Smart Grid in Denmark

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1 Smart Grid in Denmark

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3 Contents Preface... 4 Summary... 5 Framework and preconditions for the report... 8 The energy system stands at a crossroads Denmark s climate and energy targets will change the conditions for the power system Changes to the power system necessitate a decision regarding its future design...9 Fact sheet: What is Smart Grid? Smart Grid is the most effective way to accommodate increases in electricity consumption Conversion of the energy system requires large investments Smart Grid is the most effective and inexpensive method for upgrading the power system Socioeconomic costs of establishing a Smart Grid Socioeconomic costs of a continued traditional expansion strategy The economics of Smart Grid are sound even when preconditions differ...18 Fact sheet: Economic calculations Smart Grid offers new possibilities for the consumers Electric vehicles and plug-in hybrid vehicles become greener and more flexible Smart Grid can provide a complete overview of energy consumption New energy-related services will create entirely new opportunities Smart Grid is a mutual task Realisering the Smart Grid potential requires a contribution from the entire sector An efficient market will lead to a common effort and realise Smart Grid potential Two necessary political preconditions Future-proofing financial regulation in the electricity sector should create incentives Smart Grid development and demonstration activities can accelerate development The way ahead Phase 1 Facilitating phase Phase 2 Establishment phase Phase 3 Commercialisation phase

4 Preface In the coming years, electricity consumption and production in Denmark is set to change significantly. Electricity generation will be increasingly derived from renewable energy sources, while consumers will change their oil-fired burners for electric heat pumps and start to replace their petrol-powered vehicles with electric vehicles and plug-in hybrid vehicles. Consequently, the power system should be developed, but what is the most effective way to do this? Energinet.dk and the Danish Energy Association have analysed the issue of grid development to meet the new requirements in this joint report. The conclusion of the economic analysis in the report asserts that an intelligent power system a Smart Grid is the most effective strategy for developing the power system. Sensitivity calculations conducted in the analysis show that this conclusion is robust, irrespective of whether there are fewer or more electric vehicles and plug-in hybrid vehicles in relation to the basic conditions for the analysis. All in all, the conclusion of the calculations is clear: If we desire a society which is independent of fossil fuels and which utilises huge amounts of wind power for transport and heating, then Smart Grid represents the most effective strategy for developing the power system to meet future requirements. Although it will be many years before we see the complete roll out of Smart Grid, the strategic foundation should be created now. A foundation which we hope this report will help pave the way for. Enjoy reading. Peder Ø. Andreasen President and CEO Energinet.dk Lars Aagaard Director Danish Energy Association 4

5 Summary Electricity consumption and generation in Denmark is set to change significantly in the coming years. Electricity customers will demand new services as they replace oilfired burners with electric heat pumps and traditional petrol-powered vehicles with electric vehicles and plug-in hybrid vehicles. The electricity sector should be ready to provide these services with the same high level of delivery quality as today. This should occur in a situation where electricity generation is increasingly derived from renewable energy. Denmark has ambitious political climate and energy targets to reduce CO 2 emissions, integrate more renewable energy, especially wind power, into electricity generation and improve energy efficiency. Overall, these targets create a need for reinforcing and expanding the power system. But how? Energinet.dk and the Danish Energy Association have analysed this in the report 'Smart Grid in Denmark' with the objective of describing and analysing the specific challenges facing the power system in the coming 15 to 25 years. Moreover, the report describes how and to what extent Smart Grid solutions can prepare the power system for handling these challenges. Energinet.dk and the Danish Energy Association have analysed the part of Smart Grid that enables an effective interaction between wind power generation, heat pumps in private households, electric vehicles and plug-in hybrid vehicles. The project assumes in its analyses that the Danish electricity sector in 2025 is able to handle the following: that wind turbine capacity is expanded to cover approximately 50 per cent of annual Danish electricity consumption that the number of electric and plug-in vehicles totals 600,000, and that there are 300,000 individual heat pumps. The analyses in the report show that the power system will manage increases and changes in electricity consumption and more fluctuating generation most efficiently through a Smart Grid that creates a dynamic interaction between the power system and the consumers through metering, controlling and automation in the power grid and in private households. The conclusion also applies if there are fewer electric vehicles and plug-in hybrid vehicles than assumed above. However, as Smart Grid is a new and very different method for developing the power system than traditional reinforcement, a decision needs to be taken to ensure that all players are pulling in the same direction to avoid investments in and expenditures on equipment and systems that would not be used optimally. This requires increased cooperation between the players in the sector as well as strong political commitment to establish fundamental regulatory conditions for this development. Traditional expansion versus Smart Grid Traditionally, the power sector has adapted and reinforced the power grid by laying more and thicker cables in the ground, erecting more substations and securing access to sufficient generation capacity. The consumers have been primarily 'passive' with predictable and regular consumption patterns. Traditionally, in an intelligent power system a Smart Grid completely new perspectives will emerge. The consumers will be able to interact with the power system and generation through automated and intelligent control of their electrical appliances, thereby acting as resources for the power system. The overall calculations show that a future power system using Smart Grid can be established at a social net cost (present value) in the range of DKK 1.6 billion. However, this requires social investments of around DKK 9.8 billion an investment which will provide derivative benefits of around DKK 8.2 billion in the form of lower electricity generation costs, a more effective production of ancillary services and increased electricity savings. On the other hand, a traditional reinforcement strategy requires social investments of approximately DKK 7.7 billion at present value but creates no increment in benefits. Consequently, the economic benefit of choosing the Smart Grid strategy is estimated at approximately DKK 6.1 billion. The distribution network should be expanded concurrently with the customers' demand for electricity for electric vehicles, plug-in hybrid vehicles and heat pumps. However, the need for reinforcement is DKK 1.6 billion less if the new consumption is optimised flexibly and intelligently with the assistance of Smart Grid functionalities. Specifically, Smart Grid reduces the need for reinforcements of the distribution network from DKK 5.7 billion to DKK 4.1 billion. Conclusion of the report The economic analysis in the report concludes that Smart Grid is the most effective strategy for developing the power system and preparing it to meet the challenges ahead. A number of preconditions relating to the expected future development of electricity generation and consumption in Denmark are set out in the project. There is a degree of uncertainty associated with these preconditions as it is difficult to predict the pace of the development. This obviously gives rise to some uncertainty about the calculations. Of course, a significant change to the preconditions will alter the size of the calculated investments and benefits. However, the calculations are estimated to be all in all so robust that the conclusion is clear: If we desire a society with a wide- 5

