Exploring the Transition Towards an

Electricity Smart Grid Using

Evolutionary Parameter Optimisation in a
System Dynamics Model

Master Thesis
Dominik Jung
S4375718

Nijmegen School of Management

First Supervisor: Dr. Andreas Grler
Second Supervisor: Dr. Etienne Rouwette

This thesis has been elaborated starting February 2014 and was defended in Nijmegen, Netherlands
on 15th of August, 2014.

For all inquiries, the author can be reached at

dominik.jung@student.ru.nl

Content
1 - Introduction....................................................................................................................................... 4
2 - Background......................................................................................................................................... 6
2.1 - Electricity Distribution Grid in Germany: Development, Actors, Future Requirements ............. 6
2.2 - Regulatory environment for Distribution System Operators .................................................... 10
2.3 - Smart Electricity Grid: Definition, Features, Purpose, etc. ....................................................... 13
2.4 - Transition Period: Theoretical Considerations .......................................................................... 16
2.5 - Actual Progress of Smart Grid Implementation in the EU and Germany .................................. 17
3 - Literature Review for Simulation ..................................................................................................... 18
3.1 - Asset Management in Long-Life Infrastructure ........................................................................ 18
3.2 - Grid Quality Indicator: Service Reliability.................................................................................. 22
3.3 - Modelling Methodology: System Dynamics.............................................................................. 26
3.4 - Relevant Scientific Applications of System Dynamics ............................................................... 29
3.5 - Method: Evolutionary Algorithms for Parameter Optimisation ............................................... 33
4 - Description Simulation Approach..................................................................................................... 37
4.1 - Overview: Approach & Scenario Groups .................................................................................. 37
4.2 - Detailed Model Description ...................................................................................................... 41
4.3 - Use of Evolutionary Algorithms for Optimisation ..................................................................... 46
4.4 - Dynamically relevant features of Smart Grid Equipment compared to conventional assets ... 47
4.6 - Evaluation categories for Simulation Results ............................................................................ 50
5 - Simulation Results

and Evaluation ............................................................................................... 52

5.1 - Business as Usual / No SG Integration ...................................................................................... 52

5.2 - Impact of the Smart Grid Transition.......................................................................................... 54
5.3 - Theoretical Evaluation of Results .............................................................................................. 70
5.3.1 - Results Compared to Theory on Corporate Investment in General, Asset Management
and Reliability ............................................................................................................................... 70
5.3.2. Comparison of Results against Transition Plans ................................................................. 72
6 - Policy Recommendations ................................................................................................................. 74
6.1 - Policy Recommendations for Distribution System Operators .................................................. 74
6.2 - Policy Recommendations for Regulatory Bodies ...................................................................... 77
7 - Limitations and Further Research .................................................................................................... 79
8 - Conclusion ........................................................................................................................................ 81
Appendix................................................................................................................................................ 82
List of Illustrations ............................................................................................................................. 83
1

List of Tables ...................................................................................................................................... 84

Detailed Overview of Simulation Runs .............................................................................................. 85
List of Abbreviations .......................................................................................................................... 93
Research Ethics.................................................................................................................................. 94
Reports on Expert Consultations ....................................................................................................... 95
Software used for Simulation .......................................................................................................... 100
References ....................................................................................................................................... 103

I would like to thank my supervisor, Prof. Andreas Grler for his guidance and his helpful comments
during the making of this thesis. I would also like to thank Dr. Heiko Spitzer, Dr. Sven Hbner and Dr.
Michael Huserer for their guidance and input to the thesis. Same goes for my partners at the
involved Distribution System Operator company, among them Dr. Armin Gaul and Dr. Ulrich
Wernekinck, who ensured the realism of assumptions and the real-world relevance of the thesis.
Lastly I would like to express my gratitude to my family and my fellow students in the third cohort of
the European Master Programme in System Dynamics, which was a deeply satisfying time for me.

