IRENA PST Smart Grids CBA Guide 2015

SMART GRIDS AND RENEWABLES
A COST-BENEFIT ANALYSIS GUIDE

FOR DEVELOPING COUNTRIES
POWER SECTOR
TRANSFORMATION
Copyright © IRENA 2015
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About IRENA
The International Renewable Energy Agency (IRENA) is an intergovernmental organisation that supports
countries in their transition to a sustainable energy future, and serves as the principal platform for inter-
national cooperation, a centre of excellence, and a repository of policy, technology, resource and financial
knowledge on renewable energy. IRENA promotes the widespread adoption and sustainable use of all
forms of renewable energy, including bioenergy, geothermal, hydropower, ocean, solar and wind energy in
the pursuit of sustainable development, energy access, energy security and low-carbon economic growth
and prosperity.
Acknowledgements
The work for the preparation of this paper was led by Paul Komor and Anderson Hoke, University of Colo-
rado, Boulder, Colorado, USA. The report has benefited from valuable comments provided by external
reviewers: Gianluca Flego (JRC, EC), Klas Heising (GIZ), Sophie Jablonski (EIB), Yannick Julliard (Siemens),
Achim Neumann (KFW), Juan Roberto Paredes (IDB), and Manuel Welsch (KTH).
Authors: Ruud Kempener (IRENA), Paul Komor and Anderson Hoke (University of Colorado)
For further information or to provide feedback, please contact: Ruud Kempener, IRENA Innovation and
Technology Centre. E-mail: [email protected] or [email protected].
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Contents
EXECUTIVE SUMMARY��3
CHAPTER 1: RENEWABLES, SMART GRIDS AND COST-BENEFIT ANALYSIS�� 4

Smart Grid Projects Need Careful Evaluation�� 6
Smart Grids in the Developing World�� 6
CHAPTER 2: COST-BENEFIT ANALYSIS: INTRODUCTION AND OVERVIEW��8
Cost-Benefit Analysis in Context��8
Considerations Before Undertaking a Cost-Benefit Analysis�� 9
CHAPTER 3: SMART GRID COST-BENEFIT ANALYSIS FOR RURITANIA��14
Ruritania Case Study Summary��14
Step 1: Define Project�� 17
Step 2: Map Technologies to Functions��19
Step 3: Map Functions to Benefits��20
Step 4: Monetise Benefits��20
Step 5: Quantify Costs�� 27
Step 6: Compare Costs and Benefits��29
Step 7: Sensitivity Analysis��30
SUMMARY�� 32
LIST OF ABBREVIATIONS��34
REFERENCES��36
Executive Summary
Smart grid technologies can enable higher levels of renewables in electricity systems by making the system more
flexible, responsive, and intelligent. As more and more countries, particularly in the developing world, plan to
increase their use of renewables, smart grid technologies provide the means to integrate these renewables in a
cost-efficient and effective way.
Smart grid projects are often evaluated and justified on an economic basis. The challenge for decision-makers
(which can be utilities, policymakers, or others) is to evaluate smart grid proposals rigorously, objectively, and
with a well-defined and consistent methodology. Such analyses are critical for ensuring that scarce capital is
invested wisely.
Several methodologies exist for economic evaluation of smart grid projects. However, developing countries can
benefit from a customised methodology for smart grid project evaluation. This report provides a cost-benefit
analysis (CBA) methodology that is designed for developing countries. The proposed methodology allows for
analysis of benefits such as reduced theft, grid extension, and significant increases in reliability, and is realistic
about system data availability and accuracy.
CBA is an ideal first tool for evaluating a smart grid investment. Its value lies not just in the result it provides
but also in how it requires one to define and quantify the expected costs and benefits. Often it is this analytical
discipline, rather than the result itself, that is most informative.
Before undertaking a CBA, one needs to consider several issues. First, different stakeholders will value the
benefits of a smart grid differently. A societal perspective will account for all benefits; however, one may want to
take a narrower perspective, such as that of the utility or of electricity users. Second, undertaking a CBA requires
careful definition of a baseline, documenting what would happen in the absence of the smart grid project. Third,
CBA requires considerable judgment on the part of the analyst, particularly in estimating uncertain inputs and
assessing qualitative benefits. CBA can support better decisions, but it should not be used to make decisions on
its own.
This report is accompanied by a number of exercises to demonstrate the methodology and the value of CBA.
The fictional country of Ruritania1 is used to demonstrate a CBA of smart inverters for renewables in a small
developing country’s electricity system. The results reveal that fewer outages and reduced losses are by far the
most valuable benefits of these inverters, accounting for almost three-fourths of the total benefit value. The
advantages of smart inverters clearly exceed the costs. This result, however, reflects electricity users’ estimated
valuation of reduced outages. If the utility values fewer outages only at the value of the lost electricity sales, then
the smart inverters are not cost-effective. A second example shows the cost-benefit analysis methodology for
a distribution automation programme in case there is no predefined renewable energy target in Ruritania. This
exercise demonstrates a situation in which the benefits and costs of the additional renewable energy deployment
have to be considered as part of the analysis.
A third exercise is used to present a smart grid investment in an island country, and is loosely based on Jamaica.
This exercise focuses on a demand response (DR) project to accompany renewables expansion to defer
generation-capacity investment. The project is found to be cost-effective – even with moderate changes in
assumptions and with significant incentive payments to DR participants.
1
A fictional kingdom used as the setting for stories by Anthony Hope (1863-1933), and often used in academia to refer to a hypothetical country
3
Chapter 1
© LeahKat
Renewables, Smart Grids

and Cost-Benefit Analysis
Chapter summary: Smart grid projects must be evaluated and justified on an economic basis. The challenge for
decision-makers is to evaluate smart grid proposals for renewables rigorously, objectively, and with a well-defined
and consistent methodology. Developing countries present a clear opportunity for smart grids, including the
possibility of leapfrogging over outdated technologies and enhancing electricity access. There are challenges as
well, notably capital constraints and political challenges in setting electricity rates that cover costs.
R
enewable energy power generation is growing fast. Since 2011, more renewable power generation capacity
is added than conventional power generation capacity every single year. In particular, variable renewable
energy sources such as solar photovoltaics (PV) and wind are growing fast. 2014 was another record year
with around 44 GW of solar PV and 50 GW of wind power added globally.
IRENA’s global renewable energy roadmap, REmap 2030, suggests that the growth in renewables will continue
(IRENA, 2014). Based on an analysis of 26 countries, covering 75% of global energy consumption, the share of
renewables in the power sector may increase from 22% in 2012 to more than 40% by 2030, and the share of
variable renewables may increase from 3% in 2013 to around 20% in 2030.
Up to 2012, the growth of variable renewable energy took place in European countries and the United States.
However, in the last two years China and Japan have become the major markets for solar PV and wind power. Over
the next 20 years, it is expected that this shift continues, especially to those countries with growing electricity
demand in Asia, Latin America, and Africa. These countries are rapidly expanding their grid infrastructure to
keep up with the demand, and renewable power generation allows them to add capacity in a cost-effective and
timely manner.
4 S M A RT G RI DS A ND R E NE WA BL E S
Renewables are also a solution to improve the low
electrification rates in many developing countries. Table 1A: Smart Grid Technologies
Globally, as many as 1.2 billion people do not have
Advanced metering infrastructure (AMI)
access to electricity and distributed power generation
Advanced electricity pricing
of solar PV and wind could alleviate this situation.
However, this would require rapid expansion of Demand response (DR)
existing grids or the development of mini-grids with Distribution automation (DA)
decentralised control systems. Renewable resource forecasting
Smart inverters
Achieving high shares of renewables in the final
energy mix can substantially benefit from electricity Distributed storage
systems that are more flexible, responsive, and Virtual power plants
intelligent. “Smart grid technologies,” can do just that Microgrids
by leveraging the tremendous technical advances
in information and computing. Hence, they are an
essential component of the REmap 2030 analysis Smart grid technologies enable high levels of
(IRENA 2014, p. 8). renewables mainly by increasing grid flexibility and
facilitating the increased use of variable renewable
Smart grids use technologies to instantly relay generation technologies, notably wind and PV
information in order to match supply with demand, systems. However, smart grids also have profound
support well-informed decisions on dispatch, and implications for transmission and distribution (T&D)
keep systems operating at optimal efficiency. These systems, as they can ease T&D system integration
technologies can be implemented from utility-scale of distributed renewable generation and reduce
generation to consumer appliances. T&D investment needs by optimising use of existing
infrastructure. This will become increasingly relevant
For example, just as a smart appliance in a private
given that T&D is projected to account for almost half
home can switch on and off in response to varying
of the power sector investment until 2035, much of
electricity prices, a smart transformer on the grid
that in non-Organisation for Economic Co-operation
can automatically notify grid operators and repair
and Development (OECD) countries (International
personnel if its internal temperatures is too high.
Energy Agency [IEA], 2013).
Similarly, a smart meter can measure and track the
output of a rooftop photovoltaic (PV) system and IRENA’s Smart Grids and Renewables report explains
send that data to the utility, thereby making use of how smart grids enable renewables, discusses the
surplus PV energy, or addressing gaps due to solar nontechnical barriers to smart grids, and details
variability. the costs, performance, and other characteristics of
specific smart grid technologies. The report concluded
There is no universal agreement on what qualifies
that smart grids, although conceptually attractive for
as a smart grid technology; however, it is generally
their ability to enable renewables, must be evaluated
understood to include communication, information
and justified on an economic basis.
management, and control technologies that contribute
to the efficiency and flexibility of an electricity This report is IRENA’s second report on smart grids
system’s operation. The suite of available smart grid and renewables. The aim of this report is to help
technologies and applications continues to evolve at decision-makers in developing countries to perform
a rapid pace. Table 1A lists the seven major groups CBAs on smart grid projects. Such analyses are critical
of smart grid technologies and more details on these for ensuring that scarce capital is invested wisely.
technologies, including costs and market status, can
be found in the 2013 IRENA report on “Smart Grids
and Renewables” (IRENA, 2013). This list, however,
will continue to grow as entrepreneurs find novel
applications for improved intelligence and information
in the energy industry.
A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 5