6 spread use of electricity for transport and heating as well as a high level of wind power generation, Smart Grid will be the most effective solution. Sensitivity calculations conducted in the analysis show that this conclusion is robust, irrespective of whether there are fewer or more electric vehicles and plug-in hybrid vehicles in relation to the fundamental preconditions for the analysis. In particular, a Smart Grid is a very effective solution if, in the long term, the use of electric vehicles and plug-in hybrid vehicles becomes even more widespread. Advantages for the consumers The establishment of a Smart Grid will increase the digitisation of Danish households. More metering, controlling and communication electronics will be present in households, which will afford the consumers an overview of their consumption and the possibility to achieve automatically controlled and intelligent electricity consumption, thereby saving energy and money. An additional benefit of equipping households will be the possibility for consumers to purchase a number of related services. For example, it is conceivable that consumers could receive an SMS if their heat pump should happen to break down while they are away on winter holiday. They could if desired automatically shut off standby consumption in their home while they are away, and they could at any given time control the temperature in the house via their smart telephone or PC. Moreover, it is to be expected that more of such new and innovative products will become available in the future. Products that will avail of the new infrastructure, as we have seen with mobile telephony and the Internet. Moreover, Smart Grid will ensure that owners of electric vehicles and plug-in hybrid vehicles will have their energy consumption for transport covered in a very individual and intelligent way because it will be possible to charge the battery in the vehicle at varying prices depending on charging speed and charging time. At the same time, it will be possible for consumers to reduce their electricity bills through intelligent consumption and automated energy-efficient solutions by letting their electrical appliances function automatically at predetermined comfort levels to the benefit of both themselves and the power system. The realisation of Smart Grid requires a contribution from the entire sector Customer demand for such new services will make the power system more comprehensive and far more dynamic than it is today. To meet this demand, the power system needs to be further integrated across the existing interfaces in the future. A single transparent price that dynamically reflects the costs in the value chain of the entire power system should be developed so that the customers can gain the full benefit of making their consumption flexible and intelligent. In addition, systems and products should be developed to make it easy for the customers to offer their flexible consumption as regulating power and system reserves and benefit from this. This means that the transmission system operator (TSO) and distribution network companies (network companies) will have to undertake new tasks. The TSO should continue to develop the market for balancing and ancillary services. Furthermore, network companies should create a real-time view of the load on the distribution network that can form part of the overall dynamic electricity price and thereby motivate the consumers to use electricity in a way that minimises the costs of grid reinforcement. To ensure an effective development of Smart Grid on market-based conditions, it is crucial that both framework conditions and specific solutions are developed with a strict focus on securing low complexity and low costs. Two necessary political preconditions The electricity industry shall and will play an active role in ensuring a common and coordinated development of an intelligent power system in Denmark. However, this requires that the political preconditions also promote a proactive behaviour amongst all players. There are two necessary preconditions, which are crucial to supporting this proactive behaviour. The financial regulation of the network companies should ensure that they are incentivised to actively participate in the development of a Smart Grid and that they make the necessary, long-term investments to create an intelligent power system. Under the current regulation, these expenses do not result in an increase of the revenue caps of the network companies. Furthermore, increased demonstration efforts are required, partly to further develop and adapt the necessary Smart Grid technologies and partly to ensure the necessary standardisation within the field. Consequently, society should continue to grant financial support to conduct focused and coordinated development and demonstration activities which encourage the advancement of those technologies and solutions that will form the building blocks for the intelligent power system of the future. These efforts are decisive if Denmark is to achieve a market leading position within the Smart Grid value chain. The way ahead Although it will be many years before we 6

