1. 1 Master’s Thesis Project Presentation Author: Oleg Gulich Fortum supervisor: Ville Karttunen LUT professor:Jarmo Partanen Date: 29/04/2010 TECHNOLOGICAL AND BUSINESS CHALLENGES OF SMART GRIDS Aggregator's Role in Current Electricity Market

2. 2 Foreword Thomas EdissonAlexander Graham Bell Rapid development of civilization in the 20 th century. Fathers of electricity and communication:

3. What is Smart Grid? ‘System of systems’ concept A Smart Grid is an electricity network that can intelligently integrate the 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. The smart grid is a broad collection of technologies that delivers an electricity network that is flexible, accessible, reliable and economic. Smart grid facilitates the desired actions of its users. It may include distributed generation, the deployment of demand management and energy storage systems or the optimal expansion and management of grid assets 3

4. What Does the Smart Grid Concept Look Like? 4

5. Smart Grid Characteristics Optimized for best resource and equipment utilization Distributed by its structure (assets and information) Interactive (customers, retailers, markets) Adaptive and scalable (for changing situations) Proactive rather than reactive (to prevent emergencies) Self-healing (can predict/distinguish/bypass abnormal situations) Reliable and secure (from threats and external disturbance) Efficient and reliable Open for all types and sizes of generation Environmental friendly (using renewable energy resources) Integrated (monitoring, control, protection, maintenance, EMS, DMS, AMI) 5

6. Traditional Grid vs. Smart Grid 6

7. Transforming Guidelines for Smart Grid 7

8. Smart Grid For Different Industry Players 8

9. Driving Factors for Smart Grids Technology Advancement –Growing Energy Demand –Convergence of IT, telecoms, and electricity markets –New products and solutions –Venture capital investments in SG technologies Higher Efficiency (through grid optimization) –Multiple integration points for intelligent grid software and hardware from transmission to consumption –Embedded sensors and monitoring capabilities –Two-way communication networks –RES and Distributes Power Generation and Storage integration 9

10. Driving Factors for Smart Grids (continued) Advanced Customer Services –Robust and simple energy management platforms –“Smart homes” –New pricing models and tariffs Infrastructure Reliability and Security –Disaster tolerant systems –Auto-response to system disturbances 21st Century Power Quality –Distribution of electricity that is free of sags, spikes, and interruptions 10

11. Applications of Smart Grid: Overview Demand Response Energy Storage Home Area Networks Advanced Metering Infrastructure Integration of Distributed Generation Advanced Utility Control Systems Smart PHEVs Charging 11

12. Applications of Smart Grid: Demand Response 12

13. Applications of Smart Grid: Home Area Networks 13

14. Applications of Smart Grid: Utility Control Systems 14

15. Smart Grid Challenges: Surveys 15 Pacific Crest Mosaic Smart Grid Survey

16. Smart Grid Challenges: Overview 16 All discovered challenges have been split into the following categories: 1.Technology Challenges 2.Economic Challenges 3.Business Challenges 4.Regulation Challenges

17. Smart Grid Challenges: Category 1 17 Technology Challenges –Communication Coverage of T&D Grids –Choice of Communication Technology –Information Security –Distributed Energy Resources Integration Challenge –Distribution Automation –Synergy with Advanced Metering Infrastructure –Cheap Energy Storage Technology –Grid Network Design

18. Smart Grid Challenges: Categories 2, 3, and 4 18 Economic Challenges –Market Barriers to the New Business Models –Social and Economic Issues Business Challenges –Integration Challenge –Energy Management Regulation Challenges –Interoperability –Lack of Standards and Regulations

19. Aggregator Definition 19 What is an Electricity Aggregator? –An Aggregator joins brings customers together into a single purchasing unit to negotiate the purchase of electricity from Retail Electric Providers (REPs) or directly from Electricity Markets. –Aggregators shop for their customers and often help them save time, effort, and money. –An Aggregator conducts research on electricity prices, contract terms and conditions, and other services that their customers want, and recommends a REP

20. Aggregator Functions 20 What are the functions of an Electricity Aggregator? –Grouping customers and participating in the wholesale market to get the lowest possible prices –Planning the use of the Distributed Generators when the associated cost is lower than the market prices –Shifting and managing the movable loads of the customers to hours with a low electricity price –Trading shiftable loads on the balancing markets (ELBAS)