SMART GRID PROJECTS NEED SMART GRIDS IN THE DEVELOPING
CAREFUL EVALUATION WORLD
Numerous studies have concluded that smart grids can Several methodologies exist for economic evaluation
be financially attractive investments. A meta-analysis of smart grid projects. Among the most widely known
of 30 business cases for smart meter projects is one developed by the Electric Power Research
in 12 countries, representing 4 continents, found Institute (EPRI) (EPRI, 2010 and 2013) and modified
that on average, the net present value (NPV) of by the Joint Research Centre of the European
project benefits exceeded the NPV of costs by Commission (EC, 2012a and 2012b). This methodology
nearly two to one (King, 2012). In the Middle East is rigorous and well documented, but it does require
and North Africa, studies found that smart grid further modification for use in the developing world.
investments could save the region USD 300 million to
Developing countries’ electricity systems differ from
USD 1 billion annually while helping to realise the
those industrialised countries in several ways. In some
region’s potential for solar power (Northeast Group,
cases, these differences create a clear opportunity for
2012). A study in the U.S. found that potential
smart grids:
investments in sustainable technologies, including
smart grid and renewables, have an NPV of USD 20 • In many cases, the electricity systems are
billion to USD 25 billion based solely on benefits to still expanding in order to reach residents
utilities (Rudden and Rudden, 2012). Although these without grid access (Table 1B). This
studies are based on predictions rather than actual provides an opportunity for “leapfrogging,”
project results (hence, they should be interpreted as countries can take advantage of smart
carefully), nevertheless, they suggest that smart grid grid technologies while building out the
projects are economically viable options. T&D grid instead of having to retrofit the
existing infrastructure.
A critical question facing utilities, governments,
and other decision-makers, however, is whether • Smart grids enable a number of innovative
their individual proposed smart grid project makes energy services that could help realise goals
financial sense. However, each individual project must of universal access to electricity, possible.
be assessed on its own merits. These include linking energy payments to
mobile phones, installing local charging
The costs of smart grid projects are typically well-
stations and building mini- and microgrids.
defined and straightforward to quantify. The benefits,
(Welsch et al. 2013).
however, may not be. Some of the benefits, such as
decreased operations and maintenance (O&M) costs, • Sometimes the electricity systems suffer
are relatively clear. Others such as improving consumer from relatively high levels of theft and
information or enhancing grid resiliency clearly have technical losses (Table 1B). Smart grids are
some value, but assigning a monetary value to these well suited to tracking and reducing these
types of benefits is quite challenging. types of losses by recording electricity load
across the lines.
An additional challenge in evaluating smart grids is
that the benefits often flow to multiple stakeholders. • On average, electricity systems have lower
Improved consumer information is of some value to reliability than those in industrialised
consumers, but probably of less direct value to the countries (Table 1C). As is the case for
utility. Smart grid projects can enable higher levels of theft and technical losses, smart grids
renewables and thereby reduce carbon emissions, but are particularly well suited to provide
different stakeholders will value that carbon reduction significant improvements in reliability by
differently. tracking any outages or faults in the lines.
The challenge for decision-makers is to evaluate smart

grid proposals for renewables rigorously, objectively,
and with a well-defined and consistent methodology.
There are ways in which these differences create a grid project evaluation. One that can accommodate
clear challenge for smart grids: the benefits such as reduced theft, grid extension,
increased reliability, and is simultaneously realistic
• Many (utilities in) developing countries
about system data availability and accuracy.
are capital-constrained, with limited
access to low-cost capital for upgrades This report is the first to provide such a methodology
and extensions of their electricity systems. for developing countries.
This complicates efforts to invest in smart
The remainder of this report is organised as follows:
grid projects, even if they are clearly cost-
effective. • Chapter 2 provides an overview of how
CBA works and what major issues need to
• Electricity systems may be unable to
be considered before undertaking a CBA.
set electricity rates at a level that covers
costs of operation, due to concerns over • Chapter 3 provides a detailed guide on
affordability of electricity for residents, how to estimate the benefits and costs of
businesses, and industry. This leads to a smart grid project with our methodology,
insufficient O&M spending and a backlog and how to use sensitivity analysis to
of basic maintenance, therefore making incorporate uncertainty and qualitative
it difficult to justify smart grid projects, benefits into a CBA-guided decision. The
which may be seen as a luxury and/or not text will be accompanied by an exercise
absolutely critical to basic grid functioning. that will illustrate all of the different steps..
This is the most challenging component of
• Smart grid analyses may require detailed
a CBA.
data on system operational characteristics
(such as reliability/downtime and • The appendices provide further details on
minute-by-minute load data), customer two additional case studies, and include
demographics, and more. Such extensive an illustration of the alternative approach
data may not be available. to be used when there is not an explicit
renewables goal. Furthermore, the case
• Regulatory and institutional issues,
study provides an explanation on how
such as the need for standard setting,
to calculate the different benefits, and
harmonisation of different electricity
provides starting-point cost data for any
systems, and ensuring data privacy, can
analysis.
limit innovation.
Owing to these substantial differences, developing

countries require a customised methodology for smart
Table 1B: Electricity access and T&D losses Table 1C: Electricity outages in selected
countries
Region Access to electricity T&D losses (%)
(% of population) Country Value lost due to electricity
Sub-Saharan Africa 35 12 outages (% of sales/year)
(developing only) Hungary 1
Least-developed 32 16 Samoa 7
countries: United Nations Yemen 13
classification
Zimbabwe 18
Middle income 85 11 Source: http://data.worldbank.org/indicator/IC.FRM.OUTG.ZS
European Union >99* 7

Source: http://databank.worldbank.org/data/home.aspx
*Authors’ estimate

Chapter 2
© Francois Loubser
Cost-Benefit Analysis:
Introduction and Overview
Chapter summary: Before undertaking a CBA, one needs to consider several issues, including perspective (whose
costs and benefits are relevant) and baseline definition (what would happen in the absence of the proposed smart
grid project). There are two basic approaches to a smart grid CBA: one in which there is a predefined renewables
goal that will likely be met with or without the proposed smart grid project, and one in which the smart grid project
allows for renewables that wouldn’t otherwise occur. Our methodology works for both approaches.
COST-BENEFIT ANALYSIS IN CONTEXT
U sed properly, CBA can give an estimate of how a smart grid technology investment will perform,
that is, the overall financial attractiveness of the investment. CBA’s principal strengths are:
• It is relatively simple.
• It is rigorous and quantitative, enabling evidence-based decision-making.
• Its assumptions and methodology are transparent.
• It lends itself to sensitivity analysis, allowing one to vary the value of uncertain inputs and see how
the results change.
However, there are some significant drawbacks as well, namely:
• It is data-intensive. It requires quite a few inputs, some of which may not be known.
• It requires an assessment of the future impacts of present-day investments, which is inherently

uncertain.
• Specific (point value) inputs are required Whose perspective does one take when doing
and therefore, a sensitivity analysis may be a CBA?
needed if the input values are uncertain.
This report generally takes a societal perspective,
• Its incorporation of qualitative factors and one that incorporates all costs and benefits as seen
second-order impacts is imprecise. by all stakeholders. In the carbon example above,
the utility’s perceived value of the carbon emissions
CBA is an ideal first tool for evaluating a smart grid would be used. In most cases, smart grid projects in
investment. Its value lies not just in the result it developing countries are undertaken by government
provides but also in how it requires one to define and agencies, and the perspective of these agencies is
quantify the expected costs and benefits. It is this typically close to that of society.
analytical discipline, rather than the result itself, that
is often most informative. Note, however, that there is no requirement that
CBA take a societal perspective and a more narrow
CBA is one of several methods that can be used perspective on costs and benefits can be taken. Where
to assess the economic impacts of a smart grid possible, this handbook shows how costs and benefits
investment. In the private sector, this assessment is flow differently according to the stakeholders, allowing
referred as the ‘business case’ and might relate to users to tailor the analysis to different stakeholders
the profit potential, competitive advantage, market perspectives.
positioning, or other business attributes. However,
in most cases, electricity in developing countries Importance of Qualitative Factors
is provided by a government agency or a regulated
Some costs and benefits of smart grid projects, such
monopoly and therefore, competitive market issues
as up-front hardware costs, are straightforward
(such as market share) are not of concern. Instead, the
to quantify. Others, such as allowing for increased
overall question is whether the benefits of investing in
electricity system reliability, can be valued in monetary
smart grids are greater than its costs. This is a question
terms, but with some uncertainty. Still others, such as
CBA can help answer.
providing consumers with greater information and
control, certainly have some value, but are extremely
CONSIDERATIONS BEFORE difficult to attach a monetary value to. We call these
UNDERTAKING A COST-BENEFIT qualitative benefits.
ANALYSIS Our CBA methodology, detailed below, stresses the

