Synapse Energy Economics Inc BenefitCost Analysis for UtilityFacing

Synapse Energy Economics, Inc. Benefit-Cost Analysis for Utility-Facing Grid Modernization Investments Tim Woolf, Synapse Energy Economics NASUCA Annual Meeting November 11, 2018 ENERGY TECHNOLOGIES AREA E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL IMPACTS DIVISION

Outline of Presentation • Overview of benefit-cost analysis (BCA) in general • Key challenges of grid modernization (grid mod) BCA • Review of recent utility grid mod proposals • Focus on utility-facing grid mod • Using Advanced Distribution Management Systems (ADMS) as an example • How to address key challenges of grid mod BCAs • References for additional information • Lots of Q&A throughout E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 2

Synapse Energy Economics, Inc. OVERVIEW OF BCA & KEY CHALLENGES OF GRID MOD BCA ENERGY TECHNOLOGIES AREA E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL IMPACTS DIVISION

The Role of Benefit-Cost Analysis 1. Case: Utility seeking approval of costs before spending • Typically in a case dedicated to review proposed investments • Utility often asks for pre-approval • Allows for focused review of proposal • Utility can be held accountable to cost forecasts • Costs can be reduced or rejected before incurred 2. Case: Utility seeking approval of costs after spending • Typically in a rate case • Allows for review in context of other costs • Grid mod issues might be one of many contentious issues • Difficult to modify, reduce, or disallow costs E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 4

Benefit-Cost Analysis – Key Steps BCA is used to assess a project by comparing multiple costs with multiple benefits over the long term. Key steps include: 1. Define a reference case/scenario (without the project). 2. Define an alternative case/scenario (with the project). 3. Decide which costs and benefits to include (which test(s) to use). 4. Define all relevant costs and benefits (clarify metrics). 5. Determine appropriate time frame and discount rates. 6. Develop assumptions and input data. 7. Conduct scenario and sensitivity analyses. 8. Present, document, and justify results. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 5

Benefit-Cost Analysis – Key Principles NSPM (EE) DOE (Grid Mod) NY PSC (NY REV) Assess projects comparably to traditional alternatives ü ü ü Account for applicable policy goals ü ü -- Account for all relevant costs & benefits (quant. and qual. ) ü ü -- Ensure symmetry across relevant costs and benefits ü -- -- Apply full life-cycle analysis ü ü ü Apply incremental, forward-looking analysis ü -- -- Ensure transparency ü ü ü Avoid combining or conflating different costs and benefits -- -- ü Assess bundles & portfolios instead of separate measures ü ü -- -- ü ü Principle Address locational and temporal values Sources: NESP 2017, DOE 2017, NY PSC 2016. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 6

Grid Mod BCAs – Key Challenges Challenge Description Define reference & alternative cases Differences are not clearly articulated. Alternatives are often bundled too much. Decide which BCA tests to use (i. e. , which costs and benefits to include) Utility system? Policy goals? Society? Consistency with BCAs for other resources? Define costs & benefits Sometimes requires different metrics (e. g. , resilience). Time frame & discount rate Utility, regulatory, or societal perspective? Account for qualitative impacts Many benefits are in qualitative terms only. Describe beneficiaries Sometimes unclear who enjoys some benefits. Account for interactive effects Many benefits depend upon interactions across components Present, Document, & Justify Results Proposals frequently do not include information needed to make key decisions. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 7

Synapse Energy Economics, Inc. OVERVIEW OF UTILITY-FACING GRID MODERNIZATION PROPOSALS USING ADVANCED DISTRIBUTION MANAGEMENT SYSTEM (ADMS) AS AN EXAMPLE ENERGY TECHNOLOGIES AREA E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL IMPACTS DIVISION

Grid Modernization: Customer Facing Grid Modernization Utility Facing Customer Facing • • • E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION Energy Efficiency Demand Response Distributed Generation Storage Electric Vehicles Advanced Meters Third Party Access Customer Data Cybersecurity 9

Grid Modernization: Utility-Facing Grid Modernization Utility Facing These are referred to here as “components” • Advanced distribution management system (ADMS) • Geographic information system (GIS) • Distribution system supervisory control and data acquisition (DSCADA) • Outage management system (OMS) • Distributed energy resource management system (DERMS) • Fault location, isolation, & service restoration (FLISR) a/k/a/ dist. automation • Volt-var optimization (VVO) • Advanced metering infrastructure (AMI) • Network monitoring: • Substation devices See Appendix for definitions • Field (feeder) level devices E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 10