1 - Introduction
The transition of the German electricity grid towards a so-called Smart Grid is a development which is
politically desired and estimated to take place in the coming years (ETP: Smart Grid, 2010). This is
due to the fact that a Smart Grid provides numerous benefits when compared to a conventional
electricity grid1. These benefits are valuable both independently as well as in the Smart Grid's role as
an enabling technology for another ongoing change process in the German energy system: the
increasing share which renewable sources take in the generation of electricity.
Research Problem
All of these mentioned qualities which Smart Grid delivers are desirable. However, amongst
practitioners in the electric grid industry, scepticism has been growing. Practitioners are usually
aware, that the transition will be a major endeavour, but it uncertainty prevails about key aspects of
it. The uncertainties concern mostly the exact shape of changes to come - e.g. the prevalence of
dynamically relevant aspects of the new assets and the final elements included in the rollout
regulation - as well as the impact which those changes will have on DSO's2. Naturally, the question of
adaption to those impacts is closely related to those mentioned considerations3. Literature on large
scale transformations in long-life infrastructure is scarce.
Furthermore, this uncertainty receives perspective from a policy standpoint, with scholars pointing
out the fact, that a new technology impacting an existing complex techno-economic system (such as
the electricity grid) can always have consequences which are hard to anticipate without detailed
analysis (Forrester, 1969, 1971). Considering the characteristics of long-life network infrastructures
(see section 3.1), these uncertainties are pressing questions, ignoring which could have serious
consequences.
Implementing Smart Grid can be pictured as a transition from one steady-state equilibrium towards a
new one (more detail in section 2.4). This transition has been described as "[...]open heart
surgery[...]" of a long-life network infrastructure operating within a regulatory framework, where
steering policies have consequences for long amounts of time (Paulssen & Handrack, 2011). Its main
steering mechanism consists of the investment and asset management decisions, which are taken
inside of the regulatory environment (Short, 2004). Large financial sums are at stake and while there
is still debate on features of the regulation, it is likely that the end customer will shoulder the cost for
the transition (Edelmann & Kstner, 2013). This adds to the political dimension of the discussion.

To outline the most important: Among these benefits are higher energy efficiency, the capacity to implement
higher percentages of electricity from volatile renewable sources, the ability to integrate new technologies
which account for a higher number of generating actors in the electricity system and bidirectional flow of
electricity (eg. E-Vehicles) as well as an improved data generation and monitoring capacity. More detail can be
found in section 2.3
2
Distribution System Operators
3
Consultation Dr. Gaul, Consultation Dr. Wernekinck, Consultation 3

Consequently, the economic impacts of the Smart Grid endeavour also have to be seen in
conjunction with the plans to transform the generation part of the electricity system4.

Research Design
The research contribution of this thesis is a thorough exploration of the Smart Grid5 transition,
reducing the prevalent uncertainty by shedding light on the most important aspects of the issue. Its
research questions can be grouped in two areas: First, from a point of view of the individual
Distribution System Operator (DSO), the work seeks to establish a broad estimation of the range of
financial impacts which the most probable changes would have, depending on the eventual form
which the uncertain aspects take. Also - considering the often mutually exclusive nature of DSO's
goals such as reliability and cost - we seek to explore how these goals are interdependent, finding
guidelines to arrive at feasible compromises to manage and adapt to the transition. The second set of
research questions builds on the first one and takes a more general perspective: The effects of the
most probable adaptations of DSO's to the transition are explored. Trying those under different
financial and regulatory assumptions we aim to explore if and under which circumstances service
quality can be affected. From this, a broad perspective is sought on how this transition should be
viewed ideally, enabling us to give recommendations for the shape of its regulatory framework.
The research can therefore be classified as an explorative scenario approach towards a synthetic
case-study. It does not set out with a hypothesis, instead it seeks to explore likely outcomes of
different assumptions. While the Smart Grid transition affects the whole grid, a scope was chosen
which focuses on the distributive part of the grid. The geographical scope of the work concentrates
on Germany. It is a synthetic case study, as data for the initial model has been chosen with the goal
of representing the average DSO in Germany. The thesis is characterised by its proximity to practical
concerns, having been guided by the experience of DSO consultancy entellgenio GmbH Munich and
consultations with three practitioner experts on the topic.
Methodologically, the thesis uses a scenario-making approach which combines System Dynamics
modelling and Evolutionary Algorithms. The System Dynamics model seeks to capture the underlying
structure of the issue, and Evolutionary Algorithms are then used on the model to find likely
strategies under the given assumptions. The use of scenario-making was chosen since it fits the
research goals, according to Brjeson et al. (2006). More detailed reasoning for this point can be
found in section 4.1.

Plans for the transition on the generation side have a longer time horizon than the ones for Smart Grid
transformation: Until the year 2020 merely a 20% conversion is mandated, which seems little in comparison to
the 80% goal that is recommended for the grid transition. However through the comparably higher worth of
assets, this is still a very challenging process, with considerable costs.
5

In this thesis, the term "Smart" (eg. "Smart Assets,", "Smart transition") refers specifically to the technical
term. It will therefore be written in capitals.

2 - Background
The following chapter aims to scientifically investigate the background of the transformation towards
Smart Grid. It details our scope, our point of departure - the role of the electricity grid, its traditional
features and legal background - as well as our goal, the fully implemented Smart Grid. Also, the
chapter gives an account on how far the implementation of Smart Grid has progressed at the point of
writing of this thesis.