Several overarching issues need to be considered importance of keeping track of all relevant costs
before undertaking a CBA. and benefits, including those not easily quantifiable.
However, in the end, decision-makers will need
Costs and Benefits as Seen by Whom? to make a judgment on the relative value of the
A smart grid project will have numerous benefits, all of qualitative benefits to the decision at hand. CBA can
which will not be equally valued by the stakeholders. clarify the uncertainties, but cannot eliminate them.
For example, smart grid technologies might allow
for higher renewables and therefore lower carbon
Second-Order Impacts
emissions, but an individual electricity user may not Imagine a smart grid project with an up-front hardware
place any value on reducing carbon emissions. So cost of USD 10 million. From the utility’s perspective,
the CBA, if done from the individual electricity user’s that USD 10 million is clearly a cost. However, from
perspective, might value the higher renewables the perspective of the company selling that hardware,
benefit at 0. However, the utility may value those that is a USD 10 million benefit. USD 10 million that
emissions reductions quite highly (due to, for example, may flow through the economy would have second-
a government commitment to reduce emissions), and and higher-order benefits to the system as it does so.
would therefore place a very different value on that CBA considers only the first-order impacts.
emissions reduction benefit.

Need for a Baseline Need to Select a Discount Rate
A CBA requires defining a baseline, or a prediction of Most of the benefits associated with a smart grid
what would happen if the smart grid project were not project occur in the future. A discount rate allows one
implemented. Firstly, that prediction is compared to to find the present value of those future benefits—that
what is predicted to happen if the smart grid project is, it allows one to unequivocally compare the future
were implemented and secondly, the net benefits and benefits with the capital investments costs at the start
costs are calculated. of the project. Doing a CBA of a smart grid project
requires one to select a discount rate. The selection of
The CBA baseline is not necessarily a business-as-
a discount rate can significantly influence the results,
usual or ”no changes” scenario. In fact, the baseline
and it is therefore important to give careful thought as
should include all projects, or components of projects,
to just what discount rate to use.
that are expected to take place with the exception
of the smart grid project that is under consideration. If a CBA takes a societal perspective that incorporates
For example, consider a utility undertaking a grid all costs and benefits accruable to society as a whole,
extension project to serve new populations that do then a societal (sometimes called social) discount
not have current grid access. rate should be used. The World Bank has adopted a
societal discount rate of 5% for certain kinds of debt
The baseline would be grid extension, while the
(IMF, 2003). However, a sensitivity analysis across
smart grid analysis scenario is the grid extension with
different different discount rates can be run to explore
smart grid technologies. Similarly, consider a utility
the CBA results’ sensitivity to this assumption.
considering how smart grid technologies could assist
in reaching a goal of 30% renewables by 2020. That CBA Process Overview
goal would be part of the baseline, as it is predefined
At the highest and simplest level, CBA has three major
and smart grid technologies will not alter that goal.
components:
The CBA in this example would evaluate the costs and
benefits of implementing smart grid technologies, not • Estimation of the benefits of the proposed
the costs and benefits of the goal itself. smart grid project. Our methodology,
illustrated in Chapter 3, focuses on the
Need to Define Project Boundaries benefits related to renewables integration;
The boundaries of a smart grid project need to be however, the other potential benefits are
clearly and carefully defined ahead of the CBA. In addressed as well.
general, the narrower the boundaries, the simpler
• Estimation of the costs of the proposed
the analysis and the less uncertain the results. Critical
smart grid project. This guide focuses
boundaries are determined by:
on up-front hardware costs and ongoing
• Time: the period of interest. Notably, for operations and maintenance (O&M) costs.
what period the costs and benefits need to O&M costs vary considerably according to
be analyzed. For example, a project may the project but can be roughly estimated
define this time frame as 10 years from based on published data.
project launch.
• Comparison of costs and benefits. By
• Space: the geographic area of interest. This combining costs and benefits occurring at
is typically the utility service area or the different times through use of an overall
country as a whole. discount rate, an overall single number
(typically net present value, NPV) that can
be compared to other projects is obtained.
However, this valuation is complicated by renewables that the smart grid investment will enable
the presence of qualitative benefits and by and the ensuing the costs and benefits, needs to be
uncertainty associated with the estimated estimated.
future cost and benefit values.
Costs = (smart grid project costs) plus
Two Fundamental Approaches (enabled renewables costs)
There are two fundamental approaches to smart grid Benefits = (smart grid project benefits) plus
CBA for renewable implementation: (1) Start with an (enabled renewables benefits)
explicit renewables deployment goal, to be met with
or without smart grid technologies (the Predefined Overview of Methodology
Renewables Goal approach); or (2) estimate the Our methodology for identifying and quantifying the
renewables deployment that would be enabled by benefits of a smart grid is adapted from that proposed
the smart grid investment under consideration (the by the Joint Research Centre EC (EC, 2012a and 2012b)
No Predefined Renewables Goal approach). The which was in turn adapted from EPRI (2010) and EPRI
difference is essentially one of baseline, meaning (2013). Figure 2 shows an overview of this process.
what one assumes would happen if the smart grid After first identifying and defining the boundaries of
investment were not made. the project and the baseline against which it is to be
valued, the smart grid technologies to be deployed
The Predefined Renewables Goal Approach are listed (Step 1). Each technology is then mapped
This approach is for situations in which there is a to the functions it provides (Step 2), and then each
preexisting renewables deployment goal, such as function is in turn mapped to the benefits it provides
“20% of electricity sold in 2020 must come from (Step 3). Finally, the economic value of each benefit
renewable sources.” The smart grid investment under is monetised (Step 4). Costs are then estimated (Step
consideration is one of perhaps several paths to reach 5), costs and benefits compared (Step 6), and finally a
the goal. sensitivity analysis is performed (Step 7).
In this case, the baseline is reaching the goal without The process is slightly more complicated if using
the smart grid investment. The CBA considers the the No Predefined Renewables Goal approach to
incremental costs and benefits—that is, those costs incorporate the effect of renewables enabled by the
and benefits resulting from the smart grid investment, smart grid project, as shown on the right-hand side
relative to the costs and benefits of the baseline. of Figure 2. (As a reminder, under the No Predefined
Notably, in this approach the benefits of reaching set Renewables Goal approach the new renewables are
RE goals, such as the associated carbon reduction, treated as a benefit in the CBA; see Chapter 2 for
are not included in the CBA, as these benefits are details). If enabling wind or solar is identified as a
assumed to occur in any case. potential benefit in Step 3, the enabled renewables
are mapped to their benefits and added to the list of
The No Predefined Renewables Goal Approach smart grid benefits. Then, the complete list of benefits
This approach is for situations in which the smart grid is monetised in Step 4.
investment is seen as enabling the deployment of
This methodology can be complex—particularly in
renewables that otherwise would not occur. In this
estimating benefits (Steps 1 through 4 in Figure 2).
case, the smart grid investment enables additional
Chapter 3 provides a detailed case study on a fictional
renewables deployment, and the benefits and costs
country called Ruritania. Ruritania represents a small
associated with those renewables become part of the
developing country in which investments in smart
CBA. The baseline is whatever renewables penetration
inverters are considered. More complex examples,
would occur in the absence of the smart grid project.
based on a distribution automation programme in
For ease of analysis, this is typically assumed to be
Ruritania and a demand response (DR) project in
zero (or unchanged from the present renewables
Jamaica, can be found in Annex I and Annex II.
level). This is more challenging since the amount of

Figure 2
Yes
Start
v
No Predefined Renewables
v
Goal Approach
Predefined Renewables (The New Reneables are treated
Goal Approach as a benefit in the CBA; see Annex I for details)
Step 1: Does project Step 1:

Define Project: YES facilitate a NO
Define Project:
• Baseline predefined renewables • Baseline
• List technologies goal? • List technologies
Step 2: Step 2:
Map technologies Map technologies
to function to function
Step 3: Step 3:
Map functions Enables YES
Map functions
to benefits renewables?
to benefits
NO
Step 4: Step 4: Map renewable
Monetize benefits Monetize benefits functions to
benefits
Step 5: Step 5:
Quantify Costs Quantify Costs
Step 6: Step 6:
Compare costs Compare costs
and benefits and benefits
Step 7: Step 7:
Perform sensitivity
analysis
End Perform sensitivity
analysis
© gui jun peng
Chapter 3
© pedrosala
Smart Grid Cost-Benefit