Advanced Distribution Management Systems (ADMS) Definitio n of ADMS A software platform that: • Integrates several operational components, such as • • • Outage Management System (OMS) Geographic Information System (GIS) Supervisory Control and Data Acquisition (SCADA) Distribution Energy Resource Management (DERMS) Enables advanced components such as • Automated fault location, isolation, and service restoration (FLISR) • Volt-var optimization (VVO) • Distribution State System Estimation (DSSE) • Allows for centralized decision-making • Optimizes distribution grid performance E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 11

ADMS Integrates and Enables Many Components ADMS integrates several grid mod components: Detailed network topology Monitor, control, optimize and predict operations GIS Core DMS Applications + Optional Applications e. g. , FLISR VVO Outage-Related Restoration Activities OMS Manage a variety of interconnected DER Assets DERMS E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D Monitor and Operate the Distribution Network DSCADA AMI ENVIRONMENTAL I MPACTS DIVISION Two-way communication between customer and utilities 12

ADMS Not Always Used With Other Components Percent of Utilities Using Application Utilities that have installed ADMS and use, or plan to use, other components: Not all utilities use all ADMS functions 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Network Monitoring FLISR VVO DERMS Optimal Protection Feeder Coordination Configuraton Source: Newton-Evans 2017. Based on survey of 29/68 surveyed North American utilities that reported either having or intending to acquire DMS/ADMS in the near future. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 13

Key Purported Benefits of ADMS (as claimed in utility filings) • Increased Reliability • FLISR allows for faster restoration times and enables reduced outage duration and outage frequency • Distribution O&M Cost Savings • FLISR reduces labor cost through reduced call volumes, reduced truck rolls, and reduced field crew hours • VVO reduces asset maintenance costs through reduced capacitor switching • DER Integration • Increased hosting capacity to accommodate additional DERs; better management of DER resources • Energy and Capacity Cost Savings • VVO flattens the voltage profile, which enables energy savings, reduces energy losses, and reduces peak demand—thereby reducing need for generation and T&D capacity infrastructure • Increased DER Integration can avoid both energy and capacity related costs • Improved Distribution System Planning • DSSE and Advanced Power Flows provide visibility into the grid and allow for better distribution system planning E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 14

Additional Benefits of ADMS (as claimed in utility filings) • Increased Customer Satisfaction • Through reduced outage duration and frequency • Increased Safety • Through reduced exposure of field crew due to reduced outages and increased automation • Environmental Benefits • Primarily from increased DER integration • Improved Power Quality • Through reduced voltage sags and swells due to more accurate grid optimization • Improved Resilience • Through reduced vulnerability to storm outages • Economic Development and Job Creation • From reduced customer bills as a result of utility cost savings E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 15

Synapse Energy Economics, Inc. REVIEW OF SAMPLE UTILITY-FACING GRID MODERNIZATION PROPOSALS ENERGY TECHNOLOGIES AREA E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL IMPACTS DIVISION

Recent Grid Mod Proposals Including ADMS Utility Unitil (MA) Eversource (MA) National Grid (NY) NYSEG (NY) & RGE (NY) PSCo (CO) SDGE (CA) APS (AZ) First. Energy (OH) Xcel (MN) Vectren (IN) DTE Electric (MI) Consumers Energy (MI) PSEG (NJ) LGE (KY) Central Hudson (NY) National Grid (RI) E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D Year 2015 2016 2016 2017 2017 2018 ENVIRONMENTAL I MPACTS DIVISION We reviewed 22 grid modernization proposals. Of those, 17 proposals included ADMS. 17

High-Level Trends in Utility-Facing Grid Mod Proposals • Wide variety in grid mod components proposed • Almost all proposals include monetary estimates of costs • All proposals claim qualitative benefits • Few proposals offer methodologies for how to account for qualitative benefits • In the absence of qualitative benefits, some proposals are not cost-effective • Few proposals provide monetized results for grid mod components in isolation • Including ADMS in isolation • Few proposals even provide monetized results for portfolios E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 18

Deployment, Enhancement, & Integration of Components Utility National Grid NYSEG & RGE Unitil National Grid Eversource PSCo Xcel First. Energy Vectran National Grid DTE Electric APS PSEG Consumers Energy LGE SDG&E CHG&E State NY NY MA MA MA CO MN OH IN RI MI AZ NJ MI KY CA NY GIS E E I E E E I I E DSCADA E E ` E E I E OMS E E I I D E E I E D E E D D E E ADMS D E D D D I D D D Enhancement and Integration Deployment and Integration Only No Specific Proposal These results are based upon a brief review of utility proposals, and are meant for illustrative purposes only. In certain cases, it was not clear whether the technology has already been implemented or the degree of integration proposed. E E This table includes components that ADMS can help integrate. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 19

