Cost Reduction Opportunities in Local Distribution Grids with Demand Response

Abstract: The development of future smart electricity grids is driven by efficiency and climate targets and economic benefit for producers, retailers and customers on the deregulated electricity market. Since most investments will be made by grid owners acting as regulated monopolies, it is unclear how they will get return on their investments. Can demand response programs create cost reductions for the grid owner that help motivate the investment in smart grids? Two cases of cost reduction opportunities are evaluated assuming that peak loads are reduced by a demand response program: optimization of cable dimensions for lower peak loads when building new grids, and avoided investments in reinforced capacity in the existing grid. Potential cost reductions are estimated for the two example cases, using financial and technical data for Fortum's local distribution grid in Stockholm. The result shows that reducing the capacity in the cables by 70-80 % only brings down investment costs by 3-4 %, since the common expense for excavation outweighs the incremental cost of cables. Over-capacity means increased redundancy and flexibility to increase load in the future, which are valuable features for a grid owner.Regarding investments in the existing grid, a substation that needs replacement because of overload is analyzed. Assuming a continued trend of steadily increasing load, a 34 % peak load reduction would delay the investment 20 years, which is in turn worth 900,000 SEK in 2010 prices.