Modernizing the investment approach for electric grids

The future of the power grid has arrived. Utilities, policy makers, and communities have agreed for years that the aging electric transmission and distribution (T&D) grid in the United States needs to be significantly upgraded to withstand the challenges of the future. Recent events and trends across a number of fronts have made the situation more urgent than ever:

• Customer needs are evolving, sharply accelerated by COVID-19.Operating the grid safely and reliably at a low cost has long been so called table stakes for T&D operators. But that is no longer enough. Customers were already increasingly adopting digital and mobile channels a trend that has been rapidly accelerated by the COVID-19 pandemic and the subsequent physical-distancing measures. With greater acceptance of working from home, access to reliable electricity service has become paramount. And the economic slowdown and uncertainty will further highlight the importance of T&D rate affordability.
• Increasing operational risks are changing the calculus for new investments. Climate change and cyber attacks pose increasing levels of risk and they are here to stay. On the US climate front, for example, recent wildfires have affected California’s networks, blackouts have hit New York City, and coastlines have been battered by a plethora of catastrophic hurricanes. According to a recent McKinsey Global Institute report on climate risk, the chance of a once in a century hurricane is likely to double in some parts of south-eastern United States and triple in some parts of Southeast Asia by 2040.
• Distributed energy resources (DERs) are changing the grid’s value proposition. The T&D grid faces increasing pressure to integrate new technologies such as electric vehicles (EVs), distributed solar generation, and energy storage in a rapid, safe, and low-cost way. While grid planners, control centre operators, and engineers face significant challenges in managing the complexity of the two way electric grid, they can take advantage of new capabilities to support grid operations, such as smart inverter control and vehicle to grid and managed charging. Increased automation and control capabilities at the “edge” of the electric grid are no longer thought experiments; they are now an operational reality. As indicated by the rise in flexibility contracts tendered in the United Kingdom’s distribution flexibility markets (1,900 megawatts to be tendered in 2020 across UK distribution-network operators), the role of DERs in managing the grid is here to stay.
• Grid-technology innovations are creating opportunities to drive value across T&D workflows. While utilities in more advanced economies have already gone through several rounds of investments in grid modernization technologies such as smart meters, grid management systems (DMS/TMS), asset management platforms, and geospatial information systems (GIS), these systems were largely viewed as isolated solutions serving soloed system requirements. Today, advanced cloud technology, software engineering models, and data-governance practices are paving the way for transformational use cases that cross the boundaries of individual systems.

As a result of these shifts, modernizing the grid is now critical. Utility companies have responded by proposing comprehensive grid-modernization plans. Yet only $2 billion out of $14 billion of requested grid-modernization investments were approved in 2018. Clearly, there is a disconnect between what utility companies are proposing and what regulators see as appropriate.

A unified approach to solving the grid modernization puzzle

Utilities can develop an integrated, step-by-step modernization plan. First, companies must define the specific performance outcomes with target KPIs and metrics that the modernization programs will achieve. In meeting these objectives, they can pursue two parallel streams: one aims to determine the foundational capabilities and centralized investments required to accomplish the vision, and another aims to develop business cases for localized grid investments.

1. Set top-down priorities

Utilities have previously used simple and well-understood compacts to justify their grid investments: in exchange for building a reliable electric grid, utilities’ stakeholders would approve their projects and guarantee a return on the capital invested. Utilities have specific metrics to track reliability and safety (such as Customer Average Interruption Duration Index or Occupational Safety and Health Administration recordable), and stakeholder expectations cantered on a continual improvement in these metrics. In other words, more capital investment meant greater reliability for their customers and communities.

Today, a safe electric grid continues to be table stakes, but customers’ expectations around resilience, security, and flexibility have changed. This evolution represents not only an opportunity for utilities to deliver expanded outcomes and benefits to their customers but also a challenge to define the relationship between investments and what customers can expect.

2. Define foundational investments

Capabilities are not binary. Some may become more mature and widespread across the grid over time. Monitoring and control, for example, are universally foundational. Thus, most utilities have basic monitoring and control capabilities already in place, but many seek to grow maturity over time. Understanding the foundational investments required can be difficult, as they are often not tied to a specific grid circuit or asset. Companies can work with subject-matter experts and line leaders to diagnose weaknesses in existing foundational workflows such as grid planning, asset design, control-room operations, and field and emergency operations.

3. Size and prioritize physical-device investments

News reports on grid-modernization programs tend to cover the deployment of millions of field devices. These monitoring and control devices include smart digital substations, next-generation smart meters, and distribution automation devices (recloses or sectionalizes). What goes unmentioned, however, is that other programs focus on retrofitting obsolete designs, such as upgrading substations and feeders to higher voltage levels. Regardless of the type of investment, our research shows that the best approach is bundling investments in packages that achieve a common outcome. For example, feeder undergrounding can serve higher levels of resilience, while sectionalizing feeders achieves higher reliability. An investment package can therefore be sized based on a target level of device penetration and subsequently prioritized based on quantifiable outcomes achieved for the customer versus the cost of each package.

4. Articulate the plan’s value

Most plan rejections across the country are rooted in insufficient documentation of ratepayer benefits, as compared with cost implications. This trend will likely persist unless utilities articulate the value of all ratepayer outcomes and, if necessary, commit to targets enabled by their plans.

Developing an appropriate modernization plan is difficult and will inevitably be an iterative process. Utilities should start by clearly defining their goals and embedding disciplined, rigorous investment-planning processes that are aligned to those goals. Only through these processes can they mitigate the risk of misdirected investments and make real progress toward building the best possible grid of the future for both themselves and their customers.

Source: McKinsey