7 see the complete Smart Grid roll-out, the foundation should be laid now. A number of network companies are either engaged in or planning to roll out automated metering systems (AMR) to private households. Moreover, the replacement of oil-fired burners with electric heat pumps is already in progress partly due to the payment of public subsidies to customers substituting oil burners for heat pumps. Although the major challenge in relation to electric and plugin vehicles is still some years away, extensive work is carried out today to develop concepts and charging stations and to plan the expansion of the entire charging infrastructure. Therefore, efforts should be directed towards identifying the need for and ensuring the necessary standardisation and functionality requirements, thus preparing these elements to the widest possible extent to function immediately in a Smart Grid concept. The way towards an intelligent power grid can be described briefly in three phases: Facilitating in the short term, establishment in the medium term and commercialisation in the long term. Facilitating phase ( ) From 2010 to 2012, society will experience an increasingly widespread use of electric heat pumps and the first proper launch of electric and plug-in hybrid vehicles by commercial players. By the end of this period, the electricity sector should have ensured that the relevant players both inside and outside of the electricity sector are mobilised and involved in considering the power system of the future. Also during this period, a wealth of experience should have been gained through development and demonstration projects which can form the basis for frameworks and standards. Establishment phase ( ) From around 2010 to 2020, changes on the demand side will begin to take shape as the use of heat pumps will have become significantly more widespread and consumers will have begun to purchase electric and plug-in hybrid vehicles on a larger scale. By the end of this period, this development will have brought about a power system in which the fundamental Smart Grid infrastructure has been established. At the same time, the system should be so mature that commercial solutions supporting intelligent demand response start to find more widespread use. Commercialisation phase (2020-) This phase is expected to occur after By that time, electric heat pumps will be the most widespread source of heating outside areas supplied with district heating and natural gas. At the same time, electric and plug-in hybrid vehicles will be recognisable and commonplace on the streets. This situation makes it possible to balance the power system via Smart Grid functionality in the form of intelligent and automated control of the consumers flexible appliances while Smart Grid services should be further developed so that consumers have a wide range of products to choose between. 7

8 Framework and preconditions for the report In recent years, the Danish Energy Association and Energinet.dk have worked determinedly on investigating the opportunities and challenges facing the power system, given the ambitious political climate and energy targets. In the first half of 2010, a joint project was initiated with a view to analysing the prospects of Denmark taking advantage of the opportunity to make the Danish power system more environmentally friendly and efficient by setting up intelligent demand response in Danish households. The platform for this intelligent electricity consumption is created concurrently with increased consumer investment in electric heat pumps and in the near future electric and plug-in hybrid vehicles. The objective of the project has been to describe and analyse the specific challenges facing the power system in the coming 15 to 25 years and to describe in which ways and to what extent Smart Grid solutions can address these challenges. The project will provide an overview of the possibilities that these potential solutions create for the consumers and of the investments that the solutions require. This overview is central to creating the basis for a forward-looking and long-lasting investment plan for regulated companies and market players in the electricity industry. Moreover, the project should describe which framework conditions it would be advantageous to adjust to ensure an effective outcome; similarly, the project should seek to show how such an effective outcome could be achieved in Denmark in both the short and the long term. The work is carried out by a number of working groups consisting of personnel from Energinet.dk, the Danish Energy Association and member companies of the Danish Energy Association. This report is based on the analyses and conclusions of these groups, whose work is described in detail in a number of appendix reports. 8

