. From 17 Grid Mod proposals reviewed. Percent of studies claiming benefit ‘Other Benefits’ includes acceleration of future beneficial technology (National Grid MA), and customer empowerment (LGE KY).

22. Frequency of Claimed Monetized Benefits Frequency of Monetized Benefits in Proposals Where Benefits Related to ADMS are Monetized • Of the 17 proposals, only 9 provided any form of monetized benefits related to ADMS. • Most of the monetized benefits are for energy and capacity, and reliability. Percent of studies claiming benefit

23. Grid Mod Benefit Cost Results - Monetized Portfolio Benefit-Cost Ratios • Benefit-cost ratios from the 9 proposals that provided any form of monetized benefits. • Unmonetized benefits are not included here. • Proposals typically do not present benefit-cost ratios, because they do not include the non-monetized benefits.

24. Example: PSE&G Storm Hardening Results Purported Costs and Benefits for Entire Storm Hardening Proposal PSE&G Provides Monetized Values for All Benefits

25. Example: Grid BCA Results Purported Costs and Benefits for Entire Grid Mod Portfolio Proposal • The unmonetized benefits must exceed this much for the investment to be cost-effective Millions of Dollars (NPV) 25

26. Example: ADMS Benefit-Cost Results Claimed Benefit-Cost Ratios for Portfolios and ADMS in isolation • Only 2 proposals provide monetized results for ADMS project in isolation. • With very different results. • Differences probably due to how benefits are characterized. • Unmonetized benefits are not included in graph.

27. How to Address Key Grid Mod BCA Challenges

28. Grid Mod BCAs – Key Challenges

29. Define Cases: Full Description and Justification • This issue can mostly be addressed with robust filing requirements. • The initial filing should clearly articulate: • what already exists on the system • what would exist in a future without the proposed investment • what the proposed investments will be

30. Define Cases: Full Description and Justification

31. BCA Tests: Decide Which Costs and Benefits to Include Which test (i.e., perspective) is most important: • Utility System Perspective • Impact on utility system (Utility Cost test) • Societal Perspective • Impact on utility system and society in general (Societal Cost test) • Regulatory Perspective • Impact on utility system and state energy goals (state specific test) This decision should ideally be made by regulators, with stakeholder input, prior to proposals being filed.

32. BCA Tests: California Standard Practice Manual • The CA Manual has been universally used for energy efficiency • Describes five standard cost-effectiveness tests: • Utility Cost test: impacts on the utility system • Total Resource Cost test: impacts on utility system and participants • Societal Cost test: impacts on society • Participant test: impacts on program participants • Rate Impact Measure test: impacts on rates • These tests are increasingly being used to assess grid modernization, DERs, and related initiatives. • But the CA Manual does not address current needs: • Does not address energy policy goals • Has been interpreted inconsistently • Does not address some key DER issues

33. BCA Tests: National Standard Practice Manual • Designed to update, improve, and replace the California SPM • Includes a set of fundamental BCA principles • Identifies the importance of accounting for policy goals in BCAs • This is a key concept missing from the California SPM • Introduces the “regulatory perspective” • Which reflects the overarching goals of providing customers with safe, reliable, low-cost energy services while meeting applicable policy goals • Articulates that there are multiple ways to develop a BCA test • States are not limited to the Utility, the Total Resource, or the Societal Cost tests • A test can include some societal benefits, but not necessarily all • Provides a framework for determining a state BCA test • The primary test used in a state to determine whether benefits exceed costs. Might be one of the traditional tests, or might be a new one

34. BCA Tests: EPRI: Benefit-Cost Framework for the Integrated Grid • EPRI report explains the rationale for both the utility and societal perspectives • There is no mention of a Total Resource Cost test Source: Electric Power Research Institute, 2015, pages 9-3.

35. BCA Tests: U.S. Department of Energy: Modern Distribution Grid DOE report divides modern grid expenditures into four types: Concerns: (a) requires distinguishing by category; (b) results in inconsistent tests across projects/components/resources. Source: US Department of Energy, 2017, pages 39-44.

