What electric reliability is actually worth and what it means for utilities
LBNL’s new numbers on the value of service reliability are revealing
The cost of outages to utility customers is not always adequately included in utility planning, according to experts at calculating those costs.
But Pacific Gas and Electric (PG&E) and Southern Company, two very different types of investor owned utilities, are among the most advanced at including the cost into their planning. That raises a very interesting question about the way utilities spend money.
“Utilities usually plan to certain minimum requirements or only consider their own costs and benefits,” according to Nexant Utility Services Managing Consultant Josh Schellenberg, co-author of the just-released report, "Updated Value of Service Reliability Estimates for Electric Utility Customers" from Lawrence Berkeley National Laboratory (LBNL).
“By providing a meta-analysis to understand the customer benefits associated with various types of reliability interruptions,” Schellenberg said, “this report helps address one of the barriers to utilities incorporating the customer perspective.”
Incorporating customer interruption costs into planning, which is known as "value-based reliability planning," leads to a much better assessment of the societal costs and benefits, Schellenberg said.
Often the utility is comparing multiple investments, he added. If it looks only at utility costs and benefits and doesn’t incorporate the customer perspective, it could make the wrong decision because “the customer may benefit greatly from one investment and not much from another investment.”
Who gets the costs and benefits?
Utility benefits from reliability investments include operations and maintenance savings and lower restoration of service costs. Though the utility incurs costs for reliability investments, those costs are generally recovered from ratepayers in time.
“Power interruptions can be incredibly costly to customers, especially to commercial-industrial customers,” Schellenberg said. “Ignoring the potential benefits to customers in the cost-benefit assessment of reliability investments can undervalue them.”
The LBNL survey provides three key metrics for planners:
- the cost for an individual interruption for a typical customer
- the cost per average kilowatt (kW)
- the cost per unserved kilowatt-hour (kWh), which is the expected amount of unserved kWhs for each interruption and is relatively high for a momentary interruption because the unserved kWhs in a 5-minute period is relatively low.
The national average price of residential electricity for 2014 was $0.1246 per kWh, according to the U.S. Energy Information Administration. The average commercial electricity price was $0.1071 per kWh and the average industrial price was $0.0703 per kWh.
The values derived from the survey, soon to be publicly acessible through the Department of Energy ICE Calculator, show customers value their electricity at “orders of magnitude larger than what they pay for the electricity,” Schellenberg said. "That shows interruptions can be highly costly to customers and utilities should incorporate those costs into planning.”
The electricity not provided that a medium to large commercial and industrial (C&I) customer otherwise would have consumed, the survey shows, is valued at $21.80 per kWh. For the small C&I customer, the value for a one hour outage is $295 per kWh. For the residential customer, it is $3.30 per kWh.
How to use the numbers
Demonstrating the high value customers place on reliability to regulators can be a power lever in justifying utility spending, Scehllenberg acknowledged.
“Tell me something a utility does that doesn’t affect reliability,” he said. "Tree trimming is about reliability. Demand response affects reliability. Distributed batteries and solar can affect reliability. Improving the call center could affect reliability.”
PG&E incorporated interruption costs into many of their proposals for reliability investments on the transmission and distribution side in their last rate case, Schellenberg said. Southern Company has incorporated interruption costs into their generation planning for about 20 years.
“There are two basic kinds of outage,” explained Regulatory Assistance Project (RAP) Senior Advisor Jim Lazar. RAP is a global, non-profit team led by former regulators that provides guidance on power sector economic, environmental, reliability and benefit allocation issues.
Outages from a shortage of generation are “very very unusual,” Lazar said. “Transmission and distribution system failures are far more common. The average customer experiences one of those per year.”
There is a supply curve for reliability services, Lazer went on.
“The cheapest are things that can be delayed or done without for a few hours," he said. "At the high end of the scale is building utility scale generation, plus transmission, plus distribution upgrades for reliability that is only needed a few hours per year."
Regulators must understand the supply curve and “figure out the best way to acquire the options at the cheap end of the curve,” Lazar said. "Utility scale generation, transmission, and distribution is a very, very expensive solution. It is an appropriate expenditure for providing thousands of hours of service per year but inappropriate for one hour every ten years.”
The key question to ask about Southern Company’s use of the costs and benefits to customers of outages to justify expenditures for new generation is whether they are necessary if “substantially all outages are distribution-related and virtually none are generation related,” Lazar suggested.
PG&E’s use of the customer perspective to justify transmission and distribution spending “is more logical,” Lazar said, “because that is where the interruptions – even the biggest ones – are coming from, and not from an insufficiency of generation.”