wws 402 angela wu final

8/7/2019 WWS 402 Angela Wu Final

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WWS 402 The Electric Power Grid in the United States

H.A. Feiveson

THE 21ST

CENTURY ELECTRIC GRID

Integrating Renewables, Building New Transmission, and Modernizing Infrastructure:

Case Studies and Pilots

Angela Wu

May 3, 2011

This paper represents my own work in accordance with University regulations.


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Table of Contents

Briefing Memo

The Electric Grid of the 21st

Century 1

Case Studies 3 Integrating Renewables: The TresAmigas Project 4

Upgrading the Transmission System: The Susquehanna Roseland Project 8 Modernizing Infrastructure: The Smart Grid 11

Principle Findings 17

Public understanding or support

Funding Policy Environment

Conclusion 22


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Briefing Memo

This paper attempts to identify factors affecting development of the electric grid throughcase studies of several types of modernization efforts:

y Integration of renewable energyy Construction of new transmission linesy Development of smart grid infrastructure.

From these efforts, several case studies were selected, including:

y The TresAmigas project, a superstation in New Mexico that would connect theWestern, Eastern and Texas Interconnections and open up a market for renewableenergy.

Spurred on by political and economic enthusiasm for clean energy,TresAmigas is a privately-operated merchant project,could significantlyexpand the electricity market. Currently, 10 DC converter links exist thatallow the exchange of about 2.3 GW between the grids. An earlyTresAmigas could carry up to 5 GW, and in time, over 30 GW.

y The Susquehanna Roselandproject, a new high-voltage 500 kV transmissionline from Pennsylvania to New Jersey that local regulators say is necessary topreserve reliability, but residents call an unnecessary eyesore and health risk.

Though the line would run on an existing right-of-way, construction has

been delayed by an environmental evaluation by the National ParkService, which controls a small portion of land through which the linepasses. PJM Interconnection has projected reliability problems in theregion if the line is not constructed by 2012but the review will set theprojects time table back by three years, to 2015.

y Smart grid pilot projects in Colorado, Hawaii, California and Maryland.Many smart grid pilot projects have faced difficulty with cost allocationfor costly infrastructural updates, or backlash from lack of publicunderstanding of smart grid technologys purpose and potential.


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Summary of findings

The primary factors that affect development efforts are:

y Public understanding or support: Public opinion of transmission and distributionissues, which influences private investment and community and governmental

support.

o In several cases, modernization efforts have been met with community backlash, often based on misinformation or misunderstandings. Utilitiesand policymakers should effectively communicate how the transmissionand distribution systems operate, as well as why changes to the grid arenecessary. Increased transparency and communication efforts from utilitycompanies, beyond public forums, could also help address customerconcerns for both smart grid and transmission development.

y Funding: Cost allocation of new electric grid technology.o Financing and cost allocation pose a distinct challenge to modernization

efforts, many of which have high upfront costs and indirect benefits tocustomers. While many may argue that infrastructure changes areimportant, not all are willing to pay for them. One obvious funding optionfor smart grid projects is bill surcharges or rate increases for utilitycustomers, which need to be approved by the regional public utilitycommission (PUC). But the question of cost allocation can be a significantobstacle in cases where ratepayers are unsure of the benefits they may

receive from upgrades. The delayed and often indirect benefits of smartgrid technology make it more difficult to make the case for steep upfrontcosts, even when ratepayers are the direct recipients of new technology.

y Policy environment: The political, economic and regulatory environment thatdetermines how modernization projects are funded on a private, state and federal

level.

o The current policy environment for modernization efforts is favorable,with state and federal support for new transmission infrastructure and agrowing number of state mandated renewable portfolio standards

increasing the need for access to renewable energy. Favorable tax policyhas encouraged private investment in grid modernization, and the electricindustry, in part to maintain compliance with FERC reliability standards,is motivated to carry out modernization projects.


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I. The Electric Grid of the 21st

Century

The United States is outgrowing its power grid. Since the first infrastructure of the

North American electric grid was laid out in the 20th

century, demand for energy has

risen significantly. Peak demand for electricity continues to grow, a result of larger

populations and the spread of more energy intensive technology. But the grid that

crisscrosses the country connecting over 75,000 megawatts of generated electricity with

millions of customers has grown very little in the past 25 years, with the average age of

electric grid infrastructure at more than 40 years.12

Since 1990, electricity demand has

increased by about 25 percent, while construction of transmission facilities has decreased

by about 30 percent.3 From 1992 to 2002, peak demand grew by about 2.7 percent per

year, but transmission capacity in that same period grew only just over 0.5 percent per

year, with 9,600 miles (7,300 GW miles) added. The decline is expected to continue

through 2012, with only 10,400 miles expected from 2002 to 2012.4

As the U.S. enters the second decade of the 21st

century, efforts to modernize the

electricity transmission and distribution systems have ramped up. A U.S. Department of

Energy task force found that the electric system was aging, inefficient, and congested,

and incapable of meeting the future energy needs of the Information Economy without

operational changes and substantial capital investment over the next several decades.5

At

least 10 states, including California, Maryland and Texas have enacted legislation to

1 Modernize the Grid, ITC Holdings Corp, accessed Mar. 27, 2011. http://www.modernizethegrid.com2Ibid.3 Independent Planning, The Transmission Line, Issue 3. ITC Holdings Corp.http://www.modernizethegrid.com/documents/TransLineNL_Issue3.pdf4Ibid.5U.S. Department of Energy.Grid 2030: A National Vision for Electricitys Second 100 Years, July 2003.