9 1. The energy system stands at a crossroads Realising Denmark s ambitious climate and energy-policy targets to reduce CO 2 emissions, increase its share of renewable energy, especially in electricity generation, and to improve energy efficiency means that electricity will play an even more central and sustainable role in the power system of the future than it has to date. This chapter describes the implications of this new role for the power system. The conclusion is that this development will result in increased investments, which in principle could follow two paths. One of the paths can be characterised as a traditional expansion strategy in which the power system is reinforced and the electricity consumers are maintained as 'passive' consumers. Alternatively, the other path would lead to the establishment of an intelligent power system a Smart Grid that creates a dynamic interaction between the power system and the consumers through metering, controlling and automation. With a view to avoiding double investments, it would be most expedient to begin adapting to a Smart Grid strategy already now if this path is assessed to be the most effective in the long term. As such, the economy of the Smart Grid strategy would be undermined if large-scale expansions based on a traditional strategy were carried out. 1.1 Denmark s climate and energy targets will change the conditions for the power system Denmark has set an ambitious political target for the next ten years to reduce CO 2 emissions in non-ets sectors by 20 per cent, to increase the share of renewable energy in electricity generation to 30 per cent, to increase the share of renewable energy in the transport sector to 10 per cent and to improve energy efficiency. The targets represent a significant step on the path towards achieving the long-term political objective of making Denmark independent of fossil fuels. The way ahead is to adapt the Danish energy system and significantly change the power system, both in relation to the way electricity is generated and how it is used by the consumers. Electricity that is increasingly generated with the assistance of renewable energy can favourably replace fossil fuels in the heat and transport sectors. Consequently, electricity will play an even more central and sustainable role in the energy system of the future than it has to date. On the supply side, there will be a significant expansion of Danish wind generation capacity so that in 2025 wind turbines are expected to generate up to 50 per cent of annual Danish electricity consumption. In addition, a focus on renewable energy and zero-energy houses will increase the number of households engaging in local energy generation by means of photovoltaic cells, domestic wind turbines, etc., in the coming years. On the demand side, electricity will be increasingly utilised in the heat and transport sectors through the increased use of electric heat pumps as well as electric and plug-in hybrid vehicles. In both these sectors, electricity can easily make consumption more climate-friendly and efficient. The heat sector uses approximately 20 per cent of Danish energy consumption for heating homes, of which 60 per cent is generated from fossil fuels. Electric-powered ground-to-water heat pumps can generate the same volume of heat as today with per cent lower energy consumption 1. The transport sector uses another approximately 20 per cent of Danish energy consumption on road transport, of which almost 100 per cent is supplied by fossil fuels. The motor in an electric vehicle is more energy efficient than a petrol or diesel engine as it can be driven the same distance on per cent less 1 'Efficient use of wind power-based electricity in Denmark', Energinet.dk, 2009 energy 2. Consequently, by investing in heat pumps as well as electric and plug-in hybrid vehicles consumers will be contributing significantly to: improving energy efficiency reducing CO 2 emissions by substituting fossil fuels for renewable energy based electricity realising the target of 10 per cent renewable energy in the transport sector minimising the dependency on imported oil and natural gas. 1.2 Changes to the power system necessitate a decision regarding its future design The current power system is based on a number of fundamental assumptions about generation and consumption. Firstly, the balance between consumption and generation is ensured basically by letting generation follow consumption, but through the active use of our international interconnections, however. Secondly, the power system is a one-way system in that electricity is almost exclusively transmitted from the power system to the consumer. Thirdly, it is always essential to keep some central power stations operating in order to establish and maintain the electrotechnical system stability. As the power system undergoes considerable changes on the supply side in the future as described above, power system development must be aimed at finding new ways to ensure: Effective utilisation of wind power generation. Electricity generation from wind turbines cannot be determined to fixed times. If wind power capacity is expanded substantially, considerable amounts of electricity will be generated during windy periods which can be utilised advanta- 2 Technology assessment of alternative propellants in the transport sector, COWI, The efficiency is based on mechanical output relative to input energy. 9