2.1 - Electricity Distribution Grid in Germany: Development, Actors, Future

Requirements
First, we will consider the role of the distribution grid in a broader context and examine its
conventional technical features. We can then evaluate, which organisational stakeholders act on this
system and in which regulatory framework they have been operating, both in the past and in the
coming transition towards smart grid. Lastly, an approximation of other future developments of the
grid, apart from the transition towards Smart Grid is given.

Overview & Relevance

To judge the relevance of our topic, it shall be noted that the electrical grid is considered one of the
key infrastructures which serve as the foundations of all modern economic and general public life.
Indeed, a functioning electricity grid is "[...]no longer a luxury [but] now a necessity" (Short, 2004:
p.19). Throughout the last decades, dependence on constant availability of electricity has steadily
increased because of new forms of economic activity and societal processes which both rely on
reliable supply of electricity. This increase in importance came through the higher reliance on grid
functioning for economic development during the last decades and higher societal interconnection of
systems. Helbing (2013) describes this interconnection as "Networks of networks[...]" which are
interdependent and vulnerable for cascading failure at all scales. As an example, he mentions the
coupling of modern communication infrastructure, automation systems and transport infrastructure
with reliable electricity supply. While thankfully not all failures of the grid system lead to such big
cascading events, it is however clear that the adverse effects and financial costs of interruption of
power supply are rising with the growing level of interdependence.6
The electrical grid in Germany is presently in good condition and has been developed and maintained
steadily in accordance to the demands imposed on it (Bundesnetzagentur, 2012). However this
development happened only in the framework of what shall be called conventional technology. The
planned Smart Grid in its final state represents a significantly enhanced role of the grid with different
characteristics from what is conventionally used.

The mentioned interconnection and interdependence can be expected to keep growing in the long
term, which justifies our attention on electricity grid functioning. It is also noteworthy that in the
United States, most blackouts in the last 35 years were caused by malfunction of the transmission
system and only very rarely, malfuntion of generation (Levqu, 2007).
6

The German electricity grid regulating agency compares the transition period to an "open-heart
surgery", which symbolizes the two mentioned characteristics: First, an intervention that is already
complex in itself and second, the necessity to undertake it without interrupting the normal system
functioning (Paulssen & Handrack, 2011). This explains the value of putting much though into shaping
the transition process.

Technical Features of the Electricity Distribution Grid

In this thesis, the technical focus will be on the distribution grid, which is a smaller part embedded in
the larger electricity grid. Short (2004, p.19) defines the electricity distribution grid as "[...]the
portion of the power delivery infrastructure that takes the electricity from the highly meshed, highvoltage transmission circuits and delivers it to customers". From a purely technical perspective, the
purpose of the distribution grid is to ensure the functioning of power delivery to the end user at all
times. More detailed technical aspects of this task involve maintaining power quality aspects like
general flow of the electric circuit, management of voltage and prevention of flickering circuits.
(Short, 2004).
When seeking to define the boundaries of the distribution grid, the best way to do so is in terms of
voltage: A distribution grid operates at a medium to low voltage range, with voltage declining, the
closer one gets towards the end customer. This means a voltage of about 35kV at the connection
parts to the transmission grid and down to about 600V towards the doorsteps of the end customer.
Compared to this, the long distance transmission grid uses a much higher voltage of about 10 kV to
1000 kV (EPRI, 2000 and Short, 2004).
The typical parts of the distributive grid are primary distribution circuits. These consist of various
types of cables (e.g. overhead or underground cables), which connect to the high-voltage
transmission grid at a distribution substation. Attached to the primary circuits are several distribution
transformers, which further lower the voltage (typically to 230V in European grids) and transmit it to
the end user via a secondary circuit. For easier overview, the parts in the grid are often grouped into
segments that are aligned on an imagined chain from spanning from the connection point to the high
voltage grid to the end customer. This part is relevant as the simulation approach (explained in
chapter 4) will be based on this assumption. (Short, 2004).

Figure 1: Conventional Tree Shape of Electricity Transmission and Distribution. Adapted from Short (2004).

From a high level view, the layout (topology) of the traditional electricity grid resembles a tree with a
one-directional electricity flow: Electricity is produced at the centre, then transmitted by a small
number of key transmission lines (the tree branches) with the distribution grid circuits branching out
like twigs and leaves into smaller and smaller sections (Fig. 1).
The statistical reliability of these technical parts of the distribution structure will become important
at a later point. Broadly speaking, it depends on momentary quality condition of the used equipment
and technical redundancies which are built into the system to ensure transmission flow even when
some parts of the system are non-functional. How exactly then, reliability is defined and measured,
will be treated in section 3.2 (EPRI, 2001).