Analysis for Ruritania2
Chapter summary: The CBA methodology can be a bit complex. To demonstrate its use, it is first applied to a
simplified, fictional country called Ruritania. The exercise assesses the impact of smart inverters and reveals that
fewer outages and reduced losses are by far the most valuable benefits of these inverters, accounting for almost
three-fourths of the total benefit value. The advantages of smart inverters clearly exceed the costs. This result,
however, reflects electricity users’ estimated valuation of reduced outages. If the utility values fewer outages only
at the value of the lost electricity sales, then the smart inverters are not cost-effective.
The exercise illustrates how sensitivity analysis reveals the way in which net benefits vary with critical assumptions.
RURITANIA CASE STUDY SUMMARY
R
uritania is a country with an electricity system primarily based on coal- and gas-fired power stations, and
only 2% of variable renewables (wind). Its electricity system is expected to growth from 10 GW peak to
20 GW peak by 2030. Ruritania has a goal of 20% renewable electricity by 2030, to be met with wind
and solar PV. The costs and benefits of upgrading the planned wind and PV systems to include advanced grid
support features are analysed. The case study assumes that the renewable energy goal of 20% will not change,
so the CBA will only consider the costs and benefits on the electricity system.
The CBA looks specifically at the advanced grid support features. It assumes an upgrade of new wind and PV
with smart inverters. The smart inverters will provide grid-friendly features like fault ride-through and assistance
with voltage and frequency regulation. The smart inverters will be rolled out alongside the deployment of the
renewables to achieve the 20% renewable energy target assuming a project rollout time of 15 years. The CBA will
apply to this 15-year period.
Benefits One qualitative benefit of this project is to provide
The functions (in a smart grid CBA) of the grid- utility workers with experience in advanced
friendly controls are to enable wide-area monitoring technologies for control of renewables. The smart
and visualisation, power flow control, and automated PV inverters could also be integrated into future DA
voltage and volt-ampere reactive (VAR) control. These schemes, acting as distributed reactive power sources
functions map to 13 out of the 24 possible benefits, as for voltage optimisation and thus, resulting in further
shown in Table 3A3. The full list of possible benefits loss reductions and investment deferral.
are discussed in Table 3D, and Table 3F will show how
these benefits were calculated.
2
A fictional kingdom used as the setting for stories by Anthony Hope
(1863-1933), and often used in academia to refer to a hypothetical
country
3
Only those benefits relevant to this project are listed. Additional
benefits may be relevant to a smart grid project, depending on the
project specifics.
Table 3A: Values of benefits

Benefit NPV (thousand USD) Uncertainty level Primary beneficiary
Reduced ancillary service cost 4 300 Medium Utility
Deferred distribution investments 2 300 Medium Utility
Reduced equipment failures 8 Medium Utility
Reduced distribution operations cost 0 Low Utility
Reduced electricity losses 17 600 Medium Utility
Reduced electricity cost 0 Low Customers
Reduced sustained outages 29 000 High Customers
Reduced major outages 0 High Customers
Reduced restoration cost 70 High Utility
Reduced momentary outages 0 Low Customers
Reduced sags and swells 0 Medium Customers
Reduced CO2 emissions 9 600 Medium Society
Reduced SOx, NOx , and PM10 1 100 Medium Society
emissions
Reduced wide-scale blackouts 0 High Society

Costs in Table 3A assume a value of USD 3 for each kWh
The costs relevant to the CBA are any costs that reduction in sustained losses. That value is based on
would not be incurred if the grid-friendly renewable a meta-analysis of a large number of studies. Note,
controls were not used. For PV systems, an average however, that this USD 3/kWh value reflects the
inverter cost increase due to these grid-friendly electricity user’s perspective. The utility, in contrast,
controls of 10% is assumed. For wind plants, the total might value these reduced outages as worth only the
system capital cost is assumed to rise by 1%. In both regained electricity sales they yield, at the current
cases, these costs include the communications and IT retail rate of electricity.
infrastructure required. Project costs are summarised Changing the value of these outage reductions from
in Table 3B. USD 3/kWh to USD 0.10/kWh changes the NPV from
plus USD 25 million to minus USD 2 million. In this case,
Discussion the project would no longer be cost-effective based
The total present value of the project benefits is USD 63 on quantified benefits alone; the qualitative benefits
million, while the total present value of the costs is would need to be worth at least USD 2 million to make
USD 38 million. The benefits exceed the costs, so the the project cost-effective under this reduced-benefit
project is cost-effective. scenario.
As shown in Table 3A, reduced sustained outages and
reduced electricity losses are the largest components
of the benefits NPV. A critical assumption in estimating
the benefit of reduced sustained outages is the value
of this reduction to electricity users. The results
Table 3B: Values of costs

Cost NPV (thousand USD) Uncertainty level Primary beneficiary
Advanced PV inverters 23 800 Low Utility and PV
owners
Advanced wind turbines 14 200 Medium Utility and wind
owners
STEP 1: DEFINE PROJECT
The first step in analyzing the costs and benefits of a Box 1 shows the project definition for Ruritania.
project is to clearly define the project. This includes
In this chapter, we illustrate the CBA methodology
recording general project information, identifying the
using a fictional case study: the Ruritania grid
technologies being deployed, and determining the
support project. The details are described in sidebars
baseline for the CBA.
throughout this section.
Relevant general project information may include the
goals of the project, its stakeholders, its regulatory
environment and its dimensions and boundaries. One
key dimension is the length of the project, as it will
define the window within which costs and benefits
should be included in the CBA.
Box 1: Ruritania Smart Grid Project: Country Information

The Ruritania example is based on a hypothetical power system and shows how the methodology might apply
to that system. The intent is to provide an example of each step rather than to show a complete CBA, which
would include more detail.
General country information:
• 10 GW peak electricity demand, growing to 20 GW in 2030 (4.7% annual growth)
• 31 TWh annual generation, growing to 62 TWh in 2030
• 1 000 distribution feeders, doubling to 2 000 by 2030; average feeder capacity of 10 MW
• Renewables goal: 20% of electricity from wind and solar by 2030 (currently at 2%); 70% of renewable
energy to come from wind plants, 15% from centralised PV plants, and 15% from distributed PV
installations
• The capacity factor for wind is taken to be 40%, and the capacity factor for PV is taken to be 21%,
based on median data from OpenEI
• Electric utility is owned and managed by the national government
• Average retail electricity price: USD 0.10 per kWh
• Average wholesale electricity price: USD 0.05 per kWh
• Annual discount rate used for government planning: 8%
• Annual price inflation rate: 3%
Proposed smart grid project:
• Goal: facilitate the preexisting renewable deployment goal
• Project term: 15 years (2015 to 2030)
• Project scope: nationwide
• Stakeholders: utility, electricity consumers, society at large

List Technologies
After compiling general project information, the microgrids should also be considered as potential
specific smart grid technologies and renewable technology options, because they may find niche
assets under consideration should be listed. IRENA’s applications in emerging countries (IRENA, 2015).
publication ‘Smart Grids and Renewables’ provides an Annex IV provides a summary of these six categories
overview of six categories of smart grid technologies of smart grid options. Box 2 illustrates the smart grid
and applications that can be considered as “well- technology chosen in our case study.
established” or “advanced.” Energy storage and
Box 2: Ruritania Smart Grid Project: Introducing Smart Controls

In our illustrative example project, we propose to upgrade the wind turbines and solar
inverters to include advanced grid support capability that uses improved controls to help
renewables integrate with the grid, assisting with voltage and/or frequency regulation
and remaining connected during grid faults. We will refer to this upgrade as grid-friendly
renewable controls.
Select Baseline
If an RE goal has been set prior to the smart grid continuing with existing grid maintenance and
project (the Predefined Renewables Goal approach), development plans.
then the baseline for the CBA involves achieving that
Under either approach, the baseline should be carefully
goal without using smart grid technologies (or without
chosen to include projected future changes to the
adding smart grid assets if some already exist).
electricity system. For instance, if there is a preexisting
Other sources of the flexibility needed to integrate
goal to expand electricity access to unserved areas or
renewables include upgrades to grid infrastructure and
to greatly increase the hours of electricity availability,
investment in more-flexible conventional generators.
then the baseline for the CBA involves achieving that
IEA provides guidance as to amounts of flexibility
goal without the proposed smart grid technologies.
available from various conventional generators and
In this case, the smart grid project may have the
infrastructure upgrades as well as economic analyses
opportunity to leapfrog conventional electrification
of the different options (IEA, 2014).
technologies. Box 3 illustrates the baseline selection
When no prior RE goal exists (the No Predefined for our case study.
Renewables Goal approach), the baseline involves
Box 3: Ruritania Smart Grid Project: Baseline Selection