Deployment, Enhancement, & Integration of Components Utility State National Grid NY NYSEG & RGE NY Unitil MA National Grid MA Eversource MA PSCo CO Xcel MN First. Energy OH Vectran IN National Grid RI DTE Electric MI APS AZ PSEG NJ Consumers Energy MI LGE KY SDG&E CA CHG&E NY AMI D D D DERMS D D FLISR D E D D D D I I I VVO D E D D E E E D D D E E Enhancement and Integration Deployment and Integration Only No Specific Proposal These results are based upon a brief review of utility proposals, and are meant for illustrative purposes only. In certain cases, it was not clear whether the technology has already been implemented or the degree of integration proposed. This table includes components that ADMS can help enable. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 20

Frequency of Claimed Grid Mod Benefits Frequency of benefits related to ADMS, including monetized and non-monetized. From 17 Grid Mod proposals reviewed. Reliability Distribution O&M DER Integration Energy & Generation Capacity System Planning Customer Satisfaction Safety Environmental Power Quality Other Benefits Resilience (Storm Restoration) Percent of studies claiming benefit Economic Development 0% 20% 40% 60% 80% 100% ‘Other Benefits’ includes acceleration of future beneficial technology (National Grid MA), and customer empowerment (LGE KY). E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 21

Frequency of Claimed Monetized Benefits Frequency of Monetized Benefits in Proposals Where Benefits Related to ADMS are Monetized • Of the 17 proposals, only 9 provided any form of monetized benefits related to ADMS. • Most of the monetized benefits are for energy and capacity, and reliability. Percent of studies claiming benefit E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 22

Grid Mod Benefit Cost Results - Monetized Portfolio Benefit-Cost Ratios E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION • Benefit-cost ratios from the 9 proposals that provided any form of monetized benefits. • Unmonetized benefits are not included here. • Proposals typically do not present benefit-cost ratios, because they do not include the nonmonetized benefits. 23

Example: PSE&G Storm Hardening Results Purported Costs and Benefits for Entire $1 800 Storm Hardening Proposal PSE&G Provides Monetized Values for All Benefits Costs or Benefits (Millions of PV Dollars) $1 600 $1 400 Communications ADMS Reclosing Sectionalization $1 200 $1 000 $800 $600 Hardening [SERIES NAME] Substation Upgrades [SERIES NAME] $400 $200 Resilience [SERIES NAME] Day to Day Cost Reductions $0 Costs E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION Benefits 24

Example: Grid BCA Results Purported Costs and Benefits for Entire Grid Mod Portfolio Proposal $ 400 Unmonetized Benefits Millions of Dollars (NPV) $ 350 $ 300 25 VVO $ 250 System Planning Distribution O&M DER Integration Customer Satisfaction $ 200 $ 150 $ 100 $ 50 FLISR [SERIES NAME] With Monetized Benefits Only: BCR = 0. 74 Qualitative Benefits The unmonetized benefits must exceed this much for the investment to be cost -effective Electricity Cost Savings [SERIES NAME] $- Costs E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION Benefits 25

Example: ADMS Benefit-Cost Results Claimed Benefit-Cost Ratios for Portfolios and ADMS in isolation 4, 5 4, 0 Benefit-Cost Ratio (BCR) 3, 5 3, 0 2, 5 • Only 2 proposals provide monetized results for ADMS project in isolation. • With very different results. • Differences probably due to how benefits are characterized. • Unmonetized benefits are not included in graph. 2, 0 1, 5 Portfolio BCR ADMS BCR 1, 0 0, 5 0, 0 PSEG (NJ) E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION Unitil (MA) 26

Synapse Energy Economics, Inc. HOW TO ADDRESS KEY GRID MOD BCA CHALLENGES ENERGY TECHNOLOGIES AREA E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL IMPACTS DIVISION

Grid Mod BCAs – Key Challenges Challenge Description Define reference & alternative cases Differences are not clearly articulated. Alternatives are often bundled too much. Decide which BCA tests to use (i. e. , which costs and benefits to include) Utility system? Policy goals? Society? Consistency with BCAs for other resources? Define costs & benefits Sometimes requires different metrics (e. g. , resilience). Time frame & discount rate Utility, regulatory, or societal perspective? Account for qualitative impacts Many benefits are in qualitative terms only. Describe beneficiaries Sometimes unclear who enjoys some benefits. Account for interactive effects Many benefits depend upon interactions across components Present, Document, & Justify Results Proposals frequently do not include information needed to make key decisions. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 28

Define Cases: Full Description and Justification This issue can mostly be addressed with robust filing requirements. The initial filing should clearly articulate: • what already exists on the system • what would exist in a future without the proposed investment • what the proposed investments will be Feature ADMS Decision Making GIS Reference Case Alternative Case Not Included Localized Decision Making Centralized Decision Making Decisions based on substation data only Decisions based on substation data and feeder level data No change to GIS model Upgrade and refinement of GIS data to ensure accurate network connectivity between assets E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 29