Stakeholders in the Discussion and Description of a Typical German DSO

Having seen the technical features of a distribution grid, we will next examine the key actors which
are concerned with this infrastructure.
As in any large-scale infrastructure, there are several actors and stakeholders in the German grid,
which steer the discussion. Those stakeholders include the traditional bulk generators of electrical
energy, stakeholders in transmission as well as in the operating of distribution networks (focus of this
thesis). Lastly it also includes the end user, which may be either large (typically commercial) or small
(private) end users. It shall be noted, that with the growing permeation of distributed generation
technologies like private photovoltaics, the distinction between consumers and producers fades,
leading to the emergence to a new type of actor, the so-called "prosumer" (Joskow, 2007 & van den
Oosterkamp et al., 2014). The stakeholder which determines the conditions in which market
participants interact is the regulating agency (Bundesnetzagentur).
To provide an outline of the German DSO landscape, Pavel (2011) points out, that the number of
DSO's is significantly higher in Germany in comparison to other European countries with similar
population. In the year 2012, the German regulating agency counted the comparably large number of
8

883 Distribution System Operators, with an average circuit length of 2543 km. On average, each of
these grids transmits electricity of 626 GWh per year a number of 64845 end users. Investments into
grid assets were on average 8,5 million per year per DSO7 (Bundesnetzagentur, 2012). Pavel (2011)
goes on to mention an inhomogeneous average age of grid, which is in tendency lower in the new
federal states, through refurbishment activities after the reunification. This indicates a very
heterogeneous landscape, resulting from federalist political structure in Germany and regional
monopolies before the market liberalisation.

Future developments and requirements

To estimate the future development for the distribution grid, it makes sense to assess requirements
which the grid needs to fulfil.
A future requirement which can be expected is an integration of more decentralised production and
with it, an ever growing percentage of renewable energy. This accounts for a higher need to
accommodate a higher number of actors feeding electricity into the grid, a much more bi-directional
electricity flow and a necessity to tolerate fluctuation in electricity volume, as renewable supply is
usually less stable.
Secondly, integration of new technologies like distributed generation, electricity storage and an
increase in electromobility fleet may be an issue, which the grid will need to be capable of handling.
This may lead to a need for an electricity grid layout ("topology") that looks like a mesh. Brown
(2008) points out how this need is in contrast to the previously mentioned standard tree-like design
of the grid, which is one-directional and stable in terms of load. The relevance of this is such, that it
would require actual new construction, as opposed to mere upkeep of existing assets, which is the
focus of this thesis. We shall keep this in mind as context for judging the result of our simulations.

Calculated from the total sum of circuitry, transmission volume, and investment spending among listed DSOs
in Bundesnetzagentur, 2012: pp.19-20., under the assumption of a uniform distribution of those indicators
among the counted DSO's.

2.2 - Regulatory environment for Distribution System Operators

Seeing that DSO's have to take their decisions embedded in a strongly regulated environment
defined by the regulating agency Bundesnetzagentur, investigating this environment deserves special
attention. We will start with a broad investigation of the background legislation which has been in
place during the recent years and then proceed to investigate regulation specifically concerning our
topic of Smart Grid transition.

General Regulatory environment for DSO's

The background regulatory framework for electricity distribution grids is set by the main act on gridbased energy.( Energiewirtschaftsgesetz, EnWG). Its 1 sets the goal of a safe, affordable, efficient
supply of energy to the general public, with a growing reliance on renewable sources. Since energy
policy is strongly influenced by the European Union, the EnWG has been modified several times since
1998 to account for implementation of EU-Directives. This is the broad environment in which DSO's
take their decisions.
For this thesis, the most defining piece of regulation is the ordinance on incentive regulation
(Anreizregulierungsverordnung, ARegV). Its coming into effect in 2007 represented a significant shift
in market design. It assigns an individual cap on total revenues for each DSO, which the regulatory
office calculates based on their costs. The key feature is its sliding nature: The cap amount is decided
for regulation period of 5 years. In following regulation periods, the new benchmark orients at the
most efficient grid operator. The resulting market is one of a regulated regional monopoly, in which
the monopoly holder has an incentive to operate cost-efficiently, to keep as much of the fixed sum as
possible. As a consequence, this structure incentivises the market to compete for increasing
efficiency. It is necessary to perceive all considerations of DSO investment and asset management
decisions in front of the background of ARegV.8
While not directly modelled in this thesis, another potentially defining piece of legislation comes
through the Renewable Energies Act (Erneuerbare Energien Gesetz - EEG). Its 9 requires
transmission system operators to optimise and reinforce their grids, if this is necessary to transmit
renewable energy. Distribution System Operators are included in this regulation. This may take
effects in the long run, considering that a significant percentage of both private and commercial
renewable energy is produced at the level of the distribution grid (medium to low-voltage), therefore
not requiring to be transmitted over long distances.
It is also noteworthy that the coalition agreement of the 2013 federal administration mentions
distribution grid regulation as an integral part of the efforts for energy transition, indicating possible
effects on future regulations.9