Because the smart grid project under consideration facilitates an existing renewables goal,
the Predefined Renewables Goal approach will be used. Therefore, the baseline against
which the project will be compared involves achieving the renewables goal without using
the proposed smart grid technology. Long-term power system modelling should be used
to determine which conventional technologies would be needed to facilitate the 20%
renewables goal. For the sake of this example, we assume that the country has determined
that in order to meet its goal without smart grid technologies, it will need to install 3 GW
of combined-cycle gas-fired turbines designed for flexible operation, retrofit 3 GW of
existing coal-fired generation for improved flexibility, install 300 kilometers of additional
transmission lines with a peak capacity of 2 GW, and install additional switched capacitor
banks on 10% of existing and new distribution circuits. As detailed later in this chapter,
advanced grid support from renewables will reduce the costs associated with some (but
not all) of these upgrades. The baseline includes conventional solar and wind inverters (not
capable of volt-VAR control or ride-through).
STEP 2: MAP TECHNOLOGIES TO More than one example of a given technology
category may be included in the matrix. For example,
FUNCTIONS one project might include both direct utility control
Once the technologies under consideration and the of industrial loads and optimised control of residential
baseline have been identified, the next step is to map water heaters, both of which are examples of DR. Each
each technology to its potential functions. Functions, should receive its own column in the matrix.
in a smart grid sense, are the roles that various
technologies can play in improving grid operation. If in doubt as to whether a given technology may
Functions do not translate directly into monetary activate a certain function, include the function for
values but are monetised in the next step by mapping later consideration. Any technology may activate
them to benefits. Thinking through the functions of more than one function, and any function may be
the smart grid technologies being deployed (rather activated by more than one technology. In addition,
than trying to jump directly from technologies to users of this CBA method may consider adding other
benefits) helps ensure a thorough analysis that does functions as appropriate.
not miss any benefits.
In total, there are 12 functions (EPRI, 2010), shown.

Choosing from the list, consider which functions each
technology may activate and create a matrix like the
example for our case study shown in Table 3C.
Box 4: Ruritania Smart Grid Project: Mapping Technologies to Functions

Table 3C shows a matrix mapping the smart grid technology installed in our example
project to its functions. The smart grid technology under consideration is listed across
the top row. The first column contains all possible functions. Checkmarks indicate where a
given technology may provide a certain function.
Table 3C: Mapping technologies to function

Functions Technology: Smart PV Inverters Technology: Wind turbines with
advanced grid support function
Fault current limiting
Wide-area monitoring and visualisation  
Dynamic capability rating
Flow control  
Adaptive protection
Automated feeder switching
Automated voltage and VAR control  
Diagnosis and notification of equipment
condition
Enhanced fault protection
Real-time load measurement and man-
agement
Real-time load transfer
Customer electricity-use optimisation

STEP 3: MAP FUNCTIONS TO BENEFITS step will determine what economic value each benefit
has, if any.
After mapping technologies to functions, each function
is in turn mapped to the benefits it may provide. A If using the No Predefined Renewables Goal approach,
benefit is any impact of the project that may have value if any of the functions may enable wind or solar,
to any stakeholder (for example, utility, customer, or the benefits of the enabled renewables should be
society), following EPRI (EPRI, 2010). If using the No considered as well. In this situation, a new table for the
Predefined Renewables Goal approach, the potential enabled wind and/or solar is needed, and the enabled
list of benefits includes enabled renewables (wind and renewables are mapped to any additional benefits
solar). Again, use a matrix to ensure that each function they enable (such as pollutant reductions and/or fuel
is considered in conjunction with each benefit. Include cost reductions). This additional step appears as a box
all benefits that may possibly be activated; the next on the far right in Figure 2.
Box 5: Ruritania Smart Grid Project: Mapping Functions to Benefits

Table 3D shows how the functions identified in Step 2 are mapped onto the benefits for the
case of Ruritania. Note that while this case study only involved one smart grid technology,
most eligible benefits received at least one checkmark in Table 3D. However, this does not
mean that all checked benefits will have associated value when monetised in the next step.
Because the Ruritania case study uses the Predefined Renewables Goal approach, enabled
wind and solar generation are not applicable benefits in the CBA and hence are not
evaluated in Table 3D.
STEP 4: MONETISE BENEFITS

Once a comprehensive list of potential benefits is project each benefit accrues, as this information will
generated, the next step is to monetise each benefit be needed to discount all future benefits to their
by estimating its value in monetary terms. The value present-day values. The value of each benefit should
of each benefit should be considered relative to the be estimated for each year of the project. A detailed
baseline case; often the benefit will take the form of a description of the different benefits, and methods to
cost savings relative to the baseline. evaluate their value is provided in Annex III.
This step is the crux of the CBA and will likely be the Uncertainty in Benefit Values
most difficult. Estimating the value of some benefits There will inevitably be some degree of uncertainty
may require power system modelling and simulation, in all benefit values. Estimate the magnitude of
which in turn requires detailed data on the power uncertainty of each benefit using the four-level scale
system and projections of the future state of the given in EPRI (EPRI, 2010) as shown in Table 3E. Values
system in the baseline case and with the smart grid with high uncertainty may be good candidates for
project. sensitivity analysis. In addition, uncertainty estimates
While monetising the benefits, determine which will allow decision-makers to gauge the overall level of
stakeholders receive the benefits so that the net cost certainty of the CBA.
or benefit to each stakeholder can be estimated.
Stakeholder groups will typically include grid
operators, consumers, and society at large.
It is also important to determine when during the
Table 3D: Mapping functions to benefits
Benefits Function: Wide-area Function: Flow Function: Automated
monitoring & visualisation control voltage & VAR control
Optimised generator
operation
Reduced generation
capacity investments
Reduced ancillary service 
cost
Reduced congestion cost
Deferred transmission
capacity investments
Deferred distribution   
investments
Reduced equipment  
failures
Reduced distribution
equipment maintenance
cost
Reduced distribution  
operations cost
Reduced meter reading
cost
Reduced electricity theft
Reduced electricity losses  
Reduced electricity cost
Reduced sustained outages 
Reduced major outages 
Reduced restoration cost  
Reduced momentary 
outages
Reduced sags and swells 
Reduced CO2 emissions 
Reduced SOx, NOx, and 
PM10 emissions
Reduced fuel costs
Reduced wide-scale  
blackouts
Enabled wind generation NA NA NA
Enabled solar generation NA NA NA
NA = not applicable, as these benefits are relevant only for the No Predefined Renewables Goal Approach. See Annex I for details.

Table 3E: Categories of uncertainty levels
Level of uncertainty Explanation
Low A low level of uncertainty in quantitative estimates and/or in monetisation implies a level of precision
where the estimate is viewed to be accurate +/- 20%, with at least an 80% level of confidence, i.e.,
there is an 80% probability that the actual value is within +/- 20% of the estimate.
Medium This category is for estimates viewed to be accurate +/- 40%, with at least an 80% level of confidence,
i.e., there is an 80% probability that the actual value is within +/- 40% of the estimate.
High This category is for estimates that are very uncertain and difficult to quantify. The precision level is
viewed as +/- 100%, with a 95% level of confidence.
Cannot be quantified This assignment should be limited to benefits that fall into the speculative category and are so
uncertain that they can only be expressed as an order-of-magnitude estimate.
Adapted from EPRI, 2010, as reproduced in Giordano et al., 2012a and 2012b
Box 6: Ruritania Smart Grid Project: Monetising Benefits

Table 3F shows the estimated value of each benefit for the case of Ruritania, along with
brief notes on how the value was estimated and the uncertainty level of the estimate.
For this simple example, many assumptions were made on monetisation input values for
illustrative purposes. A full CBA would incorporate more-detailed modelling and forecasting
using the best data available to produce the inputs needed to monetise benefits. For
example, our assumption that the use of smart PV inverters with volt-VAR control will avoid
the need for 200 switched capacitor banks could be confirmed by modelling and simulation
of typical distribution feeders in the region using IRENA’s grid stability methodology.
All of the benefits have zero value in the first year because the first grid-friendly turbines
and inverters are installed that year. The benefit values increase gradually each year as
more installations occur, reaching a maximum annual value in year 15.
The largest benefit comes from reduced sustained outages at USD 19 million in year 15, but
note that the uncertainty of this benefit is high. The next largest benefit is from reduced
electricity losses, coming in at USD 17 million during year 15. Several of the possible benefits
checked in Table 3D turn out to have no quantifiable value in this project; this is to be
expected.
Qualitative Benefits play that are difficult to put a price on. These include
improved health (for example, fewer health issues due
In additional to monetisable impacts, smart grid
to reduced burning of wood, charcoal and kerosene)
projects also produce benefits that are more difficult
and improved access to healthcare services and
to quantify. These may include improvement of local
health clinics. Educational benefits due to improved
workforce capabilities, improved safety, greater
school conditions and the ability to study after dark
inclusion of consumers, and other benefits (Giordano
can also be significant. Entrepreneurial opportunities
et al., 2012a and 2012b). While the availability of
can also bring significant benefits, allowing people to
skilled workers may present a challenge in developing
better provide for their own needs and those of their
countries, building skills in the local workforce may be
communities (World Bank, 2014). It may be possible
an especially important benefit for the same reason.
to put a rough quantitative value on the economic
When smart grid projects are used to provide benefits of electrification based on various studies by
electricity to previously unserved (or underserved) the World Bank and others. However, when deciding
areas, a number of significant benefits may come into whether these benefits are attributable to a smart
grid project, it is important to consider the baseline: the No Predefined Renewables Goal approach, this
Often the most appropriate baseline is not lack of characterisation means renewable energy beyond
electrification but electrification using conventional the amount assumed, to be enabled by the smart grid
technologies, in which case the smart grid project project under the quantitative CBA.
would not get credit for the benefits of electrification
While the benefits considered in this section are difficult
since they also exist in the baseline case.
to monetise, it is important to try to quantify them
When smart grids help reduce electricity theft, this to the extent possible to allow for comparison with
provides a quantitative benefit to the utility (and other projects. For instance, if a project is expected to
indirectly to its paying customers), but the loss of develop workforce skills, state specifically what skills
access by people who had been stealing electricity are expected to be gained and approximately how
is a dis-benefit or cost to those people. This cost many people will gain those skills. A detailed method
may be hard to quantify, but it is worth considering for quantifying benefits that cannot be monetised is
that reduced theft may create a need for subsidised provided by the Joint Research Commission (EC, 2012a
electricity. This qualitative cost will slightly reduce the and 2012b). In Annex III of this report, guidelines are
quantified benefit. given for applying weighting factors to nonmonetised
benefits so that they may be included in the integrated
Smart grid technologies tend to be mutually
CBA.
reinforcing, so a significant benefit of a smart grid
project is that it provides a basis for future smart grid Note that the functions and benefits of smart grid
projects to build upon. For example, if a DA system technologies are highly interdependent. Hence, the
and associated measurement and control hardware CBA method presented here risks missing some
are first installed with a goal of speeding recovery synergistic benefits (or double-counting benefits that
following electrical faults, that same system could are attributed to multiple technologies). System-level
later be used for other tasks such as optimizing system analysis can better manage these synergies, but there
voltage to reduce losses (see the exercise in Annex are few well-developed methodologies for CBA at a
I). The financial payback of the second project will system level.4
be greatly improved because it uses already existing
assets.
Smart grid projects may also enable future renewable

