Allocating the capital costs of building a smarter grid is one of the most challenging aspects of the whole concept. Like many other parts of the grid, some assets will essentially be built for individual customers who can expected to pay for them. However, key components of any smart grid – the central coordination and communication elements in particular – will have many beneficiaries locally and province-wide, and until there is relative clarity on who will pay for them, questions of ownership, specifications and timing could remain unresolved, and significant aspects of smart grid development may be held back.
In Ontario, as in many other jurisdictions, enhancements to the grid can only be approved by the regulator if their installation can be demonstrated to reduce costs for ratepayers or benefit them in other ways such as improving reliability. However smart grid technology might pose a slightly different proposition for distributors: Invest now in your infrastructure so that you and your customers will be able to access higher value services in the future. Costs of the grid might rise, but those costs will be offset by savings elsewhere in the system. Regulators will be understandably cautious about going along with such propositions, but may already be thinking about new systems that might allow such concepts to be worked into existing regulatory models where appropriate.
In the case of smart meters, the province of Ontario made it a matter of public policy to get the equipment installed on a universal basis and put the costs into consumer rates. Although such a sweeping treatment is unlikely for smart grid technology in general, there is probably a case to be made that some aspects could be built more quickly and at lower cost if they are established as valid components of a distributor’s capital costs, much like the smart meter infrastructure.
Of course, some smart grid investments are likely to be attractive enough to move forward on a private basis. However, before private sector investments in the smart grid can start to flow in any major way, it will be necessary for them to know what kind of investments will be rate-based, or policy-driven. This is just as true for the distributors as is it is for the private sector.
However, the capital financing question is broader than simply how to finance the core infrastructure needed to enable smart grid technology. At least in Ontario, and to a varying extent in other jurisdictions, the distribution system will require significant capital investment in the near future, either to replace aging assets or to support additional services needed either for policy or economic reasons. Given that the cost of some of the capital upgrades to distribution systems can be reduced with smart grid technology, there are strong incentives to integrate planned investments in smart grid technology with at least some distributors’ ongoing capital investment plans. Given that the latter is a well-known, mature process, and that the former is largely unknown territory, the integration process will undoubtedly present some interesting challenges.
In addition to providing for normal growth and the desire to capture efficiencies available through a smarter grid, a third driver is at work for smart grids: Public policy may necessitate some additional investments in distribution and transmission infrastructure, if only to allow greater volumes of renewable energy to be connected to the system. As a result, it’s quite possible that smart grid development will be financed as one component of a three-part initiative:
a) Upgrading transmission and distribution systems to accommodate more renewable and clean energy;
b) Ordinary capital investment plans for distributors and transmitters to replace aging assets and accommodate normal expansion; and
c) Enabling of value-added services through installation of smart grid technology.
If approached in such a context, it is possible that smart grid development will be seen as means of ensuring that the costs of other kinds of system upgrades and expansions are kept as low as possible. Such an approach would likely require a set of guidelines to be developed and enforced by the OEB to determine which kinds of costs would be considered mandatory or policy-driven, and which would be subject to case-by-case review.
As a result, if there is an integrated policy approach to the three kinds of capital investments, the prospects for early progress on smart grid development are much brighter.