A general study of liberalisation impacts on grid investing comes from Levqu (2007), who states that
privatisation leads to DSO's following a cost-based investment strategy. It shall also be noted that privatisation
of assets correlates with less in total investment and smaller margins of safety as compared to before
privatisation (Levqu, 2007).
9

CDU Deutschlands (2013), pg.42: "Die Koalition wird die Rahmenbedingungen fr die Verteilernetze
investitionsfreundlich ausgestalten, damit Investitionen zeitnah refinanziert werden knnen". Translation: The
[new] coalition is going to design a regulatory environment which is conducive to investments in distribution
grids so that investments can be refinanced promptly.

10

Regulation in Germany in support for Smart Grid Rollout

Having established the conventional market design, we can now investigate the situation in Germany
concerning the legislation for Smart Grid rollout, starting with the integration into larger EU energy
policy.
Background: EU Recommendation on Rollout
To provide some background, regulation in the larger EU concerning Smart Grid rollout in the
distribution grid is motivated mainly by the goals for integration of renewable sources and energy
efficiency (and therefore touched upon in the directives concerning these topics).
A coherent framework for technology policy which directly affects the question of Smart Grid is the
European Strategic Energy Technology Plan (EU Commission 2007). Simes et al. (2011) list six
agencies, in whose sphere of concern the topic of Smart Grid in the distribution system falls,
indicating some regulatory overlap and inconsistency.
Inside this framework, the crucial piece of regulation coming from the European Union is a directive
published in 200910 which recommends 80% rollout of smart technology in the metering segment
until the year 2020. This was further formalized in technical detail through a 2012 recommendation
to member states11. Regulation for other segments was not available for other segments of the grid.

Germany: Pending Rollout Directive

Concrete regulation for the rollout happens then at a EU member state level. The importance of
regulation can be shown at the following example.
Concrete regulation to support Smart Grid rollout, is 21c of the EnWG law, which sets regulation for
the transformation of the metering segment towards smart grid. It currently (2014) mandates the
installation of Smart metering equipment for new buildings and large-scale renovations. More
importantly, it announces a detailed technical directive by the Federal Ministry of Economic Affairs
and Energy on full-scale mandatory rollout of Smart Metering.
Industry practitioners underline the necessity for such a binding and detailed directive and its central
role in the transition, as implementation would otherwise be sluggish. However, when exactly the
directive is due to arrive is unclear, which makes for even greater uncertainty in planning . While
rollout was previously expected to start by end of 2015, practitioners are more sceptical
now(Consultation Wernekinck, Consultation 3 and Schlosser, 2014).
Which elements the directive will specify and how it defines them will have strong impact on how
the transition takes place. Key questions which industry practitioners expect to be answered through
the directive are

Date for when rollout needs to be started

Possibly: Intermediate targets of asset segment percentages for which the transformation
needs to be accomplished at a specified point in time

10

Directive 2009/72/EC, part of the Third Energy Package

2012/148/EU: Commission Recommendation of 9 March 2012 on preparations for the roll-out of smart
metering systems
11

11

The key element: Finishing date, when rollout needs to be completed (This would present
what is described as an "active" approach to transition in the section about simulation)
Legal situation as to who bears costs for transition (e.g. whether the DSO or the user is the
owner of the asset)
For the metering segment: Customer scope. E.g.: Do all meters in the grid have to transition
or is there a threshold value for yearly consumption of electricity from which on metering
needs to be smart12
Technical details: Telecommunication protocols, data security certification, coordination
between voltage levels.

Investigating whether the existing regulation promotes or hampers the transformation process
towards smart grid implementation and successful energy transition is one of the goals of this thesis.
13
The question of the finishing date for the rollout receives special attention in our simulation.
Whether there is a set goal to finish the transition process (either through the directive or self-set by
the DSO) represents the difference between the active and the passive approach.
The metering segment is until now the only segment to receive such a detailed regulation. However,
practitioners state that directives for the other grid segments might be necessary as well and already
in formalisation (Consultation Wernekinck & Consultation 3).