21. Aggregator Types 21

22. Relations between Aggregator and Customers 22

23. Ways of Sharing Benefits 23

24. Customer Remuneration Settlement 24

25. Aggregator and Other Market Players 25

26. BusMod: Customer Savings from DR Participation 26 According to the EU Project BusMod the estimated savings for the customers who participate in load shifting procedure can be as high as 15%

27. Demand Response Profitability Calculations 27 Two business models have been reviewed for feasibility in the thesis: Model 1: Customers enroll to a DR program offered by an Aggregator, buy and install automatic load controlling devices that receive real-time electricity price signals and shift the electricity consumptions according to the preset algorithm (e.g. 5 highest prices during the day are shifted to the cheapest hours). Model 2: Customers install automatic load controlling devices and subscribe to an aggregator's DR program with extra benefits, such as additional payments from aggregator for load shifting. This way, in addition to usual electricity bill savings gained from load controlling the customers will receive 30% of the revenue made by an aggregator from selling the peak-hour electricity (shifted from those customers) on the electricity market.

28. Business Development of an Aggregator 28

29. Calculation Assumptions: Prices 29 Historical data from the ELSPOT market (hourly area prices for the FI area for each day of 2009) has been taken for feasibility calculation ELSPOT Price development during 2009

30. Calculation Assumptions: Load Curves 30 Load curves for a typical Finnish detached house with room-specific electric heating and 300 liters boiler have been used in the calculations. These load curves have been measured in 1992. Therefore, the load growth coefficient of 45% (based on load from 1992) has been applied to reflect consumption pattern of 2009.

31. Calculation Assumptions: Shiftable Load 31 The amount of shiftable load for a typical Finnish detached house is approximately 1-2 kW per customer. In order for this amount of electricity to match the electricity consumption pattern, the following assumptions have been made:

32. Calculation Assumptions (continued) 32 Five most expensive hours (according to ELSPOT prices) have been selected and matched with appropriate demand for each day of the 2009 year. The peak price hours are considered to be shifted to three cheapest hours of the day by using load controlling equipment. It is assumed that the price forecast for the next day will be available for the customer either on the online web-portal or via installed smart meter display. The margin of the retail company (i.e. over-price of electricity) has not been considered in the calculations as it does not affect the difference between the prices (i.e. final results). This is so because the over-price of electricity is usually fixed. Therefore it can be neglected.

33. Calculation Methodology 33

34. Calculation Methodology (continued) 34

35. Calculation Methodology (continued) 35

36. Calculation Results 36

37. Conclusions and Summary 37 Smart Grid platform promises to transform the way power is delivered, consumed, and accounted for. Introduction of intelligence in the grid will have the following effects: Increase in reliability and power quality Improvement of responsiveness Increase in efficiency Coping with growing demand Potential reduction of costs for the provider and consumer in future Provision of communication platform for new applications The Smart Grid concept is an intersection of energy, IT, and telecommunication fields. The electricity utility networks need to have the same revolution as the telecommunication technology has recently undergone.

38. Recommendations for Fortum 38 This thesis was intended to gather major challenges connected with Smart Grid introduction, as well as justifying an aggregator company existence for Fortum Sahkonsiirto Oy company experts. The results of the calculations have shown that the reviewed aggregator behaviour model 2 (i.e. selling DR on the electricity market (ELSPOT/ELBAS)) has a clear advantage over the model 1 (see Figure 35 for model descriptions). Customers' savings are almost doubled when an aggregator shares a proposed 30% of its revenue from DR electricity trading with them. Combining Fortum's experience in operating the Nordic wholesale market can create a winning position over various stand-alone energy saving applications, offered by many technology providers.

39. Recommendations for Fortum (continued) 39 The demand response profitability calculations for two possible models have been reviewed in this thesis. However, further researches may be needed to fully understand the nature of an aggregator company positioning among other players on the electricity market. The following researches can be recommended for conduction in this regard: 1. Estimation of operation and management costs of an aggregator-retailer business. 2. Determination of optimal fees and payments charged by an aggregator-retailer. 3. Possible regulatory changes of electricity market for enabling the profitable existence of a 3rd party aggregator company. 4. Effect of distributed generation on household savings and profit of an aggregator-retailer company. 5. Incorporation of PHEVs charging network into existing distribution grid and ways of making business out of it for an aggregator company. 6. Demand response profitability studies for other customer groups (e.g. apartment houses). 7. Determination of the most profitable country areas for introduction of aggregation business.