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advance smart grid technologies, and other states have enacted laws to address energy

efficiency and conservation. 6 Part of the modernization plans includes attempts to

green the electric grid. With consideration of rising levels of greenhouse gases, many

engineers and policymakers have pushed for modernized systems that incorporate carbon

emissions-reducing features, like renewable energy and efficiency. The DOEs Grid

2030 vision calls for a 21st century electric system that connects everyone to abundant,

affordable, clean, efficient, and reliable electric power anytime, anywhere, while

contributing to the reduction of carbon emissions.7

The new North American electricity grid envisioned by policymakers and electric

industry participants will be an automatedsmart grid with a transmission capacity to

meet the demand of future generations. Advocates call for connecting the regional power

grids that separate wind farms in Texas ERCOT interconnection from reaching homes in

Californias WECC interconnection, and encouraging high-voltage transmission lines

that can move power efficiently across the country. Smart grid systems using advanced

metering infrastructure (AMI) will enable both utilities and end-users to manage demand.

Essentially, modernization calls for Americans to rethink the way they use electricity, and

perhaps consider for the first time the process through which power from a nuclear plant

in Southern California reaches a lightbulb in Northern California. The process of

changing our power culture, however, involves more than engineering and

construction.

6Reliability Considerations from the Integration of Smart Grid, North American Electric ReliabilityCorporation. December 2010. 9.7U.S. Department of Energy.Grid 2030: A National Vision for Electricitys Second 100 Years.


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II. Case Studies

This policy paper will introduce case studies of efforts to (1) connect North

American power grids to increase reliability and facilitate transmission of renewable

energy, (2) construct high-voltage transmission lines to move electricity more efficiently,

and (3) develop smart grid technology that promotes greater information sharing of and

automated management for electricity usage. The policy, economic, and political

interplay involved in each case offers insight into the major factors currently hindering or

encouraging electric grid modernization. These cases include:

y The TresAmigas project in Clovis, New Mexico, a proposed substationconnecting the currently unconnected power grids in the East, West, and Texas.

The substation has the potential to resolve the perennial problem of transporting

renewable energy from relatively isolated parts of the country to more populated

urban centers.

y The Susquehanna-Roseland line, an update to the current 230kV electrictransmission lines that cross National Park Service lands in Pennsylvania and

New Jersey. The proposed 500 kV line will require taller towers, and has been

met with strident opposition from local community members and difficulties with

siting permits.

y Smart grid pilot programs in Bakersfield, California, Boulder, Colorado (XcelsSmartGridCity), Oahu, Hawaii and Baltimore, Maryland.


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1. Integrating Renewables: The TresAmigas Project

One of the most

striking characteristics of the

North American grid is the fact

that it is actually three separate

grids: the Eastern grid to the

east of the Rocky Mountains,

the Western grid to the west of

the Rocky Mountains, and the

Texas grid, ERCOT, which has

maintained its independence

from federal regulators since

the New Deal.8

As a result, power cannot flow from one interconnection to another, even

when demand spikes in one region of the country make electricity in another relatively

inexpensive. Renewable resources cannot be fully exploited because, for example, wind

power produced in Texas is currently constrained to the ERCOT grid.

The TresAmigas superstation, in Clovis, New Mexico, aims to connect all three

grids, allowing them to buy and sell energy, including renewables like wind and solar,

which are plentiful in the less inhabited areas of the Southwest. This increased access will

also increase grid reliability, providing its customers, utility companies, with another

source of power. So far, several transmission companies, including Xcel Energy,

8 Peter Behr, Proposal to link the nations grid sparks a debate. February 3, 2010. Climatewire.http://www.eenews.net/climatewire/2010/02/03/archive/1

Figure 1 The TresAmigas project connects the three North Americaninterconnections in Clovis, New Mexico.