12

At the moment this is at 6000kWh / year of electricity consumption, which an consultation participant
mentioned as being low, leading to inefficiency
13

It is noteworthy, that the regulating agency has issued a consultation concerning this topic towards
distribution grid operators, to assess feedback for this question (Bundesnetzagentur, 2013b).
12

2.3 - Smart Electricity Grid: Definition, Features, Purpose, etc.

In the following section, the end goal shall be described, at which we seek to arrive through the
transformation to Smart Grid.
Definition
Smart Grid has been a buzzword since the early 2000's, with an increase in scientific publication
activity from 2005 on. For public interest in Smart Grid, Google Trends recognizes a stark increase in
interest towards the topic (indicated by monthly news headlines) in early 2009, coinciding with the
EU recommendation (Fig 2).

Figure 2: News headlines per month featuring the term "Smart Grid". Derived from Google Trends on 22nd of June, 2014

Several definitions for Smart Grid exist, among which the following add the most valuable
perspective. Taking a broad perspective, Ipkachi (2007, pg. 1) sees Smart Grid as a necessary result of
the "...convergence of information and power delivery technologies". With a more focussed view, the
stakeholder forum of the EU Technology Platform for SmartGrids defines its vision of a Smart Grid as
an electricity network which uses ICT to "intelligently integrate [...] the actions of generators and
consumers connected to it, in order to efficiently deliver sustainable, economic and secure electricity
supplies" (ETP:SG, 2010, pg. 6). This vision takes the form of a grid which is technically and
organisationally capable of automatic measurement, communication, control and optimisation of all
aspects of its usage. (Ekanayake et al., 2012).
The fully rolled out Smart Grid encompasses all segments of the electricity supply system - from
generation, to transmission, distribution and use of electricity. The thesis will focus on the impacts on
the distributive part of the grid, while keeping the interdependencies with other segments in
perspective, where necessary.

Smart Grid Properties

Properties, which a fully implemented Smart Grid is envisioned to have, include
High permeation of electronic elements in grid assets
Capacity for data transmission and computing capabilities.
Automatic steering and reaction capabilities for grid usage patterns (Eg. "Active Network
Management" in conjunction with small producers, automatic load shedding in cases of
drastic undercapacity (Hadjsaid & Sabonnadiere, 2012)

13

A higher level of decentralisation in contrast to the tree-like structure of the traditional grid
(as mentioned in section 2.1).
Higher grid resilience. Self-healing response capability for outages (Ekanayake et al., 2012).

Justification
Implementing Smart Grid is a significant task which comes with considerable costs of resources and
time. It is therefore necessary to be clear about which benefits one hopes to achieve from its
implementation. As the distributive part of the larger electricity grid is the focus of this thesis, we
shall also investigate whether there are special impacts here.
Since a fully implemented Smart Grid is characterised by a detailed and real-time availability of data
on supply and demand, there are many more possibilities for nuanced monitoring and control of the
system in it. The key benefits of those features are a more effective management of load and voltage
as well as a higher level of energy efficiency through reduction of energy losses. (Ekanayake et al.,
2012)
Next to realising these general benefits, there are several more nuanced motivations for Smart Grid
implementation. Their prevalence varies across the globe. Initiatives in the United States stress the
benefit of higher grid resilience through Smart Grid. Also - this being a significant point - many parts
of the US grid are in a worse condition than that of the EU14, which influences the discussion, as it
makes sense to combine the transition with overall refurbishment of the grid. Compared to this, in
the EU the goals for carbon reduction are a major driving force behind Smart Grid efforts.
As this thesis focusses on the Situation in Germany it makes sense to further investigate this
motivation. The enabling role which Smart Grid has for integrating high levels of electricity
generation from renewable sources is one of the key argument its proponents cite for its
introduction. There are several aspects to this. First, renewable sources of electricity like solar or
wind are inherently more volatile than electricity from conventional sources, therefore planning in a
traditional grid would need a higher amount of excess grid capacity to account for unexpected
overproduction. Another attribute of renewable sources is that they are much more decentralised
than standard production capabilities. This holds true for micro-level generation (e.g. rooftop
photovoltaic) as well as medium sized generation (small wind parks and PV parks), which in Germany
can typically be found in the reach of the distribution grid . Lastly, while at present, technologies for
electricity storage apart from Pumped Storage Hydro are still in their infancy, there are promising
developments to this goal (Ford, 2013). It is therefore good policy to consider the grid's ability to
integrate this technology in the long-term, when making investment decisions today.
These points all becomes more pressing, the higher the percentage of renewable sources becomes.
With EU plans to reduce greenhouse gases by 80% until 2050 (as compared to 1990 levels), longterm development of the grid is necessary to accommodate for these plans, with SG being one of its
elements.