energy deployment that is not currently under
consideration. Under the Predefined Renewables Goal
approach, this characterisation would be renewable
4
This cautionary note was prompted by Chapter 4 of (IEA, 2014),
which similarly cautions against missing system-level effects when
deployments that go beyond the preset goal. Under tallying individual renewable integration costs.
Box 7: Ruritania Smart Grid Project: Assessing Qualitative Benefits

The qualitative benefits of the example smart grid project include giving utility workers
experience with advanced renewables control technologies. These skills will be transferable
to future renewable energy and smart grid projects. The smart PV inverters could also be
integrated into future DA schemes, acting as distributed reactive power sources for voltage
optimisation, resulting in further loss reductions and investment deferral.

Table 3F: Monetised benefits of the example system
Benefit NPV Uncertainty level Primary beneficiary

Reduced USD 0 in year 1, Renewables’ ability to ride through voltage and Medium
ancillary service ramping to USD 3.6M frequency events (thus not exacerbating those
cost in year 15 events) is assumed to reduce frequency regulation
needs by 5%. High-frequency power curtailment
from wind, PV, and virtual inertia from wind are
assumed to reduce frequency regulation costs by
an additional 5%. This benefit starts from zero and
ramps to a total savings of 10% over the project life.
The demand for frequency regulation is assumed to
average 0.65% of load demand based on data from
a U.S. transmission operator (Monitoring Analytics,
2013), and the cost of regulation is assumed to be
USD 20/MWh, increasing to USD 31/MWh by year 15
due to inflation. Year-15 savings = (20 GW demand)
* (0.0065) * (8760 hours/year) * (USD 31/MWh
regulation) * (0.10) = USD 3.6M.
Deferred USD 0 in year 1, Smart distributed PV inverters performing volt- Medium
distribution ramping to USD 1.4M VAR control are assumed to avoid the need for 200
investments in year 15 switched capacitor banks (a conventional source of
voltage control) rated at 500 kVAR each, costing
USD 13/kVAR (Eaton, 2014) plus USD 1 000 per bank
to install. With inflation, this benefit comes to USD
410K in year 15.
We also assume that 50% of the distributed PV

systems are targeted at capacity-constrained
distribution feeders, where the peak load coincides
well with PV output, providing a benefit of USD
0.001/kWh of PV in deferred distribution investment,
in the lower half of the range identified in (Beck,
2009). This benefit comes to USD 940K in year 15
Reduced USD 0 in year 1, Inverter-based volt-VAR control is assumed to Medium
equipment ramping to USD 5 100 reduce annual equipment failures by 10% once the
failures in year 15 project is complete, due to reduced switching of
capacitor banks, which are assumed to be on 15% of
existing feeders for a total of 150 banks. The baseline
annual failure rate is assumed to be 3%. This benefit
ramps from zero to its full value over the project
life. Year-15 savings: (150 capacitor banks) * (0.03
baseline failure rate) * (0.1 reduction in failure rate) *
(USD 11 000/bank after inflation) = USD 4 950
Reduced USD 0 While inverter-based volt-VAR control could Low
distribution result in a reduction in manual capacitor switching
operations cost operations, this benefit is assumed to have negligible
value for this project.
Reduced USD 0 in year 1, By providing distributed sources of reactive power, Medium
electricity losses ramping to USD 17M smart distributed PV inverters are expected to
in year 15 reduce distribution line losses by 5% once all are
installed. Total distribution losses are assumed to
be 7% of the energy delivered. The USD 50/MWh
wholesale electricity cost escalates to USD 78/MWh
by year 15 given 3% inflation. Year-15 loss reduction
= (62 GWh demand) * (0.07 loss rate) * (0.05 loss
reduction) = 217 GWh. Year-15 savings: (218 000
MWh) * (USD 78/MWh) = USD 17M
Reduced USD 0 While it is possible that the use of grid-friendly Low
electricity cost controls could lead to a reduction in electricity cost,
no such reduction is assumed here.
Reduced USD 0 in year 1, In this example, by riding through voltage and High
sustained ramping to USD 19M frequency events and some momentary outages,
outages in year 15 and by contributing to voltage and frequency
regulation, grid-friendly controls are assumed to
reduce sustained outages by 1% once fully installed.
An average VOLL of USD 3/kWh and an average
load per customer of 1 kW are assumed. By year 15,
the VOLL will be USD 4.70/kWh due to inflation.
The total annual number of outages per customer is
estimated by multiplying SAIFI by SAIDI, assuming a
SAIFI of 10 outages per year and a SAIDI of 2 hours
per outage. Hence the year-15 baseline outage cost
is (10 outages/year/customer) * (2 hours/outage)
* (USD 4.7/kWh) * (1 kW/customer) = USD 94 per
customer. With 20 million customers in year 15, the
total value of this benefit that year is (20 million) *
(USD 94) * (0.01) = USD 19M.
Reduced major USD 0 No reduction in major outages is assumed for this High
outages project.
Reduced USD 0 in year 1, We assume each feeder has 10 outages per year High
restoration cost ramping to USD 47K that require manual restoration, and that restoration
in year 15 costs USD 150 in crew time (or USD 235 in year 15).
The 1% reduction in outages mentioned above then
results in a year-15 savings of (USD 235/outage) *
(10 outages/year/feeder) * (2 000 feeders) * (0.01
reduction) = USD 47 000.
Reduced USD 0 No reduction in momentary outages is assumed for Low
momentary this project.
outages