Define Cases: Full Description and Justification Feature DSCADA Reference Case DSCADA capabilities not deployed to feeder level assets Limited DER Integration Alternative Case DSCADA capabilities deployed to all feeder level assets Upgraded DSCADA system to handle large amounts of data No DERMS integrated with ADMS AMI Limited AMI deployment Increased AMI deployment VVO Based on Substation Data only Based on Substation and Feeder Level data Automated FLISR Not Included Automation Substation Automation Level only Substation and Feeder Level Automation DERMS E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 30

BCA Tests: Decide Which Costs and Benefits to Include Which test (i. e. , perspective) is most important: • Utility System Perspective • Impact on utility system (Utility Cost test) • Societal Perspective • Impact on utility system and society in general (Societal Cost test) • Regulatory Perspective • Impact on utility system and state energy goals (state specific test) This decision should ideally be made by regulators, with stakeholder input, prior to proposals being filed. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 31

BCA Tests: California Standard Practice Manual • The CA Manual has been universally used for energy efficiency • Describes five standard cost-effectiveness tests: • • • Utility Cost test: impacts on the utility system Total Resource Cost test: impacts on utility system and participants Societal Cost test: impacts on society Participant test: impacts on program participants Rate Impact Measure test: impacts on rates • These tests are increasingly being used to assess grid modernization, DERs, and related initiatives. • But the CA Manual does not address current needs: • Does not address energy policy goals • Has been interpreted inconsistently • Does not address some key DER issues E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 32

BCA Tests: National Standard Practice Manual 1. Designed to update, improve, and replace the California SPM 2. Includes a set of fundamental BCA principles 3. Identifies the importance of accounting for policy goals in BCAs • This is a key concept missing from the California SPM 4. Introduces the “regulatory perspective” • Which reflects the overarching goals of providing customers with safe, reliable, low-cost energy services while meeting applicable policy goals 5. Articulates that there are multiple ways to develop a BCA test • States are not limited to the Utility, the Total Resource, or the Societal Cost tests • A test can include some societal benefits, but not necessarily all 6. Provides a framework for determining a state BCA test • The primary test used in a state to determine whether benefits exceed costs. Might be one of the traditional tests, or might be a new one E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 33

BCA Tests: EPRI: Benefit-Cost Framework for the Integrated Grid • EPRI report explains the rationale for both the utility and societal perspectives • There is no mention of a Total Resource Cost test Source: Electric Power Research Institute, 2015, pages 9 -3. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 34

BCA Tests: U. S. Department of Energy: Modern Distribution Grid DOE report divides modern grid expenditures into four types: Type of Expenditure BCA Approach To replace aging infrastructure Apply a “best-fit / least-cost” approach. Similar to the Utility Cost test. To maintain reliable operations Apply a “best-fit / least-cost” approach. Similar to the Utility Cost test. To enable public policy or societal benefits Apply a Societal Cost test Expenditures paid for by customers No need for utilities or regulators to conduct a BCA. Concerns: (a) requires distinguishing by category; (b) results in inconsistent tests across projects/components/resources. Source: US Department of Energy, 2017, pages 39 -44. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 35

BCA Tests: General Trends • Increased flexibility in choice of tests/perspectives • Increased emphasis on: • Utility system impacts • Accounting for policy goals • Societal impacts • Less emphasis on: • The Total Resource Cost test • Rate impacts (except for DERs that reduce sales) • Increased need for consistency: • Across DERs • Across utility investments E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 36

BCA Tests: Recommendations • Decide upon test(s) prior to filing of grid mod proposal. • Use stakeholder input to decide upon tests • The primary test should reflect the state’s energy policy goals. • The same BCA tests should be applied to all types of utility investments. • Conduct multiple tests: • Utility system perspective: • Should be used in all grid mod proposals • Best reflection of impacts on total costs and average bills • Regulatory perspective • Best reflection of energy policy goals E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 37

Define Costs & Benefits: Examples of Challenging Metrics Metric Definition Reliability Maintain the delivery of electric services to customers in the face of routine uncertainty in operation conditions. Resilience The ability to prepare for and adapt to changing conditions and withstand recover rapidly from major disruptions. Flexibility The ability of the grid to respond to future uncertainties that stress the system in the short-term and may require the system to adapt over time. Sustainability The provision of electric services to customers while minimizing negative impacts on humans and the natural environment. Affordability The ability of the system to provide electric services at a cost less than customers’ willingness and ability to pay for them. Security The ability to resist external disruptions to the energy supply infrastructure caused by intentional physical or cyber attacks or by limited access to critical materials from hostile countries. Source: Grid Mod Consortium 2017 E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 38