10 geously through intelligent demand response. Access to ancillary services 3 from new sources. As wind power becomes the principal source of electricity generation, it would be expedient to ensure that consumers are given better possibilities to contribute to the supply of ancillary services to the power system so that the power system can function at times when there is no longer a commercial basis for operating central power stations. At the same time, changes on the demand side will mean that new thinking is required in the distribution network to ensure: Effective expansion of the transfer capacity in the distribution network 4. The introduction of electric and plug-in hybrid ve- 3 Ancillary services are the generation capacity for reserves and regulating power, inertia and shortcircuit capacity. 4 Energinet.dk has previously concluded that intelligent demand response is not an alternative to transmission grid expansion as the need for expanding it is to a higher degree dimensioned by the development of the generation mix used in the power system and trading in the cross-border electricity market. Therefore, the need for transmission grid expansion has not been analysed further in this project. hicles as well as heat pumps will mean that the power grid of the future should transfer more electricity than it is currently designed to do. Therefore, it should be reinforced as efficiently as possible. Continued maintenance of a stable voltage in the distribution network. Many of the electrical appliances require a stable voltage in the distribution network to function correctly. An increased number of electricity-generation facilities at domestic level together with new and widely fluctuating consumer patterns will lead to increased variation in the voltage in the local distribution networks and result in a more unstable voltage, causing inconvenience to the consumers. Traditionally, the electricity sector has adapted the power system to changes in the outside world by laying more and thicker cables in the ground, erecting more substations and securing access to sufficient generation capacity. The consumers have been primarily 'passive' with predictable and regular consumption patterns. The electricity sector can still follow this traditional strategy, yet new technologies offer an alternative possibility. This new possibility is to commence the establishment of an intelligent power system a Smart Grid which creates entirely new perspectives for electricity consumers to interact with the power system and electricity generation. This can occur through automated and intelligent control of the consumers appliances which enables them to function as resources for the power system. As Smart Grid is a new way of developing the power system which differs significantly from traditional expansion strategies, a decision should be made in favour of one or the other strategy. This decision should ensure that all players are pulling in the same direction, thus preventing investments in and expenditure on equipment and systems which would not be used optimally. 10

11 Upon substantial expansion of the wind power capacity, considerable amounts of electricity will be generated during very windy periods which can be utilised advantageously through intelligent demand response. MWh per hour projected to 2025 based on 2010 consumption and wind generation Estimated generation and consumption in ,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Hours in the second quarter, 2025 Figure 1. In the future, wind turbines will generate considerable amounts of electricity that can be utilised with advantage in Denmark via intelligent demand response, which will create times when there is no commercial basis for operating central power stations. An analysis of 148 selected radials in the low-voltage grid shows that many power lines in the future should transfer more electricity than they are built to handle today. MWh per hour projected to 2025 based on 2010 consumption and wind generation Load rate in per cent Analysed 0.4 kv radials Figure 2. Increased electricity consumption will necessitate thicker cables in many parts of the power grid, which will also generate greater variation in the voltage in the power lines on the individual suburban streets when consumption fluctuates greatly. 11

12 Fact sheet: What is Smart Grid? The Smart Grid concept has become widespread in recent years and the concept is used in various contexts with widely differing definitions. This project analyses the part of Smart Grid that enables an effective interaction between wind power generation, heat pumps in private households as well as electric vehicles and plug-in hybrid vehicles. Both the Danish Energy Association and Energinet.dk work with Smart Grid in other contexts, using broader definitions. There are numerous descriptions and definitions of what a Smart Grid is. An excellent definition proposed by 'European Technology Platform' states that Smart Grid is 'electricity networks that can intelligently integrate the behaviour and actions of all users connected to it generators, consumers and those that do both in order to efficiently deliver sustainable, economic and secure electricity supplies.' 1 1 Source: Smart Grid definition, International studies have identified a number of specific advantages for consumers, the environment and society of introducing Smart Grid into a power system. These advantages primarily relate to 2, 3 Improved system stability resulting in higher security of delivery More options to create power balance in a less expensive and more efficient way Faster remedy of faults in the power grid Reduced need for investments in the power grid General energy savings and lower electricity prices for consumers who use electric vehicles, plug-in hybrid vehicles and heat pumps intelligently Increased integration of renewable energy through the flexibility offered by electric vehicles, plug-in hybrid vehicles and heat pumps, where minor time lags in consumption will not reduce consumer comfort. 2 Source: What s So Smart about the Smart Grid?, Booz&CO Source: European Technology Platform Smart Grids, European Commission, 2006 Power grid Communication Operation and monitoring Service provider Markets Customer Generation Smart Grid Transmission Distribution Figure 3. A Danish Smart Grid builds on the existing infrastructure and creates new possibilities for interaction with the consumers. 12

13 Fact sheet: In this project, Smart Grid is analysed as the way to develop a power system capable of creating intelligent demand response using those elements that are necessary to efficiently integrate more wind turbine power, more micro generators at domestic level, electric heat pumps as well as electric and plug-in hybrid vehicles. The analyses have shown that such a Smart Grid can offer consumers the possibility to actively supply system stabilising services to the power system reduce the need for reinforcing the distribution network consume electricity when it is cheap achieve overall energy savings. Such a system can generate economic benefits for both society and the consumers without a resulting loss of comfort. The system is conceptually summarised in the following illustration. A more detailed version of the described Smart Grid and its elements is illustrated in Figure 4 below with the numbered areas described in the text after the figure. 13