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American Electric Power and ITC have committed to connecting their lines. 9Phillip

Harris, the former head of the PJM Interconnection and the leader of the project called

TresAmigasa game changer for its potential impact on electricity pricesin effect, the

project, which operates as a privately-owned electricity market, expands the supply of

electricity across the country, allowing companies to import lower cost power.10The

capacity of the currently available 10 DC converter links that allow exchange of

electricity between grids is around 2.3 GWan early TresAmigas would be able to carry

up to 5 GW, and potentially even 30 GW.11

More importantly, it expands the markets

available for green energy, which currently accounts for only 8 percent of total energy

consumption.12

Innovation in renewable energies has increased markedlyand the idea of a

superstation that can bring renewables to areas where they are legally required by state

portfolio standards has grown in its appeal to investors and policymakers alike. In recent

years, wind, which is plentiful in the areas around the TresAmigas station, has been one

of the fastest-growing sources of power, and wind power is cost competitive with fossil

9 Teresa Hansen. TresAmigas Technology Holds Promise for Expanding Renewable Energy Supply,Accessed March 28, 2011.Electric Light & Power. http://www.elp.com/index/display/article-display/0605782485/articles/utility-automation-engineering-td/volume-15/issue-1/features/tres-amigas_technology.html10Ibid.11 Teresa Hansen. TresAmigas Technology Holds Promise for Expanding Renewable Energy Supply,Accessed March 28, 2011.Electric Light & Power. http://www.elp.com/index/display/article-display/0605782485/articles/utility-automation-engineering-td/volume-15/issue-1/features/tres-amigas_technology.html12U.S. Energy Information Administration.Renewable Energy Consumption and Electricity PreliminaryStatistics 2009. http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/rea_prereport.html


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fuels in many regions. 13 From 2008 to 2009, production of wind generated power

increased by more than 33 percent, and wind accounted for over 63 percent of all

generating capacity gains in 2009.14

Part of this jump in investment can be attributed to

government support: The 2005 Energy Policy Act offers interest-free financing to

government entities investing in wind technology, through bonds called Clean Renewable

Energy Bonds (CREBs), and portions of the 2002 and 2008 Farm Bills offer incentives

for rural communities to invest in wind projects. 15

The Federal Energy Regulatory Commission has addressed two major regulatory

concerns regarding the first of its kind investor-owned merchant project. In 2010,

FERC granted the transmission facility the power to negotiate prices with its customers

directly, an appropriate move for a project whose customers will be market participants

using the connection, not ratepayers.16 The second regulatory concern for TresAmigas is

the independence of Texass ERCOT. The project sought assurance from FERC that

despite being connected to the other grids by TresAmigas, ERCOT would remain

independent of FERC jurisdiction, an arrangement made in the 1930s to protect Texas

cheap coal electricity. The independence of its electricity interconnection holds great

significance for the state, so the possibility of falling under FERC jurisdiction could

potentially threaten ERCOTs participation in TresAmigas. So far, FERC has held back

13 Electric PowerIndustry 2009: Year in Review, Electric Power Annual, November 23, 2010. U.S.Energy Information Administration.Department of Energy.http://www.eia.doe.gov/cneaf/electricity/epa/epa_sum.html14 Electric PowerIndustry 2009: Year in Review, Electric Power Annual, U.S. Energy InformationAdministration.15U.S. Energy Information Administration.Renewable Energy Consumption and Electricity PreliminaryStatistics 2009.16 Katherine Ling. Major Southwest transmission project clears federal hurdle, E&E News, Mar. 18,2010. http://www.eenews.net/eenewspm/2010/03/18/archive/2?terms=tres+amigas


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on ruling on ERCOTs jurisdiction. Instead, the agency encouraged TresAmigas to

submit an additional application under the Federal Power Act that would allow the

commission to issue orders pursuant to sections 210 and 211 permitting the jurisdictional

freedom ERCOT seeks. Regardless of ERCOT participation, TresAmigas could have

significant positive effects for both the Western and Eastern interconnections.

As of now, the TresAmigas project will begin construction in summer 2011, with

the goal of connecting its first Voltage Source Converter (AC to DC to AC) link between

PNM and Xcel Energy by summer 2014, allowing utilities in Colorado, for example, to

access wind power from Texas. 17 The first phase of TresAmigas is expected to cost

about $600 million, with the project being constantly under construction, like the Space

Station, according to chief operating officerDavid Stidham.1819It is owned and operated

by investors, with major support from partner companies that include not only American

Superconductor, but also utilities and renewables producers. The main components of the

project include three high-voltage DC terminals placed two miles apart, connected by

underground DC superconductor cables, and additional overhead AC transmission lines

that stretch for up to 100 miles, according to a spokesperson for American

Superconductor.2021

17 US grid to becomethree friends, Greenbang, April 4, 2011. http://www.greenbang.com/us-grids-to-become-three-friends_17387.html18 TresAmigas: The answer for US transmission? Wind Energy Update, Nov. 27, 2009.http://social.windenergyupdate.com/industry-insight/tres-amigas-answer-us-transmission19 US grid to becomethree friends, Greenbang, April 4, 2011. http://www.greenbang.com/us-grids-to-

become-three-friends_17387.html20TresAmigas: The answer for US transmission? Wind Energy Update, Nov. 27, 2009.http://social.windenergyupdate.com/industry-insight/tres-amigas-answer-us-transmission21 Teresa Hansen. TresAmigas Technology Holds Promise for Expanding Renewable Energy Supply,Accessed March 28, 2011.Electric Light & Power. http://www.elp.com/index/display/article-


