FSO Smart Grid Overview July 23, 2009 Smart Grid Overview Steve Bossart Director, Integrated Electric Power Systems Foreign Service Officers Coal and Power Training Course July 23, 2009

2 Agenda Case for Grid Modernization Smart Grid Vision, Technologies, & Metrics What’s the Value Proposition? Some Challenges and Risks Questions 2

3 Case for Grid Modernization Action

4 4 4 Why Modernize the Grid? Today’s grid is aging and outmoded Unreliability is costing consumers billions of dollars Today’s grid is vulnerable to attack and natural disaster An extended loss of today’s grid could be catastrophic to our security, economy and quality of life Today’s grid does not address the 21 st century power supply challenges The benefits of a modernized grid are substantial

5 5 Demand for Electricity Is Projected to Increase 30% by

6 FERC, “Increasing Costs in Electric Markets,” June 19, 2008 Cost of new generation is increasing NETL 2007 baseline NETL 2008 estimates, with capture

7 Retail prices are increasing 30% increase over last decade 7 DOE EIA Energy Outlook 2007

8 8 Today’s grid - status quo is not an option Aging –70% of transmission lines are 25 years or older –70% of transformers are 25 years or older –60% of circuit breakers are 30 years or older Outmoded –Designed in the 50s and installed in the 60s and 70s, before the era of the microprocessor. Stressed – Never designed for bulk power shipments – Wholesale power transactions jumped 300% from 2000 to Insight Magazine, Oct. 2005

9 WV Military Affairs / Public Safety, November 20, 2008 Role of the NETL Modern Grid Strategy Accelerate modernization of the national grid Define the vision for the Smart Grid Reach out to stakeholders to gain consensus Assist in identification and resolution of barriers & issues Communicate success stories to stimulate deployment Act as an “independent broker” consistent with Modern Grid concepts

10 WV Military Affairs / Public Safety, November 20, 2008 Smart Grid Vision

11 WV Military Affairs / Public Safety, November 20, 2008 Smart Grid Key Success Factors The Smart Grid is MORE: Reliable Secure Resilient Economic Efficient Environmentally friendly Safe

12 WV Military Affairs / Public Safety, November 20, Smart Grid Principal Characteristics The Smart Grid will: Enable active participation by consumers Accommodate all generation and storage options Enable new products, services and markets Provide power quality for the digital economy Optimize asset utilization and operate efficiently Anticipate & respond to system disturbances (self-heal) Operate resiliently against attack and natural disaster

13 WV Military Affairs / Public Safety, November 20, 2008 Smart Grid Technologies

14 WV Military Affairs / Public Safety, November 20, What is the right sequence? Consumer Enablement AT addresses congestion and integrates with RTO’s AAM helps utilities reduce costs and operate more efficiently CE empowers the customer and enables grid interaction AD improves reliability and enables self healing Advanced DistributionAdvanced TransmissionAdvanced Asset Management 14

15 WV Military Affairs / Public Safety, November 20, 2008 Metrics

16 WV Military Affairs / Public Safety, November 20, Smart Grid Metrics – Work in Progress Reliability Outage duration and frequency, momentary disruption, power quality Security Ratio of distributed generation to total generation Economics Electricity prices, transmission congestion costs, cost of outages Efficient T&D electrical losses, peak-to-average load ratio Environmentally Friendly Ratio of renewable generation to total generation, emissions per kwh Safety Injuries and deaths to workers and public

17 WV Military Affairs / Public Safety, November 20, 2008 What’s the Value Proposition?

18 WV Military Affairs / Public Safety, November 20, 2008 Value Proposition Cost to Modernize $165B over 20 years –$127B for Distribution –$38B for Transmission ~$8.3B per year (incremental to business-as-usual) Current annual investment - $18B Benefit of Modernization $638B - $802B over 20 years Overall benefit to cost ratio is 4:1 to 5:1 18 Thus, based on the underlying assumptions, this comparison shows that the benefits of the envisioned Future Power Delivery System significantly outweigh the costs. (EPRI, 2004)

19 WV Military Affairs / Public Safety, November 20, 2008 Who are the Beneficiaries? Utilities (What’s in it for my shareholders?) Consumers (What’s in it for me?) Society (What’s in it for us?) 19 We get what we reward!

20 WV Military Affairs / Public Safety, November 20, 2008 Utility Value Proposition Opportunities Rate of return Operational Benefits –Outage restoration, billing, reduce T&D losses, optimize asset utilization, maintenance, planning Improved Customer Satisfaction Cost Risk of cost recovery Utilities are the engine for investment in Smart Grid

21 WV Military Affairs / Public Safety, November 20, 2008 Consumer Value Proposition Opportunities More reliable service Reduce business loss Energy bill savings Transportation cost savings Information, control, options Sell resources into the market Cost “Consumer always pays” Is this compelling?

22 WV Military Affairs / Public Safety, November 20, 2008 Is it compelling? Potential bill savings Average residential bill~$100 / month Expected reduction from EE/DR10% – 15% Potential savings$10 - $15 / month Bill increase to pay for SG$5 - $10 / month Potential fuel cost savings Assumed miles driven10,000 mi/year Fuel cost (gas) cents/mile Fuel cost cents/mile3 – 5 cents/mile Potential fuel cost savings$500 - $1,200/year Premium to purchase EV over gas$10,000 Consumer benefits alone may not drive Smart Grid implementation

23 WV Military Affairs / Public Safety, November 20, 2008 Societal Value Proposition Opportunities Downward pressure on electricity prices Improved reliability reducing consumer losses Increased grid robustness improving grid security Reduced emissions New jobs and growth in GDP Revolutionize the transportation sector Reduce import of foreign oil Cost No incremental cost? Does the societal value proposition make it compelling?

24 WV Military Affairs / Public Safety, November 20, 2008 Some Challenges and Risks

25 WV Military Affairs / Public Safety, November 20, 2008 Change Management A significant change management effort is needed: Why do we need to change? What is the vision? Who’s in charge? What is the value proposition? Consumer education, alignment, and motivation is critical Metrics needed for accountability and to monitor progress Active leadership by stakeholder groups needed 25 Move at the “Speed of Value”

26 WV Military Affairs / Public Safety, November 20, 2008 Technical Challenges Interoperability and scalability Large number of consumers actively involved Decentralized operations with 2-way power flow Getting the communications right “Future proofing” the technologies Cyber Security Conversion of data to information to action Market driven 26 Where will we find the skilled resources to solve these?

27 WV Military Affairs / Public Safety, November 20, 2008 Regulatory Challenges Time based rates – incentives for consumers to become actively involved Clear cost recovery policies – uncertain cost recovery increases investment risk Policy changes that provide incentives and remove disincentives to utilities – investment in a Smart Grid should make business sense Societal benefits – quantified and included in business cases Increased PUC workload – impact on Smart Grid implementation 27 ….and the list is growing!

28 WV Military Affairs / Public Safety, November 20, 2008 Regulatory Consistency among state PUC’s Potential cost of “Cap and Trade” Future proofing vs. stranded assets Consumer privacy concerns Integrated Resource Plans Least cost Used and useful New operating and market models 28 Regulatory Challenges Are we limited by the “speed of regulation”?

29 WV Military Affairs / Public Safety, November 20, 2008 References The Modern Grid Strategy Collaborative, public/private effort open to all Independent “broker” Downloadable documents Grid modernization columns, articles and case studies (304) x101