14

Eto et al. (2012) measure the development of average SAIDI in the overall US as being several times higher
than in the EU

14

Specific Effects of the Transition for the Distribution Grid

A concrete prediction of the impact of Smart Grid implementation on DSO's is unrealistic, however
there exists some literatur which points at rough lines of development of the role of Distribution
System Operators, for when implementation is complete.
For DSO's, scholars generally predict an overall more active role in managing electricity supply as a
consequence of the rollout of Smart Grid (Lassila et al., 2007a; Brown, 2008; van den Oosterkamp et
al., 2014). Some even go so far as to see DSO's "...at the heart" of the transformation towards Smart
Grid (Mallet, 2012: pg. 115). This importance is due to the fact, that DSO's are the link to the end
customer, which gives them high importance for the realisation of the intended benefits like
customer participation, consumption optimisation, interoperability etc. The change in role is likely to
change the organizational structure and concrete processes of DSO in a number of ways. Mallet
(2012) and van den Oosterkamp's (2014) analysis of tasks of DSO's which are likely to be affected by
the new equipment overlap in five areas

Equipment life cycle management

Operation (Incident analysis, Automatic Service recovery functions)
Metering
Customer Service
Local Optimisation

In these areas, customers can expect a growing level of flexibility and service differentiation which
may in the long run also include new business models, either in the traditional supply business or as
side adjuncts in areas such as data handling. Translating technical potential of the modernized grid
into concrete services (e.g. integration with electromobility) is a key challenge for DSO's which
scholars mention (van den Oosterkamp, 2014).

Classification of the Transition Approach

Chidamber (1994) distinguishes two different ways in which a new technology can be introduced:
Market pull or technology push. A market pull approach is characterised by the market demanding
some services or products which need some a technology to be fulfilled. In contrast, a technology
push is described as a concerted effort to introduce products or services based on a new technology,
either from the side of a company or regulatory bodies. The introduction of Smart Grid presently falls
clearly in the latter category, as the rollout plans have a strong administrative nature. Market pull is
expected however, when services based on Smart Grid functionality become available.

15

2.4 - Transition Period: Theoretical Considerations

It is helpful to conceptualise the transition period in simple terms at this point, to understand the
relevance of the elements in the literature review. Using systems-theoretic terms, the
implementation of smart grid can be seen as the transition from one steady-state equilibrium
towards a different equilibrium, in which the asset base and corresponding strategy for system
upkeep are both modified.
The conventional grid consists of a number of assets, out of which a certain fraction deteriorates in
any given time period. This degeneration needs to be compensated for with maintenance or
replacement activities. This leads to a state of equilibrium, when both quantities are approximately
equal over the long term. Next, through the desired implementation of Smart Grid, a transition
period is necessary (Fig 3).

Figure 3: Transition from Conventional Equilibrium to Smart Equlibrium

A general distinction can be made between an "active" approach to the transition period and a
passive one. An active approach sets a time limit as to when the transition needs to be finished. If
necessary, even assets which are still in functional condition will be replaced by smart assets to reach
the time goal for implementation. In contrast, in the passive approach assets are only replaced after
reaching their technical lifetime or in case of their malfunctioning. Besides this, other aspects which
can be defined are desired time to completion, exact asset segments to be replaced, etc.

After successfully navigating the transition period, the system settles into a new steady state
equilibrium, which has different characteristics from the first one but where still equally the rate of
degeneration is matched by the activities of maintenance and replacement.

16

2.5 - Actual Progress of Smart Grid Implementation in the EU and Germany

Having established a stylised representation of a transition towards Smart Grid, we can look for real
world examples of Smart Grid rollout. At the time of writing of this thesis, this is still uncharted
territory. While there is no fully rolled-out distribution grid yet in the EU, there have been a number
of regional projects for partial Smart Grid rollout in both the EU and Germany, over which the
following section aims to give an overview.
Overall, in the EU, progress lags behind the goals. A 2012 report by the EU Commission's Joint
Research Center counted 281 Smart Grid projects in 2012. Concerning project maturity, it states a
development of the average project from the R&D phase to the demonstration phase. Project size in
the EU is small on average (less than 7.5 million per project). Only 10% of projects in 2012 had a
budget larger than 20 million . Geographically, most activity concerning Smart Grid implementation
is in the EU-15 countries, with Denmark as the leader in investments per capita. Of those countries
with the largest population, the UK and France are most active. Compared to the EU, Germany is only
in the middle of activity concerning Smart Grid implementation (Giordano et al., 2012)..
Activities and supporting legislation in Germany consists largely of implementing the EU
requirements. Most projects are part of the economic development scheme "E-Energy", worth 140
million . Main part of the project are 6 model regions throughout Germany, in which Smart Grid is
implemented in the distribution grid. These projects are still in the demonstration phase, with the
main purpose being to gather insights on how to best design the implementation phase and how to
create jobs in the process. The ministry of economy and energy states the hope, that these projects
act as "lighthouse projects" at which regions following the process will orient themselves. Other
parts of the "E-Energy" project are funding for supporting research activities on both final state of
smart grid and its implementation phase.