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2. Upgrading the Transmission System: The Susquehanna RoselandProject

One of the primary areas in need of an upgrade is the transmission system, which

is aging quickly. The transmission component of the electric grid carries energy created

at generating stations to distribution systems that send power to residences and

businesses. A majority of transmission lines and power transformers (70 percent) are at

least 25 years old, and the system is becoming less reliable as demographics change.22

Once rural regions serviced by transmission for small communities have ballooned into

suburbs with populations that consume much more electricity. Overburdened

transmission lines combined with increasing demand for electricity can lead to costly

blackouts and power outages.23

The recent policy environment has been favorable to new transmission projects,

and Congress has expressed support for a more coordinated national system. The House

of Representatives passed the American Clean Energy and Securities Act of 2009, an

amendment to the Federal Power Act that establishes federal rules for electric grid

planning and gives the Federal Energy Regulatory Commission (FERC) the task of

supporting, coordinating and integrating regional planning efforts. 24 High voltage

transmission lines in particular have attracted attention for their potential as large-

capacity transporters that can move electricity across long distances without the energy

loss that plagues smaller, higher surface area lines. High voltage lines are more effective

over long distances because power loss can occur as heat dissipates from power lines.

display/0605782485/articles/utility-automation-engineering-td/volume-15/issue-1/features/tres-amigas_technology.html22 Overview of an Industry, The Transmission Line, Issue One. ITC Holdings Corp.23Ibid.24 Independent Planning, The Transmission Line, Issue 3. ITC Holdings Corp.


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Larger, higher voltage lines have lower surface area, lowering the rate of heat dissipation.

In China, the government has declared plans to build 17,600 km of 1,000 kV ultra-high-

voltage transmission lines by 2012.25

The DOE has also committed to supporting the

planning and implementation of new high-voltage transmission networks across the

country, in order to meet reliability standards.26

In 2007,to address regional reliability issues, the PJM Interconnection Board

approved the Susquehanna-Roseland Project, a grid upgrade that would run from the

Susquehanna 500 kV substation near Berwick, Pennsylvania to the Roseland 230 kV

substation in Roseland, New Jersey. 27 The 130-mile project, along with other new

backbone transmission upgrades, addresses the 23 potential electric reliability violations

uncovered by PJM, PPL and PSE&G. It would substantially enhance the reliability and

economic performance of the transmission system in the Mid-Atlantic region, and

address reliability criteria violations, according to testimony by Steven Herling, the

Vice President of Planning for PJM.28

The PJM Interconnection, which operates the

electric grid for the region, projects power overloads and blackouts if the current 230kV

lines are not upgraded by 2012.29

25 China to Triple Ultra-High-Voltage Transmission Lines by 2012, PowerNews, March 4, 2009.http://www.powermag.com/POWERnews/China-to-Triple-Ultra-High-Voltage-Transmission-Lines-by-2012_1773.html26 Independent Planning, The Transmission Line, Issue 3. ITC Holdings Corp.http://www.modernizethegrid.com/documents/TransLineNL_Issue3.pdf27Pre-filed Direct Testimony of Steven R. Herling on Behalf of Public Serve Electric and Gas Company in

Support of Susquehanna-Roseland Transmission Line Project(statement of Steven Herling, Vice Presidentof Planning for PJM Interconnection, L.L. C.).http://www.pseg.com/family/pseandg/powerline/pdf/testimony/herling.pdf

28Ibid.29 Susquehanna-Roseland Project, PPL Electric Utilities. Accessed March 26, 2011.http://www.pplreliablepower.com/


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But the Susquehanna-Roseland case presents one example of the necessity of

public education and communication to grid modernization projects. In 2008,

Pennsylvania Power and Light Electric Utilities (PPL) and Public Service Electric and

Gas Company (PSE&G) requested permits from the National Park Service to expand

current lower-voltage transmission lines. Environmental objections have led to a three-

year delay in the $750 million project, following strident opposition from local

community and advocacy groups. 3031 One argument against the line claims that the

project is unnecessary. The New Jersey group Stop the Lines offers other solutions for

resolving the reliability violations uncovered by PJM. One alternative proposed would

include the large-scale application of solar panels in Essex County, New Jersey to

generate local electricity; anothersuggested regional conservation measures to reduce

demand. 32 According to Herling, however, these solutions are highly unlikely to be

implemented on the scale necessary to offset the long-term need for new transmission

capability in the region. In testimony, Paul McGlynn, a manager in the PJM Transmission

Planning Department, pointed specifically to the difficulty of building new generating

plants in populated urban areas to help address demand.33 Efforts to cut demand through