36. BCA Tests: General Trends • Increased flexibility in choice of tests/perspectives • Increased emphasis on: • Utility system impacts • Accounting for policy goals • Societal impacts • Less emphasis on: • The Total Resource Cost test • Rate impacts (except for DERs that reduce sales) • Increased need for consistency: • Across DERs • Across utility investments

37. BCA Tests: Recommendations • Decide upon test(s) prior to filing of grid mod proposal. • Use stakeholder input to decide upon tests • The primary test should reflect the state’s energy policy goals. • The same BCA tests should be applied to all types of utility investments. • Conduct multiple tests: • Utility system perspective: • Should be used in all grid mod proposals • Best reflection of impacts on total costs and average bills • Regulatory perspective • Best reflection of energy policy goals

38. Define Costs & Benefits: Examples of Challenging Metrics Source: Grid Mod Consortium 2017

39. Define Costs & Benefits: Examples from NJ Definition of Reliability, Resiliency, and Hardening Investments

40. Time Frame: Recommendations • Filing requirements should: • Articulate the study period (# years). • Explain how the study period was determined. • Justify the choice of study period. • The time frame (i.e., study period) should include the full lifetime of the last project/component installed. • If a component is installed in 2025 and has an estimated operating life of 15 years, the study should go through 2040 (even though impacts in later years have less impact). • This issue should be decided and resolved prior to the grid mod proposal.

41. Discount Rate: Impacts can be Significant The choice of discount rate will have a large impact on the costs and benefits.

42. Discount Rate: Several Options • The discount rate reflects a particular “time preference.” • The relative importance of short- versus long-term impacts. • Utility weighted average cost of capital (WACC) is widely used in Grid Mod and other BCAs • Examples of discount rates • Investor-owned utility WACC: 5%-8% • Publicly-owned utility WACC: 3%-5% • Utility customers: Varies widely • Low risk: 0%-3% • Societal: <0%-3%

43. Discount Rate: Limitations to Using the Utility WACC The goal of BCAs for unregulated business is different from the goal of BCAs in regulatory settings: • For unregulated businesses, the goal of BCA is to maximize shareholder value. • Investors’ time preference is driven entirely by investors’ opportunity cost and risk, and the WACC reflects both of those. • For regulated utilities, the goal of BCA is fundamentally different: • The goal is to provide safe, reliable, low-cost power to customers and meet policy goals. • The goal is not to maximize shareholder value. • Since the goal for a regulated utility is different, the time preference is also different.

44. Discount Rate: Recommendations (I) • The choice of discount rate is a policy decision. • The discount rate should reflect the time preference chosen by regulators on behalf of all customers. • In other words, should reflect the regulatory perspective • The regulatory perspective should account for many factors: • low-cost, safe, reliable service; intergenerational equity; other state or regulatory policy goals. • The regulatory perspective suggests a greater emphasis on long-term impacts than what is reflected in the WACC. • Which implies a lower discount rate.

45. Discount Rate: Recommendations (II) • Each state should choose a discount rate that reflects its own time preference and policy objectives. • The same discount rate should be used in all utility BCAs: • Grid modernization, DERs, IRP, distribution system planning • Sensitivities can be helpful. • For example: • Use the utility WACC as a high case. • Use a low-risk or societal discount rate as a low case.

46. Discount Rate: Sensitivity Analysis Discount Rate = 7% Net Benefits = $64 mil BCR = 1.3 Discount Rate = 2% Net Benefits = $234 mil BCR = 1.9

47. Interactive Effects: Apply Scenarios • Filing requirements should include full description and explanation of how the different components interact. • Proposal should present BCA results for each component in isolation. • Unless the utility can justify otherwise for some components. • Proposal should also present BCA results for different combinations of components. • Especially of components that are most inter-dependent. • Selection of grid modernization portfolio should be justified using the results of the different scenarios.

48. Interactive Effects:Example – Small Bundle Bundle includes ADMS plus components that it integrates (GIS, DSCADA, and OMS). These are hypothetical values for illustrative purposes only. GIS, DSCADA, and OMS benefits include benefits expected in the absence of ADMS, and the ADMS benefits reflect incremental benefits accruing from those other components.

49. Interactive Effects:Example – Intermediate Bundle Add FLISR and DERMS to the Small Bundle. These are hypothetical values for illustrative purposes only. GIS, DSCADA, and OMS benefits include benefits expected in the absence of ADMS, and the ADMS benefits reflect incremental benefits accruing from those other components.

50. Interactive Effects:Example – Full Bundle Add AMI and VVO to the Intermediate Bundle. These are hypothetical values for illustrative purposes only. GIS, DSCADA, and OMS benefits include benefits expected in the absence of ADMS, and the ADMS benefits reflect incremental benefits accruing from those other components.