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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
INDUSTRIAL ECONOMICS, INCORPORATED
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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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.
INDUSTRIAL ECONOMICS, INCORPORATED
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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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).
INDUSTRIAL ECONOMICS, INCORPORATED
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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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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.
INDUSTRIAL ECONOMICS, INCORPORATED
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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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).
INDUSTRIAL ECONOMICS, INCORPORATED
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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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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.
INDUSTRIAL ECONOMICS, INCORPORATED
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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% = $19,122.
INDUSTRIAL ECONOMICS, INCORPORATED
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Analytic Results: Summary Worksheet
 The Summary worksheet begins with an overview of key aspects
of the microgrid’s design.
SUFFOLK SITE: AVERAGE COST WITH PEAK LOAD SUPPORT SCENARIO
Site Characteristics
Location of microgrid (State Energy Plan zone)
System nameplate capacity
Average annual generation
Number and type(s) of DER utilized:
Natural Gas
Diesel
Wind
Solar
Hydro
Other
INDUSTRIAL ECONOMICS, INCORPORATED
Long Island (Zone K)
12.095 MW
132.64 MWh
0
10
0
1
0
0
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Analytic Results: Summary Worksheet (cont.)
 It then asks the user to specify several key assumptions for the
benefit-cost assessment:

The duration of the major power outage to be analyzed as part of
the BCA.

The probability of an outage of that duration in any year.

The discount rate to be employed in calculating present values and
annualized values.
 Specification of these inputs in the Summary worksheet is
designed to facilitate sensitivity analysis.
Key Assumptions
Parameter
Total duration of outage
Annual probability of outage
Discount Rate
Number of times microgrid fuel would be
replenished during outage
INDUSTRIAL ECONOMICS, INCORPORATED
Unit
Days
Percent
Percent
n/a
Value
1
50%
7%
Indefinite
18
Analytic Results: Summary Worksheet (cont.)
 The worksheet provides estimates of the present value and
annualized value of the system’s costs.
Results Summary
Cost or Benefit Category
Costs
Initial Design and Planning
Capital Investments
Fixed O&M
Variable O&M (Grid-Connected Mode)
Fuel (Grid-Connected Mode)
Emission Control
Emissions Allowances
Emissions Damages (Grid-Connected Mode)
Total Costs
INDUSTRIAL ECONOMICS, INCORPORATED
Present Value
Over 20 Years (2014$)
$3,021,888
$955,463
$1,148,863
$27,395
$463,443
$0
$0
$70,682
$5,687,734
Annualized Value (2014$)
$266,584
$71,960
$101,350
$2,417
$40,884
$0
$0
$6,235
$489,430
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Analytic Results: Summary Worksheet (cont.)
 It provides similar information on the project’s benefits, along
with estimates of the project’s net benefits, benefit/cost ratio,
and internal rate of return.
Results Summary
Cost or Benefit Category
Benefits
Reduction in Generating Costs
Fuel Savings from CHP
Generation Capacity Cost Savings
Transmission & Distribution Capacity Cost Savings
Reliability Improvements
Power Quality Improvements
Avoided Emissions Allowance Costs
Avoided Emissions Damages
Major Power Outage Benefits
Total Benefits
Net Benefits
Benefit/Cost Ratio
Internal Rate of Return
INDUSTRIAL ECONOMICS, INCORPORATED
Present Value
Over 20 Years (2014$)
Annualized Value (2014$)
$166,870
$0
$11,894,738
$0
$99,387
$0
$1,388
$0
$1,457,087
$13,619,470
$7,931,736
2.39
55.47%
$14,721
$0
$1,049,326
$0
$8,768
$0
$122
$0
$128,541
$1,201,478
$712,048
20
Analytic Results: Summary Worksheet (cont.)
 It also provides a table that allows the user to track results for
different major power outage scenarios, and to evaluate
impacts across multiple scenarios.
 Users can iterate to determine the probability and duration of
outages necessary for project benefits to equal project costs.
 Results can be compared with historical data on the frequency
of major outages to determine whether development of a
microgrid is likely to be cost-effective.
Alternate Duration and Frequency: Summary of Major Power Outage Benefits
Total Duration of Outage (Days)
1
3
4
Annual Probability of
Outage (Percent)
50%
25%
10%
Total
INDUSTRIAL ECONOMICS, INCORPORATED
Present Value of Major Present Value of
Power Outage Benefits
Total Benefits Benefit/Cost
(2014$)
(2014$)
Ratio
$1,457,087
$13,619,470
2.39
$2,152,474
$14,314,857
2.52
$1,145,776
$13,308,158
2.34
$4,755,336
$16,917,719
2.97
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