30Brian T. Murray, PSE&G delays construction of controversial Susquehanna-Roseland power line, TheStar-Ledger, July 30, 2010.http://www.nj.com/news/index.ssf/2010/07/pseg_delays_construction_of_co.html31 Concerns with Project, Stop the Lines! Accessed March 26, 2011.http://stopthelines.com/concerns%20with%20project.htm32 Stop the Lines, Stop the LinesOpposition to Susquehanna Roseland Powerline Project. AccessedMarch 25, 2011. www.stopthelines.com33Pre-filed Direct Testimony of Paul F. McGlynn on Behalf of Public Service Electric and Gas Company in

Support of Susquehanna-Roseland Transmission Line Project. (statement of Paul F. McGlynn, manager inthe PJM Transmission Planning Department.)http://www.pseg.com/family/pseandg/powerline/pdf/testimony/mcglynn.pdf


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demand response and conservation are unreliable, because changes are voluntary and are

likelyunsustainable as populations increase.

One point of opposition to the line is the argument that the line will benefit

residents of New York, not those who bear the cost of the Susquehanna-Roseland line

from disturbed views, lower property values, or health issues rumored to be associated

with the electromagnetic fields (EMF) around high voltage line. The distribution of the

lines benefits is unclear to many residents. According to PJM, the reliability violations

indicated that the existing transmission lines were likely to become overloaded when

dealing with load pockets, areas where electricity demand exceeds local

generation.34 When lines become overloaded, they may overheat and sag, leading to

power outages and permanent infrastructural damage. To supply these major electric load

centers, where electricity use is highly concentrated, transmission lines must deliver

energy from more distant generating plants. A transmission update to a portion of the grid

prevents overloading and preserves reliability for all customers on the grid. The utilities

should more clearly convey that new infrastructure is a necessary addition to the whole

system, not a one-way energy highway.

3. Modernizing Infrastructure: Smart Grid

The expansion of energy usage and population in the United States requires

construction of new grid infrastructure, with necessary investment totaling up to $1.5

34Pre-filed Direct Testimony of Paul F. McGlynn on Behalf of Public Service Electric and Gas Company in

Support of Susquehanna-Roseland Transmission Line Project. (statement of Paul F. McGlynn, manager inthe PJM Transmission Planning Department.)


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trillion between 2010 and 2030, according to the Brattle Group.35 Advocates argue that

the Smart Grid will be the most effective and innovative use of investment, and will help

the country reach the Obama administration and the power industrys goal of both

managing demand and incorporating renewable energy. The term Smart Grid refers to

the use of real-time monitoring and analytics of information in managing supply, demand

and delivery in the electric power system. On the Smart Grid, energy is priced according

to what it costsin real-time, making energy demand more flexible, which is necessary

to meet new demand peaks and irregular supply of renewables. This is possible through

advanced metering infrastructure (AMI), new communication systems that allow smart

electric meters and other devices to relay data on energy usage to electric utilities. This

information allows utilities to raise prices in order to reduce energy consumption at times

of peak demand. At the same time, it also allows devices to respond to pricing

information by reducing energy consumption based on consumer-determined settings.

The Smart Grid also provides better visualization data to utilities, allowing prevention of

or quicker response to problems in the system.

The first large-scale Smart Grid pilot program was launched in Boulder, Colorado

in 2008. Led by Xcel Energy, a utility company, SmartGridCity consists of 50,000

homes operating energy-saving technology, including 23,000 smart meters, which offer

two-way communication between the utility and homes.36 The pilot grid functions of

SmartGridCity include fully automated substations, the ability to move power around

35 The Smart Grid: An Introduction, U.S. Department of Energy. 17.36 Lisa Fletcher and Andrea Beaumont. Boulder, Colo.: Americas First Smart Grid City, ABC News.

Nov. 15, 2008. http://abcnews.go.com/GMA/SmartHome/story?id=6255279&page=1


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bottlenecked lines, and proactive identification of risks and power outages.37In addition,

SmartGridCity includes upgraded substations, feeders, and transformers, digital high-

speed broadband communication systems, and, for 5,000 SmartGridCity smart meter

users, pilot pricing rates like the Shift & Save, in which customers pay a lower price

during off-peak hours, and more in peak hours.38

Upon its launch, SmartGridCity was touted as the first living laboratory of smart

grid technology. By 2010, however, critics were calling SmartGridCity a bloated, over-

budget project, and the chief executive of Xcel Energy told theDenver Postthat the

project would be neither repeated nor expanded.39 Original cost projections were $100

million, with Xcel paying $15.3 million, in 2008.40 Because of unexpected software costs

and construction difficulties installing the grids new underground fiber optic network,

final costs in 2010 for the utility were $45 million, for infrastructure alone. 41 The

unexpected price tag of the project opened up another question: Who was going to pay

for SmartGridCity? The initial plan had Xcel partners taking on part of the financial

burden, but it was unclear how costs would be distributed.42 Ultimately, to recoup its

unexpected costs, Xcel raised electricity rates, which meant additional costs for all of its

customers across the state. According to Xcel, the company earmarked $11 million of