Reduced sags USD 0 Grid-friendly renewables can inject real and reactive Medium
and swells power into the grid during voltage sags to reduce
the magnitude of the event. However, because
reductions in such events are of quantifiable value
only to customers with sensitive loads, and because
the effect is very system-specific, we do not assume
any value for this benefit.
Reduced CO2 USD 0 in year 1, Because the solar and wind plants themselves are Medium
emissions ramping to USD 9.3M present in the baseline case, their CO2 reduction
in year 15 is not a benefit of the project. However, CO2
reductions from decreased distribution losses due
to local reactive power provision by smart inverters
are a benefit of the project. Each MWh saved is
assumed to save 0.68 tons of CO2 based on a mix
of coal, gas, hydroelectric, and renewable sources.
Assuming a social cost of carbon of USD 40/ton CO2
(inflated to USD 63/ton by year 15) and following the
assumptions in the Reduced Electricity Losses row
above, the year-15 benefit is (218 000 MWh) * (0.68
tons CO2/MWh) * (USD 63/ton CO2) = USD 9.3M.
SOx, NOx, and SOx: USD 0 in year 1, Reduced distribution losses due to local reactive Medium
PM10 emissions ramping to power provision also result in reduced SOx, NOx,
USD 800K in year 15; and PM10 emissions. We assume that each MWh
NOx: USD 0 in year 1, produced from coal emits 5 kg SO2, 3 kg NOx, and
ramping to USD 110K 1 kg PM10 on average. We also assume that 30%
in year 15; PM10: of the country’s electricity comes from coal at the
USD 0 in year 1, beginning of the project, and that the amount of
USD 10K in year 15 energy from coal remains constant throughout the
project at 9.2 GWh/year. The social costs of each
pollutant are assumed to be half of the U.S. market
values, or USD 3.15/kg SOx, USD 0.7/kg NOx, and
USD 0.2/kg PM10, and are adjusted for inflation. The
year-15 value of SOx reductions is (218 000 MWh
loss reduction) * (0.15 portion from coal) * (5 kg SOx/
MWh) * (USD 4.94/kg SOx) = USD 800K. Similarly,
the year-15 values of NOx and PM10 reductions are
USD 110K and USD 10K, respectively.
Reduced wide- USD 0 By riding through voltage and frequency events High
scale blackouts and some momentary outages, and by contributing
to voltage and frequency regulation, grid-friendly
controls can reduce the likelihood of a large blackout.
However, we do not assume any quantifiable benefit
in this example.
STEP 5: QUANTIFY COSTS Cost Categories
The first steps differentiate between the costs Costs can be divided into four categories:
associated with the baseline, and the costs associated
• Up-front hardware costs. Also called
with the smart grid project. The baseline should include
capital or initial costs, these expenses are
all costs associated with operating the electricity
one-time costs associated with purchasing
system. Costs attributed to the project, in contrast,
the specific technologies.
should be only those that the project imposes or
adds. Costs are by definition negative, or outlays; cost • Project implementation costs. These costs
savings or reductions should be tracked as benefits. are associated with installation, marketing,
scheduling, project management,
As with all cost estimations, there are uncertainties,
commissioning, and other cost components
notably:
of project implementation.
• Cost overruns, due to lack of field experience
• Operating and maintenance costs. These
with new smart grid technologies.
expenses are ongoing, with typical units of
• Unexpected marketing costs for those USD/year or USD/MWh.
technologies requiring consumer
• Qualitative costs. These various expenses
participation.
are difficult to quantify yet still relevant to
• Integration of new technologies into the analysis.
existing grid systems, involving multiple
Typical capital and O&M costs are shown in Table 3G;
vendors.
however, costs are very project-dependent and actual,
In general, however, these cost uncertainties will be firm quotes from vendors should be used whenever
smaller than the benefit-side uncertainties. possible. As discussed in Chapter 2, if there is no
Table 3G: Categories of uncertainty levels

Technology Typical capital costs Typical O&M costs
Advanced metering USD 100–150/meter (meter only); USD 200– USD 0.5–1/meter/month
infrastructure 250/meter including communications and IT
systems
Advanced electricity Varies; typically low if AMI already installed Varies; typically low
pricing
Demand response USD 100–250/kW capacity Varies; USD 2–5/kW/year
Distribution automa- Depends on specific technology and installation Depends on specific technology and installation
tion
Renewable resource None (typically purchased as a service) Wind forecasting service USD 2 500/month/plant;
forecasting PV expected to be similar
Smart inverters < 5% more than conventional inverter; < 1% Same as conventional technologies
more than conventional wind turbine
Energy storage Li-ion: USD 500–1 000/kWh; pumped hydro: 1%–2% of capital costs per year
USD 500–4 000/kW plus USD 0–200/kWh
Sources: Asmus, 2010; Idaho Power Company, 2013; IEA, 2014; IRENA 2013; Ontario Energy Board, 2011; U.S DOE, 2006; authors’ estimates

explicit renewables goal, then the new renewables Qualitative costs can include management time and
that a smart grid project make feasible do not fall attention, risks associated with going over budget or
under the baseline. In this situation, the costs of the with technical underperformance, and other similar
new renewables need to be included in the CBA. factors that are difficult to assign a monetary value
yet are clearly non-zero and need consideration. In
Extensive data on the costs of renewable electricity
some cases, these costs can fall on electricity users.
generating technologies are available at http://costing.
For example, a smart grid project that enables
irena.org. Typical costs are summarised in Table 3H.
commercial building load reduction may cycle air-
Project implementation costs are very project- conditioning compressors, thereby have a cost of
dependent. In general, bids from suppliers should decreased building occupant comfort.
specify which specific project implementation steps
It is simplest to assume that costs all occur at the
are included—for example, is the bid for just delivery
beginning of the project. However, it may be more
of a technology, or does it include installation, testing
accurate to recognise that some costs—particularly
and commissioning, and/or monitoring? Project
project implementation and some types of qualitative
management costs should be considered as well,
costs—can occur throughout the project life. If that is
particularly if a technology is new and/or will require
the case, it is necessary to discount those costs and
adding personnel. In general, technologies that are
calculate an NPV of the costs.
new and/or unfamiliar to an organisation will have
higher implementation costs, as new processes and
organisational learning will be needed.
Table 3H: Typical renewable energy capital and O&M costs

Technology Typical capital costs (USD/kW) Typical O&M costs (USD/kW/yr)
Wind power plant 1 280-2 200 20-40
(utility-scale)
PV power plant 1 300-2 600 25
(utility-scale)
Distributed PV 1 600-5 000 25
Sources: IRENA ,2015a; International Renewable Energy Agency Renewable Cost Database.
Box 8: Ruritania Smart Grid Project: Quantifying Costs

Our example smart grid project involves upgrading wind turbines and solar PV inverters
to provide advanced grid support. The first costs for these upgrades are typically given as a
percentage increase in the first costs for these inverters. Advanced wind turbines are penetrating
the market rapidly, and we assume that this option increases wind turbine first costs by 1%. For
PV, we assume that this upgrade increases the cost of the inverter (not the system) by 10%.
We also assume that there are no additional O&M costs for these upgrades. There are costs
associated with operating the wind turbines and PV systems, of course; however, these costs are
incurred regardless and thus are defined as being in the baseline.
Similarly, we assume that there are no additional project implementation costs. These
technologies are commercially available and require little if any additional effort beyond the
baseline technology.
STEP 6: COMPARE COSTS AND Benefit/cost ratio is a variation on NPV where all
benefits and costs are discounted and summed
BENEFITS to a current-day equivalent. Then a simple ratio of
The benefits of a proposed smart grid project, as benefits to costs is calculated. If the ratio is greater
discussed in Chapter 2, occur over the lifetime of than 1.0, then it can be concluded that the project is
the project. The costs, in contrast, typically involve a cost-effective without consideration of the qualitative
large outlay at the beginning of the project, possibly factors.
followed by a much smaller annual spending for O&M.
So, how can the different costs and benefits occurring Cash flow analysis is a third method. The costs and
at different times be compared and assessed? benefits that occur in each year to provide a clear
Fortunately, there are several financial analysis tools sense of the timing of the costs and benefits, and
for such a problem. lends itself to a graphical summary of the project’s
finances.
Net present value (NPV) is a simple and transparent
indicator of overall costs and benefits. To calculate Stakeholder Perspectives
NPV, all future financial costs and benefits are Including all costs and benefits in an NPV or benefits-
transformed into an equivalent current-day cost or to-costs ratio calculation implicitly assumes a societal
benefit. Future costs and benefits are discounted to perspective. A stakeholder perspective, in contrast,
reflect the time value of money and/or the appropriate may intentionally exclude some costs and benefits.
societal discount rate. This combines all the costs and The utility, for example, may not value reduced CO2
benefits into one number, which can be thought of emissions, and therefore could leave the CO2 reduction
as the current-day value of the entire project. If this benefit out of the analysis. When performing a
value is positive, it can concluded that the project is stakeholder CBA, it is useful to look at the list of costs
cost-effective without consideration of the qualitative and benefits, and exclude those that are not relevant
factors. or not valued.
Box 9: Ruritania Smart Grid Project: Comparing Costs and Benefits

In our example, we assess the costs and benefits of smart PV inverters and advanced grid
support from wind turbines. We found eight distinct non-zero benefits of these specific
smart grid technologies (see Table 3F). The NPV of each of those benefits is shown in Table
3I.
Table 3I: NPV of benefits in example CBA

Benefit NPV (million USD)
Reduced ancillary service cost 4.3
Deferred distribution investments 2.3
Reduced equipment failures <0.1
Reduced electricity losses 17.6
Reduced sustained outages 28.6
Reduced restoration cost <0.1
Reduced CO2 emissions 9.6
Reduced non-CO2 emissions 1.1
TOTAL 63.6
In Table 3H, we estimated the costs of these technologies. The NPV of those costs are
summarised in Table 3J.

