IoT Paves Way to Smart Grid, but Who Will Pay?

By Scott Smith, Vice Chairman and U.S. Power & Utilities leader, Deloitte

Scott Smith, Vice Chairman and U.S. Power & Utilities leader, Deloitte

Internet of Things (IoT) technologies are profoundly impacting nearly every sector of the global economy. In the US power and utilities industry, IoT technologies using sensors, high volume data transfer, machine learning and advanced analytic algorithms enable “smart grid” deployment, a multi-year effort to transform performance of the electric grid. Also known as “grid modernization,” many believe this initiative is critical to the industry’s ability to thrive during a period of significant transformation. But it carries a hefty price tag, and it’s not yet clear who would pay. In addition, it brings issues such as cyber risk into sharper focus.

Multiple challenges are driving the current electric power industry transformation–including sluggish demand growth, evolving environmental regulations, changing power generation sources, shifting customer preferences, increasingly severe weather, and the need to upgrade aging infrastructure. Advancing technologies such as distributed solar are transforming the grid from a system built around one-way power flows from large, centralized, utility-owned plants– to an increasingly decentralized system, with multi-directional flow from a widening variety of energy resources owned by utilities, customers, and third parties. To complicate matters further, some of these resources, such as wind and solar produce power intermittently.

Grid Modernization Benefits

Grid modernization can enable utilities to address these challenges, helping them boost reliability and resilience, reduce costs, integrate variable and distributed energy resources, and respond to evolving customer preferences. Below are examples of each of these benefits:

Enhancing Resilience–Utilities in the southeastern US used outage management systems (OMS) that combined advanced metering infrastructure (AMI) and analytics to restore power to most customers within two days of Hurricane Matthew’s landfall in October 2016. This compares to about two weeks in the wake of similar hurricanes previously.

“The proliferation of sensors and other devices connected to an increasingly networked electric grid has created many more targets for cyber-attacks”

Improving Operating Efficiencies/Reducing Costs–Utilities are using sensors and other devices combined with predictive analytics software to monitor critical assets–from turbines to transformers and improve asset utilization throughout the value chain. By recording temperature, vibrations, power quality, and other parameters in real-time, utilities can identify, diagnose and prioritize impending maintenance issues and correct them before they lead to unplanned downtime or catastrophic failure.

Integrating Variable and Distributed Energy Resources–Utilities, solar providers, and their customers are increasingly using advanced inverters to help integrate solar power on the grid. These smart inverters convert the direct current from solar panels into the alternating current used on the distribution grid. Traditional inverters shut off during grid disturbances such as unsafe changes in voltage or frequency. But smart inverters can help smooth these fluctuations across the grid.

Responding to Evolving Customer Preferences–Smart meters allow utilities to provide customers with usage data in near real-time, and to offer new services such as time-of-use pricing, peak-time rebates, budget setting options, high usage alerts, and demand response programs. Digital meters may soon enable “virtual power plants,” in which customers can aggregate output from solar panels, storage batteries, or other resources with those of other customers to sell in wholesale electricity markets.

Three Phases of Grid Modernization

Grid modernization is advancing in three phases, which can be labeled as Resilience, Enablement, and Optimization, and characterized as follows:

• Phase 1: Resilience–Deploying smart meters, networked sensors and control devices to gather data and monitor equipment and systems.
• Phase 2: Enablement–Using platforms such as advanced distribution management systems (ADMS) and distribution automation to aggregate and analyze the data gathered through smart devices and actively manage and control resources.
• Phase 3: Optimization–Using the data and insights gathered in the enablement phase to make informed business decisions that improve overall system performance.

Grid Modernization Costs

US utilities had installed about 70 mn smart meters by the end of 2016, covering more than 50 percent of households and expected to reach 90 mn meters by 2020. Many utilities are now moving into phase 2 of smart grid deployment, and are determining how to use the incoming “data tsunami” to improve operations and customer service. But in order to complete all three phases and realize the full benefits of grid modernization, the industry will likely need to increase investment substantially, and it’s not clear where the funding will come from. 

Regulators may encourage or even require grid enhancements, but they also have to allow utilities to recover these costs. US smart grid spending averaged about $3.4 bn per year from 2008-2015. Since the depletion of government Stimulus funds in 2013, however, spending has leveled off to about $2.7-$2.8 bn per year. This falls far short of the $17-$24 bn the Electric Power Research Institute estimates would be required annually through about 2030 to complete all three phases of grid modernization.  But the industry may have little room to increase spending. Overall capital expenditures for the largest investor-owned electric and gas utilities reached a record-breaking $117 bn in 2016. High costs associated with the general industry transformation outlined above are competing for utility capital. But while regulators are advocating many of these initiatives, they are also keeping a close eye on impacts to consumer electricity bills.

Another issue critical to grid modernization is cyber risk. The proliferation of sensors and other devices connected to an increasingly networked electric grid has created many more targets for cyber-attacks. Federal government agencies, including the Department of Energy (DOE), have set up programs to help protect against cyber-risk. But according to the DOE, “Despite numerous ongoing activities in cyber security, many other technical advances are needed to address gaps and evolving challenges.”

In conclusion, IoT technologies are helping the power and utilities industry modernize the electric grid, providing numerous benefits for utilities and their customers. Regulators, customers, and other stakeholders understand those benefits, but do they understand the costs involved? 

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