Define Costs & Benefits: Examples from NJ Definition of Reliability, Resiliency, and Hardening Investments Reliability Resilience Hardening Mitigate outages during blue sky conditions Mitigate outages during disruptive events such as storms, floods, etc. Reduce outage duration and frequency Reduce outage duration Reduce outage frequency • Enable facilities to continue running • Promote a faster return to normal operations after a disruptive event Make the grid less susceptible to disruptive events such as storms, floods, etc. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 39

Time Frame: Recommendations • Filing requirements should: • Articulate the study period (# years). • Explain how the study period was determined. • Justify the choice of study period. • The time frame (i. e. , study period) should include the full lifetime of the last project/component installed. • If a component is installed in 2025 and has an estimated operating life of 15 years, the study should go through 2040 (even though impacts in later years have less impact). • This issue should be decided and resolved prior to the grid mod proposal. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 40

Discount Rate: Impacts can be Significant The choice of discount rate will have a large impact on the costs and benefits. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 41

Discount Rate: Several Options • The discount rate reflects a particular “time preference. ” • The relative importance of short- versus long-term impacts. • Utility weighted average cost of capital (WACC) is widely used in Grid Mod and other BCAs • Examples of discount rates • Investor-owned utility WACC: 5%-8% • Publicly-owned utility WACC: 3%-5% • Utility customers: Varies widely • Low risk: 0%-3% • Societal: <0%-3% E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 42

Discount Rate: Limitations to Using the Utility WACC The goal of BCAs for unregulated business is different from the goal of BCAs in regulatory settings: • For unregulated businesses, the goal of BCA is to maximize shareholder value. • Investors’ time preference is driven entirely by investors’ opportunity cost and risk, and the WACC reflects both of those. • For regulated utilities, the goal of BCA is fundamentally different: • The goal is to provide safe, reliable, low-cost power to customers and meet policy goals. • The goal is not to maximize shareholder value. • Since the goal for a regulated utility is different, the time preference is also different. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 43

Discount Rate: Recommendations (I) • The choice of discount rate is a policy decision. • The discount rate should reflect the time preference chosen by regulators on behalf of all customers. • In other words, should reflect the regulatory perspective • The regulatory perspective should account for many factors: • low-cost, safe, reliable service; intergenerational equity; other state or regulatory policy goals. • The regulatory perspective suggests a greater emphasis on long-term impacts than what is reflected in the WACC. • Which implies a lower discount rate. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 44

Discount Rate: Recommendations (II) • Each state should choose a discount rate that reflects its own time preference and policy objectives. • The same discount rate should be used in all utility BCAs: • Grid modernization, DERs, IRP, distribution system planning • Sensitivities can be helpful. • For example: • Use the utility WACC as a high case. • Use a low-risk or societal discount rate as a low case. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 45

500 000 450 000 400 000 350 000 300 000 250 000 200 000 150 000 100 000 50 000 0 Discount Rate = 7% Net Benefits = $64 mil BCR = 1. 3 Costs $500 000 $450 000 $400 000 $350 000 $300 000 $250 000 $200 000 $150 000 $100 000 $50 000 $0 Benefits Discount Rate = 2% Net Benefits = $234 mil BCR = 1. 9 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 Cost or Benefit ($1000) Discount Rate: Sensitivity Analysis Costs E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D Benefits ENVIRONMENTAL I MPACTS DIVISION 46

Interactive Effects: Apply Scenarios • Filing requirements should include full description and explanation of how the different components interact. • Proposal should present BCA results for each component in isolation. • Unless the utility can justify otherwise for some components. • Proposal should also present BCA results for different combinations of components. • Especially of components that are most inter-dependent. • Selection of grid modernization portfolio should be justified using the results of the different scenarios. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 47

Interactive Effects: Example – Small Bundle includes ADMS plus components that it integrates (GIS, DSCADA, and OMS). ADMS GIS DSCADA OMS Portfolio Benefits (PV$) 14 0. 4 0 4 18. 4 Costs (PV$) 10 1 2 3 16 Net Benefits (PV$) 4 -0. 6 -2 1 2. 4 Benefit-Cost Ratio 1. 4 0. 0 1. 3 1. 2 Monetary Impacts These are hypothetical values for illustrative purposes only. GIS, DSCADA, and OMS benefits include benefits expected in the absence of ADMS, and the ADMS benefits reflect incremental benefits accruing from those other components. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 48

Interactive Effects: Example – Intermediate Bundle Add FLISR and DERMS to the Small Bundle. ADMS GIS DSCADA OMS FLISR DERMS Portfolio Benefits (PV$) 18 0. 4 0 4 4 1 27. 4 Costs (PV$) 10 1 2 3 3. 3 1. 2 20. 5 Net Benefits (PV$) 8 -0. 6 -2 1 0. 7 -0. 2 6. 9 Benefit-Cost Ratio 1. 8 0. 4 0. 0 1. 3 1. 2 0. 8 1. 3 Monetary Impacts These are hypothetical values for illustrative purposes only. GIS, DSCADA, and OMS benefits include benefits expected in the absence of ADMS, and the ADMS benefits reflect incremental benefits accruing from those other components. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 49

Interactive Effects: Example – Full Bundle Add AMI and VVO to the Intermediate Bundle. ADMS GIS DSCADA OMS FLISR DERMS AMI VVO Portfolio Benefits (PV$) 20 0. 4 0 4 4 1 10 3 39. 4 Costs (PV$) 10 1 2 3 3. 3 1. 2 13 2 33. 5 Net Benefits (PV$) 10 -0. 6 -2 1 0. 7 -0. 2 -3 1 5. 9 Benefit-Cost Ratio 2. 0 0. 4 0. 0 1. 3 1. 2 0. 8 1. 5 1. 2 Monetary Impacts These are hypothetical values for illustrative purposes only. GIS, DSCADA, and OMS benefits include benefits expected in the absence of ADMS, and the ADMS benefits reflect incremental benefits accruing from those other components. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 50

Interactive Effects: Interpretation of Scenarios Results for the Portfolios: As the bundles get bigger, net benefits do not change a lot, but the total benefits do. Net benefits = Benefits minus Costs E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 51

Interactive Effects: Interpretation of Scenarios Results for ADMS only: As the bundles get bigger, the ADMS benefits and net benefits increase. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 52

Qualitative Benefits: Reporting Requirements Filing requirements should include full discussion and justification of all benefits. Costs Monetary Quantitative Qualitative Capital Document all values -- -- O&M Document all values -- -- -- Document metrics -- Distribution O&M Document all values -- -- DER Integration Document all values Document metrics -- Energy & capacity Document all values -- -- Improved planning -- -- Describe & justify Environmental -- Document metrics -- Power quality -- -- Describe & justify Resilience -- -- Describe & justify Other Benefits -- -- Describe & justify Benefits Reliability E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 53

Qualitative Benefits: Several Options • Assign points to indicate potential magnitude of benefits • Example: 1=low impact, 2=med impact, 3 -high impact • Assign weights to indicate relative priority of benefits • Example: low priority, medium priority, high priority • Assign proxies • Example: Benefits of improved distribution planning are equal to 5% of the total energy, capacity, and O&M benefits. • Multi-attribute decision making: • U. S. Department of Energy, 2018, Section 3. 4. 2. • Advanced Energy Economy Institute, 2014, Section 4. 4. • Ultimately, some sort of monetization is implied. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 54

Qualitative Benefits: Example – Assign Points Assign points to qualitative benefits. May be sufficient to overcome BCR < 1. 0 (for example GIS) Monetary Impacts Benefits (PV$) Costs (PV$) Net Benefits (PV$) Benefit-Cost Ratio Qualitative Impacts System Planning Resilience Other Finding ADMS GIS DSCADA OMS Portfolio 14 10 4 1. 4 0. 9 1 -0. 1 0. 9 0 2 -2 0. 0 4 3 1 1. 3 18. 9 16 2. 9 1. 2 3 1 OK 2 3 OK 1 1 1 x 1 3 OK 2 3 1 OK Small bundle includes ADMS plus components that it integrates. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 55

Assumptions: Describe Beneficiaries Filing requirements should include full discussion and explanation of beneficiaries. Costs Utility System Subset of Customers Societal Capital ✓ -- -- Operating and Maintenance ✓ -- -- Reliability ✓ Which ones? Who benefits? Reduced distribution O&M costs ✓ -- -- DER Integration ✓ Which ones? -- Reduced energy & capacity costs ✓ -- -- System planning ✓ -- -- -- Who benefits? Benefits Environmental Power quality ✓ Which ones? -- Resilience ✓ Which ones? Who benefits? Other Benefits ✓ Which ones? Who benefits? E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 56

Results: Present, Document, and Justify This issue can mostly be addressed with robust filing requirements. • Inputs and assumptions: • Clearly define reference and alternative cases. • Articulate and justify all assumptions regarding BCA test, metrics used, time frame, discount rate, qualitative benefits, beneficiaries, sensitivities, scenarios, etc. • Results: • Present costs, benefits, net benefits, benefit-cost ratios. • Present all practices used to account for qualitative benefits. • Present results of sensitivities and scenarios. • Justify decision based on the results. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 57

Synapse Energy Economics, Inc. SUMMARY, FURTHER RESEARCH, REFERENCES, ENERGY TECHNOLOGIES AREA E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL IMPACTS DIVISION

Summary: How to Address the Key Challenges Challenge Recommendations Define reference and alternative cases Robust filing requirements, including case differences and interactive effects. Decide which BCA tests to use (i. e. , which Determine up-front with stakeholder input. Use costs and benefits to include) primary and secondary tests. Define costs & benefits Determine up-front. Use best practices. Determine time frame and discount rate Determine up-front with stakeholder input. Apply sensitivities for the discount rate. Benefits: Account for qualitative impacts Robust filing requirements. Apply quantitative and multi-attribute decision-making options. Benefits: Describe beneficiaries Robust filing requirements, including descriptions and quantification of beneficiaries. Account for interactive effects Robust filing requirements. Describe interactions. Conduct scenarios. Present, Document, and Justify Results Robust filing requirements. Present quantitative and qualitative results by component & scenario. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 59

Recommendations for Further Research • How to account for qualitative impacts • Develop practical methodologies for utilities and other stakeholders to account for qualitative impacts. • This could range from simple proxy multipliers to sophisticated multi-criteria integration techniques. • How to account for interactive effects of utility-facing grid modernization projects • Develop engineering-based protocols for determining which projects can or should be assessed in isolation. • Develop conventions and best practices for bundling utilityfacing grid mod components. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 60

Synapse Energy Economics, Inc. USEFUL REFERENCES ENERGY TECHNOLOGIES AREA E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL IMPACTS DIVISION

Recent Reports on BCA Frameworks Publication Date Summary of Approach 2010 Early systematic approach to assessing smart grid investments with four benefit categories - economic, reliability, environmental, security. 2012 Framework for evaluating smart grid investments best for vertically -integrated utilities; methodologically rigorous assessment turns on UCT or RCT. EPRI Integrated Grid 2015 Framework for evaluating DER investments; systematic approach to gauging impacts across the different utility-system sectors, with total effects summed in SCT. National Standard Practice Manual 2017 A policy-guided approach that uses resource value test (RVT) reflecting local priorities to assess cost-effectiveness. 2017 Comprehensive review of metrics organized around six facets of grid performance: reliability, resilience, flexibility, sustainability, affordability, security. 2018 Four-phase analysis grounded in stakeholder engagement and critical assessment of context, which together inform approaches to valuing smart grid investments. Framework EPRI Smart Grid Demonstration Costs and Benefits DOE Smart Grid Demonstration Projects DOE Grid Modernization Metrics DOE Grid Services Valuation Framework E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 62

References: Benefit-Cost Analysis Frameworks • Advanced Energy Economy Institute (AEEI). 2014. Benefit-Cost Analysis for Distributed Energy Resources. Prepared by Synapse Energy Economics. • California Public Utilities Commission. 2001. California Standard Practice Manual: Economic Analysis of Demand- Side Programs and Projects. • Electric Power Research Institute (EPRI). 2015. The Integrated Grid: A Benefit-Cost Framework. EPRI, Palo Alto, CA: 2015. 3002004878. • EPRI. 2012. Guidebook for Cost/Benefit Analysis of Smart Grid Demonstration Projects: Revision 1, Measuring Impacts and Monetizing Benefits. • Grid Modernization Laboratory Consortium. 2018. Valuation Framework: Guidelines Document 2. 0. Draft for External Review published July 30, 2018. • Grid Modernization Laboratory Consortium. 2017. Grid Modernization: Metrics Analysis (GMLC 1. 1). Reference Document, Version 2. 1. Prepared by the Pacific Northwest National Laboratory for the U. S. Department of Energy. • National Efficiency Screening Project. 2017. National Standard Practice Manual for Assessing Cost-Effectiveness of Energy Efficiency Resources. Edition 1, Spring 2017. • New York Public Service Commission (NY PSC). 2016. Order Establishing the Benefit Cost Analysis Framework. • U. S. Department of Energy (US DOE). 2017. Modern Distribution Grid: Decision Guide Volume III. Sponsored by the U. S. Department of Energy’s Office of Electricity Delivery (OE) and Energy Reliability and the Office of Energy Policy and Systems Analysis (EPSA). Prepared by DOE-OE, DOE-EPSA, and the Pacific Northwest National Laboratory. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 63

References: Utility Grid Modernization Proposals (I) • Central Hudson Distributed System Implementation Plan. New York Department of Public Service, Case 14 -M-0101 (July 31, 2018). • Petition of Public Service Electric and Gas Company for Approval of the Second Energy Strong Program (Energy Strong II). New Jersey Board of Public Utilities, Docket Nos. EO 18 and GO 18 (June 8, 2018). • Prefiled Direct Testimony of Gregory L. Booth, PE, President, Power. Services, Inc. on behalf of Rhode Island Division of Public Utilities and Carriers. Rhode Island Public Utilities Commission, Docket No. 4770 (April 4, 2018). • Testimony of John P. Malloy, Vice President, Gas Distribution Louisville Gas and Electric Company. Commonwealth of Kentucky, Public Service Commission, Case No. 2018 -00005 (January 10, 2018). • Direct Testimony of Lisa M. Rouse on behalf of Ohio Edison Company, The Cleveland Electric Illuminating Company, the Toledo Edison Company. Public Utilities Commission of Ohio, Case No. 17 -2436 -EL-UNC (December 1, 2017) • Xcel 2017 Biennial Report – Distribution Grid. Minnesota Public Utilities Commission, Docket No. E 002/M-17 -776 (November 1, 2017). • Consumers Energy Electric Distribution Infrastructure Investment Plan. Michigan Public Service Commission, Case No. U-1799 (August 1, 2017). • Qualifications and Direct Testimony of Paul D. Whitman. Michigan Public Service Commission, Case No. U-1825 (April 10, 2017). • Direct Testimony of Lynnae K. Wilson, Vice President of Energy Delivery, on Description and Development of the TDSIC Plan. Indiana Utility Regulatory Commission, Cause No. 4491 (February 22, 2017). • San Diego Gas & Electricity. 2016. SDGE Smart Grid Deployment Plan. 2016 Annual Report. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 64

References: Utility Grid Modernization Proposals (II) • Verified Application for an Order Granting a Certificate of Public Convenience and Necessity for Distribution Grid Enhancements Including Advanced Metering and Integrated Volt-Var Optimization Infrastructure, Public Utilities Commission of the State of Colorado (August 2, 2016). • National Grid Distribution System Implementation Plan, New York Department of Public Service, Case 14 -M-0101 (June 30, 2016). • New York State Electric & Gas Corporation and Rochester Gas and Electric Corporation Distributed System Implementation Plan, New York Department of Public Service, Case 14 -M-0101 (June 30, 2016). • Petition of Massachusetts Electric Company and Nantucket Electric Company d/b/a National Grid for Approval of Grid Modernization Plan, Massachusetts Department of Public Utilities, D. P. U. 15 -120 (June 14, 2016). • Arizona Public Service Company Rate Application – Direct Testimony of Daniel T. Froetscher. Docket No. E-01345 A- 16 -0036 (June 1, 2016). • Xcel 2015 Biennial Report – Distribution Grid. Minnesota Public Utilities Commission, Docket No. E 999/M-15 -439 (October 30, 2015). • Fitchburg Gas and Electric Light Company (d/b/a Unitil) Grid Modernization Plan, Massachusetts Department of Public Utilities, D. P. U. 12 -76 and D. P. U. 14 -04 (August 19, 2015). • NSTAR Electric Company and Western Massachusetts Electric Company (each d/b/a Eversource Energy) Petition for Approval of Grid Modernization Plan, Massachusetts Department of Public Utilities, D. P. U. 15 -122/15 -123 (August 19, 2015). • Newton-Evans. 2017. Press Release: Newton-Evans Study Finds Heavy Use of IP/MPLS and Continued Reliance on Utility-Operated Telecommunications Networks for EMS/SCADA and DMS Systems. May 5, 2017. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 65

Synapse Energy Economics, Inc. APPENDIX ENERGY TECHNOLOGIES AREA E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL IMPACTS DIVISION

Definitions • Distribution Management System (DMS) Monitors, controls, predicts, and optimizes grid operations • Geographic Information System (GIS) A detailed network model of the distribution system • Outage Management System (OMS) Identifies and resolves outages often integrated with the GIS to identify location • Supervisory Control and Data Acquisition (SCADA) Automatically monitors and reports the data collected from the distribution system. Provides real-time view into grid operations. DSCADA Refers specifically to SCADA for the distribution system • Distribution Energy Resource Management Systems (DERMS) Connects and manages the integration of all types of DERS into the grid E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 67

Advanced ADMS Capabilities • FLISR (Fault Location, Isolation, and Service Restoration) Automatically identifies feeder level faults, isolates the fault, and restores service to healthy sections of the feeder. • VVO (Integrated Volt/VAR Control) Lowers distribution line voltages to the lower end of the ANSI standard voltage range through fully coordinated/automated operation of all volt and VAR devices. Often accompanied with Advanced Metering Infrastructure to improve effectiveness of Volt/VAR Optimization. • Distribution System State Estimation/Online Power Flow Utilizes all the available measurements and data to obtain an accurate estimate of the system. Provides situational awareness and visibility and allows for real-time control of the distribution system as well as optimized grid performance. • DER Integration High penetration of DER causes bidirectional flow of power at a feeder level. ADMS (combined with DERMS) can improve situational awareness and help increase hosting capacity of DER in the network. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 68

Traditional Cost-Effectiveness Tests Source: National Efficiency Screening Project 2017. E N E R G Y T E C H N O L O G I E S A R E A E N E R G Y A N A L Y S I SA N D ENVIRONMENTAL I MPACTS DIVISION 69