Table 3J: NPV of costs in example CBA
Cost NPV (million USD)
Advanced inverters for PV -23.8
Advanced inverters for wind -14.2
TOTAL -38.0
Note: Values shown are negative, as they are costs.
The net benefit, excluding qualitative factors, is (63.6 – 38.0) = USD 25.6 million. The
benefit-to-cost ratio is (63.6/38.0) = 1.67. This project is cost-effective.
Incorporating Qualitative Costs and Benefits As shown in the example above, changing the
As discussed throughout this report, qualitative costs assumption about the value of reduced outages
and benefits should be tracked through the analysis. changes the final result from a positive NPV to a
When the final result (for example, NPV) is calculated, negative NPV. This illustrates the value of the CBA
it should be shown along with the list of qualitative process. If, in this example, decision-makers want to
costs and benefits to decision-makers. incorporate electricity users’ valuation of the benefits,
then the project appears to be cost-effective (meaning
One way to incorporate these factors into the analysis it has a positive NPV). If, on the other hand, decision-
is to consider the direction and magnitude these makers want to take a utility perspective, then the
factors would need to change in order to alter the project does not appear to be cost-effective. (This
result. In our example, we found that the project had places no value on the qualitative benefits.) There is
a net benefit of USD 25.6 million and further identified no correct answer here; the conclusion depends on
workforce training as an additional qualitative benefit. what values and perspective decision-makers want to
In this case, there is no need to attach a number to this adopt.
workforce training benefit, as the project is already
cost-effective without considering it. A similar process could be pursued for other inputs
and assumptions that are deemed uncertain and
Think about a different case, in which the proposed critical. An interesting question, for example, might
project had a net benefit of USD 2.8 million (meaning be to calculate the cost assumptions that result in an
it was not cost-effective). In this case, the workforce NPV of 0. If decision-makers are confident that costs
training benefit would need to be worth at least USD will fall below that assumption, then they could be
2.8 million to change the outcome of the CBA. This reasonably sure that the project overall will have a
process helps to clarify and bound the qualitative positive NPV.
factors.
STEP 7: SENSITIVITY ANALYSIS

Once a final result, either a NPV or benefit-to-cost ratio
is obtained, it is very useful to go back and perform a
sensitivity analysis, which is an assessment of how the
results vary when various inputs and assumptions are
changed. When doing so, focus on those inputs and
assumptions that are both uncertain and significant,
meaning they strongly influence the results.
Box 10: Ruritania Smart Grid Project: Sensitivity Analysis
As shown in Table 3I, reduced sustained outages and reduced electricity losses are the
largest components of the benefits NPV. As discussed in Chapter 3, a critical assumption
in estimating the benefits of reduced sustained outages is the value of this reduction to
electricity users. The results in Table 3I assume a value of USD 3 for each kWh reduction in
sustained losses. That value is based on a meta-analysis of a large number of studies. Note,
however, that this USD 3/kWh value reflects the electricity users’ perspective. The utility,
in contrast, might value these reduced outages as worth only the regained electricity sales
they yield—that is, at the current retail rate of electricity. As shown in Table 3K, changing
the value of these outage reductions from USD 3/kWh to USD 0.10/kWh changes the NPV
from +USD 28.6 million to –USD 2.0 million.
Table 3K: Comparing value from societal and utility perspectives

Perspective Assumed value of Resulting NPV of Final net NPV,
reduced outage reduced sustained reflecting all
outages benefit benefits and costs
Society USD 3/kWh USD 28.6 million +USD 25.6 million
Utility USD 0.10/kWh USD 1.0 million −USD 2.0 million
TOTAL -38.0

© Dainis Derics
Summary
S
mart grid projects in developing countries can enable higher levels of renewables on electricity grids,
but these projects need to be rigorously evaluated to determine if their benefits exceed their costs. CBA
defines and evaluates those costs and benefits, and can help decision-makers better allocate capital.
Defining and quantifying the benefits of a proposed smart grid project is complex and challenging. However,
breaking it down into a series of logical and ordered steps simplifies the process and clarifies the assumptions
and uncertainties.
Smart grid project costs can be estimated using published data and/or vendor estimates. The uncertainties are
generally smaller than for benefit-side estimates, although qualitative and project implementation costs are
project-specific and thus may require additional analysis.
Combining costs and benefits is a straightforward financial calculation. Qualitative costs and benefits can be
incorporated by calculating the values they would need in order to change the net benefits from positive to
negative (or from negative to positive). Similarly, sensitivity analysis can be used to show how net benefits vary
with input assumptions.
© Pi-Lens

List of
Abbreviations
AC – alternating current JPS – Jamaica Public Service Company
AMI – advanced metering infrastructure JRC – Joint Research Centre
C&I – commercial and industrial K – thousand
CBA – cost-benefit analysis kg – kilogram(s)
CCGT – combined-cycle gas turbine km – kilometer(s)
CO2 – carbon dioxide kVAR – kilo-volt-ampere reactive
DA – distribution automation kW – kilowatt(s)
DC – direct current kWh – kilowatt-hour(s)
DR – demand response LCOF – levelised cost of flexibility
DSM – demand-side management LV – low voltage
DOE – Department of Energy M – million
EPRI – Electric Power Research Institute MV – medium voltage
EU – European Union MVAR – mega-volt-ampere reactive
GDP – gross domestic product MVAR-hr – mega-volt-ampere reactive-hour
GW – gigawatt(s) MW – megawatt(s)
GWh – gigawatt-hour(s) MW-hr – megawatt-hour(s) (used for ancillary services)
hr - hour MWh – megawatt-hour(s) (used for energy)
IEA – International Energy Agency NOx – nitrogen oxide
IEEE – Institute of Electrical and Electronics Engineers NPV – net present value
IITC – IRENA Innovation and Technology Centre NRC – National Research Council
IRENA – International Renewable Energy Agency O&M – operations and maintenance
ISO – independent system operator
OECD – Organisation for Economic Cooperation and
Development
PM10 – particulate matter less than 10 micrometers in

diameter
PV – photovoltaic
RE – renewable energy
SAIDI – system average interruption duration index
SAIFI – system average interruption frequency index
SE4All – International Year of Sustainable Energy for All
SCC – social cost of carbon
SOx – sulfur oxide
T&D – transmission and distribution
TOU – time of use
UN – United Nations
U.S. – United States
USD - United States dollars
VAR – volt-ampere(s) reactive
VOLL – value of lost load
volt-VAR – voltage-volt-ampere reactive
VVO – volt-VAR optimisation
yr - year

References
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Elzinga, G. Strbac, L. Jones, A. Keane, D. Gielen, V.S.K.
Balijepalli, A. Brew-Hammond, and K. Yumkella, Smart
and Just Grids for sub-Saharan Africa: Exploring
Options, Renewable and Sustainable Energy Reviews

This report is supported by a number of annexations, which are available online.
Annex I: Ruritania Case Study: Distribution Automation Programme with no Predefined Renewables Goal
Approach
Annex II: Jamaica Case Study: Demand Response Programme With a Pre-Defined Renewables Goal
Annex III: Methods of Benefit Valuation
Annex IV: List of Smart Grid technologies for Renewable
Annex V: Smart Grids for Renewables: Real Case Studies
Annex VI: Glossary
Annex VII: Bibliography

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w w w.i re n a.o rg
C opyri g h t © I R ENA 2015

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SMART GRIDS AND RENEWABLES

A COST-BENEFIT ANALYSIS GUIDE

Cover photo: © L.F

CHAPTER 1: RENEWABLES, SMART GRIDS AND COST-BENEFIT ANALYSIS�������������������������������������������������������� 4

Renewables, Smart Grids

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 5

The challenge for decision-makers is to evaluate smart

Owing to these substantial differences, developing

European Union >99* 7

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 7

COST-BENEFIT ANALYSIS IN CONTEXT

• It is rigorous and quantitative, enabling evidence-based decision-making.

• Its assumptions and methodology are transparent.

However, there are some significant drawbacks as well, namely:

• It requires an assessment of the future impacts of present-day investments, which is inherently

ANALYSIS Our CBA methodology, detailed below, stresses the

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 9

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 11

Step 1: Does project Step 1:

Smart Grid Cost-Benefit

RURITANIA CASE STUDY SUMMARY

Table 3A: Values of benefits

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 15

Table 3B: Values of costs

Box 1: Ruritania Smart Grid Project: Country Information

General country information:

• 10 GW peak electricity demand, growing to 20 GW in 2030 (4.7% annual growth)

• 31 TWh annual generation, growing to 62 TWh in 2030

• 1 000 distribution feeders, doubling to 2 000 by 2030; average feeder capacity of 10 MW

• Electric utility is owned and managed by the national government

• Average retail electricity price: USD 0.10 per kWh

• Average wholesale electricity price: USD 0.05 per kWh

• Annual discount rate used for government planning: 8%

• Annual price inflation rate: 3%

Proposed smart grid project:

• Goal: facilitate the preexisting renewable deployment goal

• Project term: 15 years (2015 to 2030)

• Project scope: nationwide

• Stakeholders: utility, electricity consumers, society at large

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 17

Box 2: Ruritania Smart Grid Project: Introducing Smart Controls

Box 3: Ruritania Smart Grid Project: Baseline Selection

In total, there are 12 functions (EPRI, 2010), shown.

Box 4: Ruritania Smart Grid Project: Mapping Technologies to Functions

Table 3C: Mapping technologies to function

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 19

Box 5: Ruritania Smart Grid Project: Mapping Functions to Benefits

STEP 4: MONETISE BENEFITS

It is also important to determine when during the

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 21

Box 6: Ruritania Smart Grid Project: Monetising Benefits

Smart grid projects may also enable future renewable

Box 7: Ruritania Smart Grid Project: Assessing Qualitative Benefits

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 23

Benefit NPV Uncertainty level Primary beneficiary

We also assume that 50% of the distributed PV

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 25

Table 3G: Categories of uncertainty levels

A C O S T-BE N E F IT AN ALYSIS GU IDE F O R DEVE LO PIN G CO U NTRI ES 27

CHAPTER 1: RENEWABLES, SMART GRIDS AND COST-BENEFIT ANALYSIS�� 4