Decision Factors Related to Grid Modernization

The rationale for modernizing the electric transmission and distribution (T&D) network is obvious, particularly as one contemplates the specific application of Smart Grid and AMI and general implementation of full-scale distribution automation. However, any discussion about grid modernization needs to quickly shift to the planning and sequencing of the myriad actions to achieve the vision of a 21^st century grid, often involving a significant amount of replacement and refurbishment of T&D assets in addition to the installation of newer technologies. There are a number of constraints or decision factors that will govern this planning; namely:

• Investment Recovery In Rates - The investment plan must be economically feasible, offering clear benefits to its customers and result in a prudent and reasonable rate impact.
• Equity / Social Justice of the Plan - The modernization plan should be “fair” to all the customers, and the benefits of modernization should be realized by as many customers as possible.
• Pace of Current Technologies - New technologies will need to be applied prudently to ensure an adequate level of maturity has been achieved and the solutions are cost-effective.

Modernization Investment Levels and Rates

In most cases, the investment necessary to carry out a full-scale T&D modernization effort includes not only investments related to the new technologies inherent in a fully automated (or “smart”) network, but also significant capital expenditures necessary to prepare the system for modernization. In most cases, the electric utilities are already investing in their T&D network to fullest extent possible given their current and past rates.

The figure to the right validates this point by plotting the ratio of replacement and reinforcement CAPEX to depreciation, illustrating that the majority of 141 selected U.S. IOUs are, in fact, investing at levels above their current recovery threshold (i.e. greater than 1.0).

Therefore, any economically-rational or financially-feasible investment in the T&D network related to modernization can only come through increases to nominal rates net of the offsetting (positive)  effects of the cost efficiency-related benefits of modernization. Given this context, one of the key decision factors related to modernization will be the extent to which rates may increase once the net cost of the investments are made in the system.

Grid Modernization Needs to be Applied Equally Regardless of Socio-economic Factors

Under normal investment patterns, most of the modern elements of any network will be installed in the newer and, thus, commonly the more affluent growth areas of an electric utility’s service territory. In embarking on an overall Grid Modernization effort, a more holistic approach is called for that assures as many of the customers as possible can realize the benefits of modernization. Achieving this goal requires the establishment of progress tracking measures to report on the realization of benefits across all customer classes and geographic areas and thus requires an investment sequencing approach that deliberately balances the timing of these benefits.