37Xcel Energy Completes Smart Grid City in Colorado, Transmission and Distribution World. Sep. 9,2009, http://tdworld.com/smart_grid_automation/xcel-smart-grid-city-0909/38SmartGridCity Pricing Plan Comparison Chart. Xcel Energy.http://smartgridcity.xcelenergy.com/media/pdf/SGC-pricing-plan-chart.pdf39 Mark Jaffe, Xcel says costly SmartGridCity pilot project in Boulder wont be repeated or expanded,The Denver Post. Aug. 24, 2010. http://www.denverpost.com/business/ci_1587257440 Boulder SmartGridCity Cost Overruns: How Bad is it Really? Smart Grid News, Feb. 8, 2010.http://www.smartgridnews.com/artman/publish/Business_Policy_Regulation/Boulder-SmartGridCity-Cost-Overruns-How-Bad-is-it-Really-1868.html41 Mark Jaffe, Xcel Energy faces rate battle, The Denver Post, August 22, 2010.http://www.denverpost.com/business/ci_15847180?source=rss42Ibid.


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revenue from a 6.5 percent rate increase approved by the Colorado Public Utilities

Commission, to cover costs associated with SmartGridCity. In November 2010, the

Public Utility Commission (PUC) permitted Xcel to recoup up to $45 million in costs

from ratepayers in Colorado, arguing that the overall investment in SmartGridCity

directly benefited all ratepayers through the technology deployment and learning

process occurring within the pilot.43 Then, in January 2011, the PUC cut the amount

that Xcel could collect from its rate base to two-thirds of the $45 millionthe remaining

third is conditional on the company proving SmartGridCitys direct benefits to

ratepayers. 44 Smart grid infrastructure poses a particular problem in cost recovery,

because it can be difficult to point to clear benefits to the consumers who are covering its

costs. Despite some evidence that the still unfinished SmartGridCity had proven its value

in managing grid issues like blackouts and voltage surges, the project was ultimately

declared an overhyped experimentand a costly one, too.

The debate over cost allocation has stalled smart grid rollouts in other regions as

well. One obvious funding option for smart grid projects is bill surcharges or rate

increases for utility customers, which need to be approved by the regional PUC. In

Hawaii, an ambitious state with a renewable portfolio standard of 40% and efficiency

targets of 4300 GWh by 2030, the PUC denied Hawaiian Electric Companys (HECO)

request to expand its AMI pilot project. The $1.35 million project that would shed more

light on how advanced metering would operate in HECOs proposed $115 million smart

43 Katherine Tweed, SmartGridCity Costs Passed On to Ratepayers, GreenTechGrid, November 1, 2010.http://www.greentechmedia.com/articles/read/smartgridcity-costs-passed-onto-ratepayers/44 Mark Jaffe, PUC: Smart-grid tab unreasonable, The Denver Post, Jan. 6, 2011.http://www.denverpost.com/business/ci_17021599?source=pop


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grid project across the state.45 The PUC expressed concern that the costs of the project

would be forced on ratepayersresidents and businesses who are customers of HECO

without a direct benefit.46

The delayed gratification in initial smart grid development

poses a significant challenge to funding new projects through ratepayers, even when they

are the direct recipients of new technology. A smart grid project of Baltimore Gas and

Electric Company (BGE) that had received $200 million in ARRA funding (just under

half of the total cost) was denied by Marylands Public Service Commission (PSC) in

2010, because of conflicts over whether ratepayers should cover most of the upfront costs

of development. Though the PSC emphasized that it shared proponents enthusiasm for

the potential long-term gains of smart grid infrastructure, the commission wrote, "The

proposal asks BGE's ratepayers to take significant financial and technological risks and

adapt to categorical changes in rate design, all in exchange for savings that are largely

indirect, highly contingent and a long way off.47

Part of the PSCs complaints came

from the fact that BGE would implement a surcharge, rather than a general increase to the

per unit electricity charge, and especially in advance of any concrete benefits.48 The

commission also expressed skepticism regarding BGEs efforts to collect on a return on

the Companys net investment, raising suspicion that the plan was a no-lose

45 Mark Niesse, Smart grid technology rollout stalls in Hawaii,Bloomberg Businessweek, July 28, 2010.http://www.businessweek.com/ap/financialnews/D9H84CTO0.htm46Ibid.47 Liz F. Kay and Hannah Cho, Regulators deny smart grid proposal, The Baltimore Sun, June 21, 2010.http://articles.baltimoresun.com/2010-06-21/business/bs-bz-bge-smart-grid-denied-20100621_1_smart-grid-proposal-month-for-electricity-customers-meter-readers48 Smart grid skepticism derails Baltimore plan, Reuters, Jun. 23, 2010. http://blogs.reuters.com/great-debate/2010/06/23/smart-grid-scepticism-derails-baltimore-plan/


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proposition for BGE that would benefit the company more than consumers.49 The PUC

later approved an amended proposal, allowing BGE to keep its $200 million stimulus

grantwith the condition that BGE pay the upfront costs and recover its investment

through standard rate increases only after the system was built and its benefits realized.50

According to energy economist Ahmad Faruqui in Goodmagazine, the backlash

against smart meters has its own metaphorthe Bakersfield Problem. 51 In 2006,

Californias largest utility company, Pacific Gas and Electric, began rolling out smart

meters in Bakersfield. Unlike traditional home-electricity meters, which require utilities

to dispatch meter-readers to measure electricity use periodically, smart meters provide

both utility companies and customers with real-time data on energy usage that utilities

can use for dynamic pricing, which enables utilities to manage demand by charging more

for electricity in times of peak demand.