17

3 - Literature Review for Simulation

Having gained an overview over the issue and the intricacies of the DSO environment, it is now
possible to consider how to represent the issue we are interested in. Any simulation model which
aims to explain behaviour of a system in the real world needs to be based on assumptions. The
following chapter explains the scientific literature on which the assumptions for the simulation
model in chapter 4 have been based. The chapter also gives an overview over the scientifically sound
use of the two methods employed - System Dynamics and evolutionary algorithms for parameter
optimisation. Lastly, we position the work among a broader overview of applications of System
Dynamics to issues in the electricity supply system and we review works with similar methodological
and thematic focus to ours.

3.1 - Asset Management in Long-Life Infrastructure

Asset Management is the central theme of our simulation. Setting out, it proves worthwhile to clarify
how the function of Asset Management is defined scientifically and whether there are distinctive
structural features to AM in network infrastructures such as the distribution grid, which we need to
reproduce in a simulation approach.
Definition
Different authors in the scientific literature use varying definitions of the term Asset Management,
which all add some valuable facets of perspective for our purpose. In order to provide broad
perspective, Kostic (2003, p.275) defines the role of Asset Management as "...the process of guiding
the acquisition, use and disposal of assets to make the most of their future economic benefit and
manage the related risks and costs over their entire life. Gaul et al. (2005) describe an electricity
distribution grid as a complex system to which asset management presents the control element. The
Institute of Asset Management (2012) underlines the enterprise-wide nature of the asset
management function, as opposed to prior "silo-thinking" inside organisational departments. To
make these outlines more explicit, it is useful to further break down AM into several concrete
subtasks. The most important subtasks on which scholars agree are maintenance strategy,
refurbishment/replacement decisions and risk management as well as goal-oriented R&D activity. All
of these subtasks serve to fulfil the previously defined role of asset management in the DSO (Bartlett,
2002; Wenzler, 2005).
Fulfilling these tasks means finding concrete and quantified decisions to bring the DSO's verbally
stated goals for reliability, safety and financial considerations into alignment. To do so, it is necessary
to understand how assets degrade and to achieve some ideal trade-off between capital expenses,
costs for maintenance and the effect of an asset malfunctioning and its probability. Decisions in
DSO's are usually formed for aggregations of assets by quality state. In this work, assets are
aggregated into 4 quality conditions, with "one" being the newest and "four" the most deteriorated.
It can be assumed, that assets in the same quality state will have the same behaviour in terms of
indicators like reliability, risk and cost for maintenance (Kostic, 2003).
The role of simulation modelling methods is to support finding a quantified trade-off between the
DSO's verbally stated goals which are still abstract. Since aging of equipment over time and mutual
exclusivity between goals is in the nature of the problem, it is therefore necessary to describe the
18

path to these goals in an interdependent and dynamic way. Considering the cognitive difficulties the
brain has to evaluate dynamic systems, the value of using modelling methodology for decisions in
this field is obvious. (Sterman, 2000 & Wenzler, 2005).

Characteristics of AM in Long-Life Network Infrastructure

After having established a formal definition of Asset Management, it makes sense to review general
characteristics of the field of inquiry and how these characteristics influence our requirements for
decision support. Asset Management in long-life infrastructure (and especially the subset of network
infrastructures such as electricity grids15) has several special characteristics which sets it apart from
other types of Asset Management.

Long Asset Lifetime

A first characteristic to Asset Management in network infrastructures is the generally long lifetime of
assets. Assets in the electric grid typically have lifetimes of minimum 30 years or longer. This has an
effect on both the process of reaching decisions for AM and their final shape. For example,
practitioners state, that there is a need to be vigilant to avoid financial "blind-alleys" in the future,
when making decisions. Continuing the example, this might happen for example when a large
investment backlog coincides with a situation of low liquidity (Consultation Dr. Gaul). Apart from
economic considerations the long asset lifetime also plays a role in other decisions such as
technology choices, which are often subject to much deliberation. Debates for technical
specifications for Smart Grid equipment are an example of an effect of the long asset lifetimes. DSO's
and other industry actors recognize the possibility of future lock-in effects as a result of decisions in
the present. Naturally, DSO's seek to avoid this, making the choice a slow process (Arthur, 1989 and
Liebowitz & