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IEc

INDUSTRIAL ECONOMICS, INCORPORATED

Analyzing the Costs and

Benefits of Community

Microgrids

Presentation for:

The Society for Benefit-Cost

Analysis

Research Funded by:

New York State Energy Research

and Development Authority

Prepared by:

Industrial Economics,

Incorporated

2067 Massachusetts Avenue

Cambridge, MA 02140

USA

617/354-0074

March 19, 2015


New York’s Strategy to Harden the Grid

State is investing $1.4 billion to improve the resilience of the

energy system.

Investment spurred by

adverse impacts of

extreme weather

events, such as

Hurricane Sandy,

on electric service.

Strategy includes

$40 million NY Prize

competition, funding

development of

community microgrids

throughout the state.

1


Improving Grid Resilience with Microgrids

Microgrid: a group of interconnected loads and distributed

energy resources within clearly defined electrical boundaries

that acts as a single controllable entity.

Key feature: can

seamlessly disconnect

from/reconnect to

the surrounding utility

grid and operate in

both grid-connected

or islanded mode,

with little/no

disruption to the loads

within the microgrid.

Promises the ability to

maintain critical health and safety services during extended

outages.

2


Evaluating the Costs and Benefits of Microgrids

NY Prize awards will be based in part on assessment of the

costs and benefits of the microgrids proposed.

Analytic perspective: costs and benefits to society as a whole.

Scope of cost analysis:

Initial design and planning costs.

Capital investments.

Operation and maintenance (O&M) costs.

Environmental costs.

Scope of benefits analysis:

Energy benefits.

Reliability benefits.

Power quality benefits.

Environmental benefits.

Benefits of avoiding major power outages.

3


NYSERDA’s BCA Model

Software Platform: Excel, Microsoft Office 2010.

Structure: 38 linked worksheets.

Site overview and summary of results (1).

Site inputs (5).

Intermediate outputs (2).

Cost calculations (6).

Benefit calculations (4).

Calculation of benefits during extended power outages (8).

Data (12).

Analyzes project impacts over a 20-year operating period,

2016-2035.

Results are reported in 2014 dollars.

4


Analysis of Project Costs: Highlights

Initial planning and design costs are estimated by the user and

assumed to occur in 2016.

Estimates of capital costs are based on information provided by

the user on equipment cost and lifespan.

Model analyzes three subcategories of O&M costs:

Fixed O&M - costs that are unlikely to vary with the amount of

electricity generated (e.g., software licenses).

Variable O&M – costs, other than fuel costs, that are likely to vary

with the amount of electricity generated.

Fuel – for oil- or gas-powered distributed energy resources (DER) .

Estimates of fuel costs are based on forecasts of petroleum

distillate and natural gas prices ($/MMBtu) developed for the

Draft 2013 State Energy Plan (SEP).

5


Analysis of Project Costs: Highlights (cont.)

Environmental costs include the cost of emission control

equipment, emission allowances, and emission damages.

Emission control costs are calculated separately only if not

included in estimates of overall capital and O&M costs.

Cost of allowances for emissions of SO2, NOx, and CO2 are based on

SEP forecasts and calculated for DER that would be subject to

allowance requirements.

Emission damages are based on values from the literature

(Wakefield 2010) and calculated for the operation of DER that

increase emissions of SO2, NOx, CO2, PM2.5, or PM2.5-10.

O&M and environmental costs analyzed for two general

operating scenarios:

Grid-connected mode – annual costs.

Islanded mode – costs incurred during a grid outage of a given

duration.

6


Energy Benefits: Energy Cost Savings

Energy cost savings include costs that bulk energy suppliers

avoid in generating electricity, as well as efficiencies realized

through installation of CHP/CCHP systems.

The reduction in demand for electricity from the macrogrid

(MWh/year) is calculated based on the amount of electricity to

be generated by the microgrid in grid-connected mode, coupled

with an adjustment factor (7.2 percent) to account for

distribution losses.

The associated savings ($/year) are calculated based on

forecasts of energy prices ($/MWh) developed for the SEP.

Savings realized through installation of CHP/CCHP systems are

calculated based on an estimate of annual fuel savings provided

by the system, the type of fuel saved, and forecasts of fuel

prices developed for the SEP.

Reliability benefits include the maintenance of commercial,

industrial, and public safety and security services during major

power outages.

7


Energy Benefits: Capacity Cost Savings

Capacity cost savings will be realized if development of a

microgrid defers the need to invest in expansion of the energy

generation, transmission, or distribution system.

The model values the capacity benefits the microgrid would

provide based on its anticipated effect on:

Generating capacity requirements—due to the microgrid’s provision

of peak load support or its customers’ participation in a demand

response program.

Transmission and distribution capacity requirements.

The value ($/year) of impacts on generating capacity are based

on forecasts of prices for generating capacity ($/MW-year), by

zone, developed for the SEP.

The value ($/year) of impacts on distribution capacity are

based on prices for distribution capacity ($/MW-year), by area

(New York City or Upstate), reported by the New York State

Department of Public Service.

8


Reliability Benefits

The analysis of power reliability benefits employs the U.S.

Department of Energy’s Interruption Cost Estimate (ICE)

Calculator, which is available online. The model provides a link

to the ICE Calculator website.

The ICE Calculator values damages attributable to outages

captured in the following indices of service reliability:

The System Average Interruption Frequency Index (SAIFI).

The Customer Average Interruption Duration Index (CAIDI).

The System Average Interruption Duration Index (SAIDI).

These indices typically exclude outages due to storm events or

other factors beyond the utility’s control.

Thus, the analysis of reliability benefits does not include the

benefits of maintaining service during outages caused by such

factors. The model analyzes and reports these benefits

separately.

9


Reliability Benefits (continued)

The annual benefits of improved service reliability are

calculated based on:

The estimate of annual service interruption costs for all customers

provided by the ICE Calculator.

The percentage of service interruptions the microgrid would

prevent, as specified by the user.

The model reports both gross benefits and benefits net of any

additional costs associated with operating the microgrid during

an outage.

10


Power Quality Benefits

The analysis of power quality benefits begins with calculation

of the baseline costs of power quality events ($/year) for the

customers served by the microgrid.

Costs are calculated for three groups: small commercial and

industrial customers; medium and large commercial and

industrial customers; and residential customers.

Costs are based on:

The baseline frequency of power quality events (events/year), as

estimated by the user.

The cost of a power quality event ($/event) for the average

customer in each rate class, as specified in Sullivan et al.

The number of customers in each class the microgrid would serve.

The annual benefits of improved power quality are calculated

based on the percentage of power quality events the microgrid

would prevent, as estimated by the user.

11


Environmental Benefits

The analysis of environmental benefits assumes:

Electricity generated by the microgrid while in grid-connected

mode would otherwise have been generated by natural gas

combined cycle units.

These units would be large enough to require the purchase of

allowances for emissions of SO2, NOx, and CO2.

Thermal energy generated by CHP/CCHP system would otherwise

have been generated by commercial natural gas or diesel boilers.

12


Environmental Benefits (continued)

Calculation of emissions avoided (tons/year) is based on:

The amount of electricity (MWh/year) to be generated by the

microgrid while in grid-connected mode.

An adjustment factor of 7.2 percent to account for distribution

losses.

Unit emissions factors for SO2, NOx, CO2 , PM2.5, and PM2.5-10

(tons/MWh) for natural gas combined cycle units, provided by

NYSERDA.

The amount of fuel saved (MMBtu/year) as a result of the

installation of a CHP/CCHP system.

Unit emissions factors for SO2, NOx, CO2 , PM2.5, and PM2.5-10

(tons/MMBtu) for commercial natural gas and diesel boilers.

Benefits of reduced emissions are valued in a manner

equivalent to the valuation of costs attributable to an increase

in emissions (see above).

13


Benefits of Avoiding Major Power Outages

By maintaining commercial, industrial, and public services –

including those critical to public health and safety - microgrids

can reduce the damages attributable to major power outages.

The benefits of a particular project depend on:

The likelihood and severity of major outages, particularly outages

due to major storms or manmade events.

The services the microgrid would help to maintain.

The likelihood and severity of such outages is difficult to

predict.

Given this uncertainty, the model allows the user to explore

the implications of different scenarios for a project’s overall

benefits.

14


Benefits of Avoiding Major Power Outages (cont.)

The model distinguishes between two categories of services in

its calculation of the benefits of avoiding major power outages:

Critical services, including fire, hospital, police, emergency

medical, wastewater, water, and electric power services.

Other commercial and industrial services.

For both categories, the model employs the same approach:

Estimate the value of any lost service, taking into account existing

backup generation capabilities.

Consider the costs of emergency measures that may be necessary

while using backup generators, or in the event of a total loss of

power.

Consider the incremental costs of providing service while using

backup generators, or with a microgrid in islanded mode.

The model allows the user to tailor the valuation of benefits in

each category to the characteristics of a particular site.

15


Benefits of Avoiding Major Power Outages: Example

Consider the Department of Public Works Control Building and

Pump Station in Suffolk County:

The facility provides sewage service to, on average, 2,850 county

employees each day.

The facility is equipped with a 100-kW backup generator capable of

supporting the facility’s normal load.

The BCA model uses FEMA’s Hazard Mitigation Grant Benefit-

Cost Analysis methodology to value the impact of lost

wastewater service on economic activity.

The model estimates the benefit of avoiding a one-day power

outage to be $19,122, based on the following parameters:

Backup generation failure rate: 15 percent.

Impact of lost wastewater service on economic activity: $45 per

person per day.

2,850 * $45 * 15% = $19,122.

16


Analytic Results: Summary Worksheet

The Summary worksheet begins with an overview of key aspects

of the microgrid’s design.

17

SUFFOLK SITE: AVERAGE COST WITH PEAK LOAD SUPPORT SCENARIO

Site Characteristics

Location of microgrid (State Energy Plan zone) Long Island (Zone K)

System nameplate capacity 12.095 MW

Average annual generation 132.64 MWh

Number and type(s) of DER utilized:

Natural Gas 0

Diesel 10

Wind 0

Solar 1

Hydro 0

Other 0


Analytic Results: Summary Worksheet (cont.)

It then asks the user to specify several key assumptions for the

benefit-cost assessment:

The duration of the major power outage to be analyzed as part of

the BCA.

The probability of an outage of that duration in any year.

The discount rate to be employed in calculating present values and

annualized values.

Specification of these inputs in the Summary worksheet is

designed to facilitate sensitivity analysis.

18

Key Assumptions

Parameter Unit Value

Total duration of outage Days 1

Annual probability of outage Percent 50%

Discount Rate Percent 7%

Number of times microgrid fuel would be

replenished during outage n/a Indefinite



The worksheet provides estimates of the present value and

annualized value of the system’s costs.

19

Results Summary

Cost or Benefit Category

Present Value

Over 20 Years (2014$) Annualized Value (2014$)

Initial Design and Planning $3,021,888 $266,584

Capital Investments $955,463 $71,960

Fixed O&M $1,148,863 $101,350

Variable O&M (Grid-Connected Mode) $27,395 $2,417

Fuel (Grid-Connected Mode) $463,443 $40,884

Emission Control $0 $0

Emissions Allowances $0 $0

Emissions Damages (Grid-Connected Mode) $70,682 $6,235

Total Costs $5,687,734 $489,430

Costs



It provides similar information on the project’s benefits, along

with estimates of the project’s net benefits, benefit/cost ratio,

and internal rate of return.

20

Results Summary

Cost or Benefit Category

Present Value

Over 20 Years (2014$) Annualized Value (2014$)

Reduction in Generating Costs $166,870 $14,721

Fuel Savings from CHP $0 $0

Generation Capacity Cost Savings $11,894,738 $1,049,326

Transmission & Distribution Capacity Cost Savings $0 $0

Reliability Improvements $99,387 $8,768

Power Quality Improvements $0 $0

Avoided Emissions Allowance Costs $1,388 $122

Avoided Emissions Damages $0 $0

Major Power Outage Benefits $1,457,087 $128,541

Total Benefits $13,619,470 $1,201,478

Net Benefits $7,931,736 $712,048

Benefit/Cost Ratio

Internal Rate of Return

Benefits

55.47%

2.39



It also provides a table that allows the user to track results for

different major power outage scenarios, and to evaluate

impacts across multiple scenarios.

Users can iterate to determine the probability and duration of

outages necessary for project benefits to equal project costs.

Results can be compared with historical data on the frequency

of major outages to determine whether development of a

microgrid is likely to be cost-effective.

21

Alternate Duration and Frequency: Summary of Major Power Outage Benefits

Total Duration of Outage (Days)

Annual Probability of

Outage (Percent)

Present Value of Major

Power Outage Benefits

(2014$)

Present Value of

Total Benefits

(2014$)

Benefit/Cost

Ratio

1 50% $1,457,087 $13,619,470 2.39

3 25% $2,152,474 $14,314,857 2.52

4 10% $1,145,776 $13,308,158 2.34

$4,755,336 $16,917,719 2.97Total


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