After the rolling blackouts of 2000 and 2001, California enthusiastically turned to

dynamic pricing efforts to encourage consumers to conserve energy during times of high

demand. But even before PG&E could implement dynamic pricing, customers began

complaining in growing numbers about higher bills, which they attributed to the smart

meters. The true culprit in this case was a heat wave in July that meant that customers

were using much more electricity in a month-long period than the year before. With

PG&Es long-standing inverted tier rate system of billing, an effort to reduce demand

among the heaviest users, customers were not just using more electricity to power their

49Ibid.50Hanah Cho, BGE wins smart meter approval but most bill customers after its built The BaltimoreSun, August 16, 2010. http://articles.baltimoresun.com/2010-08-16/news/bs-md-bge-smart-grid-20100813_1_initial-five-year-deployment-bge-estimates-number-of-consumer-advocate-groups51 Price, Andrew. Smart Meters, Dumb Backlash. Goodmagazine. Winter 2011. 38.


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air conditionersthey were paying more per unit of electricity used. The problem,

according to journalist Andrew Price, was that people didnt understand how much

energy they were using or how they were being charged for itand so even before the

implementation of dynamic pricing, residents began to connect their higher bills with the

installation of new smart meters.52 The Bakersfield Problem was a clear case where

lack of understanding of both how customers were charged for electricity use and how

smart meters affected that process led to suspicion of new technology.

Until the need for and potential consumer benefits of smart grid technology are

clearly articulated, utilities will face pushback from regulators and consumers, largely

around economic issues of cost allocation. Because infrastructure development is

especially capital intensive, often without immediate results, consumers may be unwilling

to face the upfront costs. For Xcel, in Boulder, the upfront costs were much higher than

anticipated. For the PUC and Colorado residents, Xcels lack of a contingency plan to

afford the tripled costs of the project significantly raised the cost of smart grid

implementation from nothing to $45 million. Considering the Bakersfield Problem

referenced earlier, skillful communication is necessary to avoid community backlash and

to negotiate funding plans through rate increases.

III. Principle Findings

As indicated in these case studies,efforts to revamp the electric grid target multiple

areas of the transmission and distribution system. The roadblocks that these projects have

52 Price, Andrew. Smart Meters, Dumb Backlash. Goodmagazine.


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faced provide insight into the development process for future projects. This policy paper

reviewsseveral of the exogenous factors that affect these development efforts. The key

factors addressed are:

y Public understanding or support: Public opinion of transmission and distributionissues that influence private investment and community and governmental

support.

y Funding:Cost allocation of new electric grid technology.y Policy Environment: The political, economic and regulatory environment that

determines how modernization projects are funded on a private, state and federal

level.

1. Public understanding or supportFor most Americans, electricity is as complex as turning on a light switch.

Raising the publics awareness of how the transmission and distribution systems operate,

as well as why changes to the grid are necessary, will become increasingly important as

policymakers and utilities move to revamp aging transmission lines and initiate

participatory measures like smart meters. In several cases, modernization efforts have

been met with community backlash, often based on misinformation or

misunderstandings. The cases of the Susquehanna-Roseland transmission line and of the

smart grid pilot projects indicate that there is still a communications gap between grid

planners and those who will ultimately be affected by changes to the gridand in many


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cases will be asked to pay for them, as well. In Bakersfield, customers blamed a smart

meter rollout for raising their monthly billseven before the local utility had

implemented the dynamic pricing that would begin to affect electricity prices. Utilities

and policymakers should more effectively articulate the need and implementation process

for modernization of the grid. But as the government aims to overhaul the electric grid, it

should also keep in mind the need for public awareness campaigns to educate Americans

about not only how they are affected by potential changes, but also about how the system

operatesand why changes are needed.