14 Fact sheet: Power stations Power grid Communication Communication at home Automatic on/off Real-time readings PV cells Facilities for ensuring system stability Grid company Integrated price signal Electricity meter Household appliances Heat pump TSO Commercial market players Other relevant players Wind farm Figure 4. Illustration of the elements of a Danish Smart Grid. Electricity consumption control system Charging station Electric vehicle 1 Systems for interdisciplinary coordination and data exchange between the players in the power system Smart Grid requires close coordination across the interfaces of the power system, and it will therefore be necessary to establish IT systems capable of receiving and processing data about the status of the power system for most of the parties involved online. These IT systems should make it possible to fulfil the wishes and needs of the consumers without overloading the power system and thus reward the consumers for their flexibility. 2 Equipment for measuring the condition of the distribution network Measuring the condition of the distribution network is a prerequisite for ensuring that the distribution network does not overload. Consequently, measuring equipment should be installed at nodes in the distribution network, particularly in those areas that are at risk of such overloading. This measuring equipment should be able to send real-time information about the condition of and load in the grid. 3 Equipment for flexible control and settlement of the consumption of consumers investing in a heat pump or an electric vehicle Flexible consumption control is managed by one or more electronic units in the consumer s home which can control the consumption of the flexible, electrical appliances in the house. Such control can simultaneously maximise the consumer s comfort and ensure effective interaction with the needs of the power system expressed through price signals. Flexible settlement is performed with the assistance of data from a remote-reading electricity meter 4. The electronic unit seeks to ensure that optimising electricity consump- 4 It is assumed in the project that all private consumers owning heat pumps and/or electric vehicles will have an electricity meter capable of recording and saving the consumer s electricity consumption each hour. This assumption reflects the fact that a large number of network companies today have or are planning to roll out meters which can meet these requirements, and that several of the network companies will install new AMR systems for customers with a demand response potential when the 'old' electricity meters are due to be replaced. For some consumers it will also become relevant to change their existing electricity meters when they acquire a consumption device that can be used for demand response purposes, such as an electric vehicle or an electric heat pump. tion intelligently entails the least possible difficulty for the consumer. Although the electricity meter is an important element in the establishment of an intelligent power system, it could not create the desired ambitious conversion to demand response and an intelligent power system alone. It is necessary to support the electricity meter data with a contractual relationship between consumer and electricity supplier that rewards the consumer for acting flexibly, eg settlement according to the hourly rates on the wholesale market. 4 Facilities for ensuring system stability In a future of more wind power, there can be periods when there will be no economic rationale for having power stations in operation. System stabilising services such as inertia and short-circuit capacity, which are normally provided by power stations, should be ensured at all times. No decision has been taken in the project regarding the most effective method for ensuring system stability; however, based on calculations it is assumed that it could be achieved by installing synchronous compensators and SVCs. In order to link the Smart Grid elements together effectively, a wellfunctioning division of work should be ensured between the regulated players in the industry and the competition-based enterprises. At the same time, a market model should be created which facilitates well-functioning interaction between the players. The conversion to an energy system that helps Denmark to come closer to achieving its climate and energy-policy targets will require significant investments throughout the energy system and especially in the power system. The analyses show that the power system can manage increases and changes in electricity consumption and more fluctuating power generation most efficiently by establishing a Smart Grid that creates a dynamic interaction between the power system and the consumers through metering, controlling and automation in the power grid and in private households. 14

