Smart grid investment in pilot projects has been booming over the last decade, exceeding €3 billion in Europe alone. However, key questions remain to be answered such as is investing in smart grids worth the cost, and is there a business case for scaling up locally tested smart grid solutions to wider cities or regions?
In the case of ACEA’s smart grid pilot project, which was initiated in the Malagrotta area of Rome, the answer is a clear yes, according to the EU’s Joint Research Centre (JRC) in a new study.
Malagrotta smart grid demonstration
ACEA, one of Italy’s biggest distribution system operators (DSOs), is in charge of managing the distribution system of Rome. The four-year smart grid pilot, which ran from January 2011 through 2014, was aimed to test novel automation, monitoring and remote control solutions on different sections and voltage levels of the distribution grid. The three sub-projects focused on medium voltage grid automation; MV/LV monitoring and remote control; and new MV grid management criteria.
Scaling up the project to the city of Rome would entail, among other activities, expanding the impact area from the two HV/MV primary substations covered by the pilot project to the whole set of 70 HV/MV primary substations operated by ACEA in the city. Also, a scaled up smart grid would involve all the approximately 200 MV consumers and 1.6 million LV consumers across Rome, whereas the pilot included six users connected to the MV grid and 1,200 consumers to the LV grid.
The JRC has developed a cost-benefit analysis methodology for smart grids, with the aim to quantify the socioeconomic benefits of the technology, in addition to those incurred by the players implementing the project. Applying this methodology for the first time to a full-scale project, the JRC finds that a scaling up of the Malagrotta pilot across Rome would provide an internal rate of return (IRR) of 16.6% with a net present value (NPV, year 2014) of €36-39 million. This compares with an NPV of €-1.1-1.2 million and IRR of just over 1.2% for the pilot.
In the case of the Malagrotta project the figures reflect the typical challenges of a pilot project, including sunk costs and innovation risks, leading to generating losses of moderate size (so that IRRs, though lower than the discount rates, are positive), according to the report.
In both cases the figures from both the private investor and societal cost-benefit analyses are similar, with as expected, the societal NPVs and IRRs slightly higher for all projects. This is due to taking into account also the benefits accruing to the society at large with lower discount rate values (social discount rates are typically lower than those of a private investor) and to the introduction of avoided CO2 emissions.
Positive smart grid outlook for Rome
“Considering the variation ranges of the parameters used for this cost-benefit analysis, the overall outlook for ACEA’s smart grids modernization project of Rome’s electricity network may be deemed very positive,” the report concludes.
The report also comments on the observance of active end-consumers as central for the large-scale roll-out of smart grids. Thus in assessing smart grid scalability, the cost-benefit analyses should be complemented with targeted studies on the end-consumer role and non-monetary appraisals of non-quantifiable impacts and externalities (e.g. social/health impacts, contribution to policy goals).