2. FundingAnother question affecting almost every electric grid update is who will fund the

project. This debate is especially complicated in new transmission planning; the

Department of Energys Electricity Advisory Committee described cost allocation as the

single largest impediment to any transmission development.53

In some cases, the

government provides funding. The American Reinvestment and Recovery Act (ARRA)

allocated $4.5 billion in Grid grants for expenses necessary for energy delivery and

energy reliability activities to modernize the electric grid, and offered commercial

projects another $6 billion in rapid deployment loan guarantees for renewable energy

and transmission development.54

But distributing costs among utilities and users is less

straightforward. When it comes to cost allocation among customers, some argue that only

those who directly benefit from new transmission should bear the costs of the project. But

53 Cost Allocation, The Transmission Line, Issue Two.ITC Holdings Corp.http://www.modernizethegrid.com/documents/TransLineNL_Issue3.pdf54 ARRA Appropriations Provisions Table, Ballard SpahrAnrews& Ingersoll, LLP. Baltimore, MD.http://goo.gl/sbDH6


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because the grid is extremely integrated, it is difficult to determine who exactly benefits,

especially because transmission projects improve reliability and can increase access to

cheaper electricity for all customers.

Rollouts of smart grid initiatives have also faced cost allocation problems. A lack

of communication between utility companies and customers has waylaid smart grid meter

plans across the country, especially in cases where customers are most directly affected,

as with meter installation. The smart grid meter installation initially defeated in Baltimore

faltered because customers would have had to pay for the implementation of the meters

long before they would see any benefit. Despite the promise of a $200 million federal

grant, the plan was rejected in 2010 because the utilitys plan had customers paying for

the majority of the cost of installation upfronta situation consumers and the state were

unwilling to accept. Cost socializationdistributing the investment in the new

technology among end-usershas proved politically unpalatable, in part because of the

education issue reviewed in the previous section. Reluctance on the part of both

consumers and utilities to foot the cost for new technology threatens to slow down

modernization of the electric grid. Tellingly, the one privately funded project assessed in

these case studies, the TresAmigas project, has faced mostly regulatory roadblocks, with

its capital secured from partner companies and private investors.

3. Policy EnvironmentThe policy environment encompasses external factors that can influence the

success of modernization efforts. One factor in the policy environment is political will

whether regulators and politicians are interested or see value in implementing changes, or


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have the political power to do so. Another factor is the state of the economy. The

economic downturn in 2007-2009, for example, influenced how much both private

investors and the government were willing to spend on modernization efforts.While

planning the rollout of its own smart grid plan, Southern California Edison (SCE) created

a more detailed method of modeling policy environments. SCE used scenario planning

before implementing changes, analyzing driving forces that could affect research,

development and the actual operation of the smart grid. SCEs findings, however, can

also be applied to other efforts to update the grid. These driving forces included

economic growth, policy focus, technology innovation and adoption, energy markets,

customer trends, and environmental developments.55

Using two factorseconomic growth and policy driven innovationSCE

determined four scenarios for the future.56In the first, Slow and Steady, policymakers

continue to support modernization efforts, but economic forces slow innovation. In the

second, Light Speed, industry investment in smart grid deployment is mandated and

subsidized by policymakers, leading to an investment boom. In the Market Driven

scenario, strong economic growth drives innovation and investment in modernization. In

Keep the Lights On, the economy stagnates, slowing investment and innovation. Based

on current regulatory climate and investment incentives, and the evidence from these case

studies, this paper finds the current policy environment most resembles Slow and

Steady. Modernization efforts appear to be progressing with adequate investment and

55Reliability Considerations from the Integration of Smart Grid, North American Electric ReliabilityCorporation. 4656Ibid.


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policy support. The obstacles they face are often case by case problems, and cant be

traced to structural issues in the policy environment. There are, however, dominating

themes in the challenges faced by modernization projects: public support and funding.

IV. Conclusion

The three grid modernization efforts explored in this paper are smart grid

demand-side efforts, new high-voltage transmission lines, and the unprecedented

construction of an electricity market that could resolve the problem of transporting

renewable energy. From the case studies selected, the most challenging obstacles to grid

modernization appear to involve public support and funding. In particular, many projects

have encountered resistance from residents who are wary of costly efforts to change what

appears to be a working system. This exacerbates the uncertainty ofthe funding

challengenot only thescope of the financing necessary, but also who exactly pays for

themwhich is often unclear for many infrastructural updates.

While many may argue that infrastructure changes are important, not all are

willing to pay for them. The question of cost allocation can be a significant barrier to

progress in cases where ratepayers are unsure of the benefits they may receive from

upgrades. In Maryland and Hawaii, PUCs have asked utilities to prove how ratepayers

directly benefit from smart grid pilot projects before approving the rate hikes necessary to

fund them. In the case of SmartGridCity, Xcel lost the backing of both the Colorado PUC

and the initially enthusiastic city of Boulder because of implementation problems that

tripled costs, leaving many residents unexpectedly paying for the project. Rapidly


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ballooning costs and failed pilot projects can lead to disillusionment of modernization

pilot projects, especially when customers are footing the bill. Thanks to a supportive

policy environment that has encouraged both private and public investment in grid

modernization, the electric industry has the will to carry out Smart Grid projects.

Unfortunately, public support and understanding of grid modernization projects lags

behind, and neither ratepayers nor utilities are willing to bear the cost of new

infrastructureeven if it is critical to the preservation of reliability and quality of the

electric grid.


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