15 2. Smart Grid is the most effective way to accommodate increases in electricity consumption 2.1 Conversion of the energy system requires large investments The future will bring great changes in both the generation and consumption of energy. Generation will change to become increasingly based on renewable energy, which will happen through an expansion of wind power, for example. If Denmark is to become less dependent on fossil fuels, consumers should change their energy consumption considerably to use the new renewable energy efficiently, eg through electric heat pumps as well as electric and plug-in hybrid vehicles. These changes will require significant investments from both society and the consumers, which this project has not sought to quantify. Analyses in the project are based on the premise that wind turbine capacity expands to cover around 50 per cent of Danish annual electricity consumption, that there will be a total of around 600,000 electric and plug-in hybrid vehicles as well as approximately 300,000 individual heat pumps in Denmark all in However, it is not critical to the analyses and conclusions of the project that the aforementioned development is achieved in this specific year. This development will result in a need for ensuring effective interaction between the new forms of fluctuating generation and the new forms of consumption. The power grid and its components are the central link between generation and consumption. Increased electricity consumption and more fluctuating generation will require investments in the power grid to make both ends meet. 5 The number of electric vehicles is based on scenario A2 from the EFP project Electricity for Road Transportation, Flexible Power Systems and Wind power, and the number of heat pumps is estimated by analysing the potential for replacing existing individual heating units, primarily oil-fired boilers and electric heating. The size of these investments depends partly on how effectively the power grid can be utilised and partly on the consumers ability to act flexibly. The analysis does not include investments in transfer capacity in the transmission grid as this was closely analysed in the work undertaken by the Electricity Infrastructure Committee in Smart Grid is the most effective and inexpensive method for upgrading the power system The economic analysis in the report concludes that Smart Grid is the most effective and inexpensive method for upgrading the power system so that it is prepared to meet the challenges ahead. Consequently, establishment of a Smart Grid will cost Denmark approximately DKK 9.8 billion in investments for metering, control and automation at the consumers premisis and in the power grid. This investment will yield benefits for Denmark totalling approximately DKK 8.2 billion, so that the total cost will be around DKK 1.6 billion. The alternative to Smart Grid is a traditional expansion strategy, which requires a socioeconomic investment of approximately DKK 7.7 billion without yielding any benefits. Consequently, the advantage of pursuing 6 See 7 The calculations do not take into account the socalled net tax factor. The net tax factor is a calculation concept that seeks to adjust for differences between factor and consumer prices (for more information see the Danish Ministry of Finance s guidelines for socioeconomic analysis). An application in this project would have only changed the absolute size of the figures and not their relative connection. the Smart Grid strategy is estimated to be around DKK 6.1 billion. These calculations 7 are further specified in the following Socioeconomic costs of establishing a Smart Grid Upgrading of the Danish power system to a Danish Smart Grid will require investments and will therefore generate increased costs. The analysis has identified the necessary investments and costs, which amount to total socioeconomic costs of approximately DKK 9.8 billion. These costs comprises of the following items: Metering equipment in the distribution network which can provide a continuous overview of the load on the distribution network. This is a significant precondition in combination with the electricity price on the wholesale market for establishing integrated price signals which the consumers can act upon both to their benefit and that of the power system. To this should be added costs necessary to enable consumers owning electric vehicles, plug-in hybrid vehicles and heat pumps to use hourly settlement, which is secured through the upgrading of their electronic electricity meter (approximately DKK 2.1 billion) Electronics in private households which can automatically communicate with the power system and based on this with the consumer s acceptance can control electricity consumption in the household. (approximately DKK 1.6 billion) Expansion and reinforcement of the distribution network in areas where Smart Grid functionality alone cannot handle the overload (approximately DKK 4.1 billion) 8 The economic calculations describe the economics of power generation. Unless otherwise stated, all amounts are the discounted present value of future cash flows based on an annual discount rate of 5 per cent. 15

16 Investment in facilities to ensure system stability in a power system with significantly more wind power. (approximately DKK 1.7 billion) Metering and control software at Energinet.dk and the network companies that collects and processes data and ensures sufficient data communication between both regulated and commercial players in the power system (approximately DKK 0.3 billion). The analyses have also investigated the benefits of a Smart Grid in a Danish context. Today, the Danish power system is very robust with high security of supply, and thus there are no significant Smart Grid benefits to be gained from improving security of supply, even though this is often mentioned in other countries. However, the analyses show that the other areas of benefit contain a significant Danish potential that can provide socioeconomic benefits amounting to approximately DKK 8.2 billion distributed on the following areas: Utilisation of the time-oriented flexibility of electric vehicles, plug-in hybrid vehicles and heat pumps can move their electricity consumption to times when electricity is cheaper and thus reduce the socioeconomic costs of total electricity generation without reducing the perceived comfort of the consumers (approximately DKK 4.4 billion) Costs of regulating power, reserves and ancillary services can be reduced by giving more providers with lower costs access to the market (approximately DKK 2.4 billion) Clarification of the consumers electricity consumption and the possibility of implementing energy-saving solutions, eg through automatic standby function, can reduce total electricity consumption, which saves society the alternative costs that would otherwise have been incurred from implementing such energy-saving initiatives (approximately DKK 1.4 billion). Smart Grid has additional social costs of approximately DKK 1.6 billion in contrast to DKK 7.7 billion in a traditional grid expansion scheme. Socioeconomics in DKK billion Smart Grid Traditional expansion Investments Benefits Total Investments Benefits Total Smart Grid investment in detail Present value in DKK billion Smart Grid investment in detail Present value in DKK billion Metering and control software Metering equipment in the grid and at consumers premises Control electronics at consumers premises Reinforcement of distribution network Facilities for ensuring system stability Savings in regulating power and reserves Savings in electricity generation Saved costs for energy-saving initiatives Figure 5. Investments and benefits of establishing the power system of the future. 16

17 Further benefits may be gained in the form of improved possibilities for locating faults in the power grid and thus reducing the duration of power cuts, a potential reduction in the number of production units for covering peak-load demand and the development of know-how in Denmark which can ensure that Denmark s leading position in the industry is translated into jobs and exports. However, these benefits are not appraised in the work of the project, yet they represent a considerable upside to the conclusions of the analysis. The overall calculations show that the future power system with Smart Grid can be established at a socioeconomic net cost of approximately DKK 1.6 billion, which is derived from DKK 9.8 billion in investments less DKK 8.2 billion in benefits. The benefits can be realised on condition that all Smart Grid potentials are commercialised. 2.4 Socioeconomic costs of a continued traditional expansion strategy As an alternative to Smart Grid, future challenges facing the power system would be managed using a traditional expansion strategy wich does not focus on generating increased consumer involvement in the power system but merely on strengthening the power grid. If this strategy is selected to resolve the challenges, the socioeconomic costs of generating electricity will increase by approximately DKK 7.7 billion, thus constituting approximately DKK 6.1 billion more than the net socioeconomic costs of a Smart Grid expansion strategy. The largest portion of the costs (around DKK 5.7 billion) stems from the need to strengthen the distribution network. This need arises because especially electric vehicles, plug-in hybrid vehicles and in some cases heat pumps will draw energy from the distribution network late in the afternoon and at the start of the evening if their consumption is not optimised intelligently. This increased consumption will coincide with the peak time when the distribution network is already today under most stress the so-called 'evening peak'. A lesser part of the costs (around DKK 2.0 billion) results from the need to establish new electrical installations that can ensure the system stability of a Danish power system with a significantly expanded wind turbine capacity. In contrast to the establishment of an intelligent power system, the traditional expansion strategy and consumer behaviour 17

18 will not yield socioeconomic benefits in the form of reduced system and production costs and additional energy savings. 2.5 The economics of Smart Grid are sound even if preconditions differ A number of preconditions relating to the expected future development of electricity generation and consumption in Denmark were set out in the project. There is some uncertainty about the exact development, and this naturally leads to uncertainty about the preconditions for the project which of course will be reflected in the calculations. A significant change to the preconditions will naturally change the size of the calculated investments and benefits. However, the calculations are estimated to be all in all so robust that the conclusion is clear: If we desire a society with a widespread use of electricity for transport and heating, Smart Grid will be the most effective and least expensive solution. Analyses in the project of the long-term implications of an electricity-oriented society clearly show that Smart Grid is in the longterm a better socioeconomic and technical solution than traditional power system expansion. In particular, increased amounts of wind power or a greater number of consumer appliances with large and flexible consumption could increase the value significantly. It has been specifically calculated in the project that from a socioeconomic standpoint it is possible to save additional billions by implementing a Danish Smart Grid under the precondition that the number of electric vehicles and plug-in hybrid vehicles increases significantly in the period after A long-term scenario has been calculated, in which half of the Danish vehicle fleet comprises of electric and plug-in hybrid vehicles. With an already established Danish Smart Grid, the increase in the number of electric vehicles and plug-in hybrid vehicles could be integrated into it and all in all generate a socioeconomic net benefit in the power system of approximately DKK 1 billion. This benefit is achieved by carrying out minor investments which ensure the integration of electric vehicles and plug-in hybrid vehicles 8 Calculations in the project assume an increase in the number of electric and plug-in hybrid vehicles from approximately 600,000 in 2025 to approximately 1,1 million in This development is based on scenario A2 from the EFP project 'Electricity for Road Transportation, Flexible Power Systems and Wind power' into the power system while generating significant socioeconomic savings through cheaper electricity generation and energy savings for the owners of the new electric vehicles and plug-in hybrid vehicles. If the power system is expanded using a traditional strategy, the increase in the number of electric vehicles and plug-in hybrid vehicles will generate additional socioeconomic costs of approximately DKK 2.2 billion. Using this methodology, the network companies will conduct local and individual reinforcements and expansion of their distribution network when areas with a risk of overloading are identified. Consequently, the need for investments will rise constantly and concurrently with new consumption. Similarly, the analyses show that the conclusion will be the same also if there are fewer electric vehicles and plug-in hybrid vehicles than stated above, for example. The net cost of 300,000 electric vehicles and plug-in hybrid vehicles is DKK 6.2 billion in a traditional expansion scheme, whereas it is DKK 2.5 billion in a Smart Grid expansion strategy. In the long term, increased expansion of electric vehicles will further increase the value of Smart Grid Socioeconomics in DKK billion when integrating an additional 500,000 electric vehicles from 2025 to 2030 Smart Grid Traditional expansion Invest- Benefits Total ments Invest- Benefits Total ments Figure 6. An intelligent power system will also be socioeconomically advantageous in the long term. 18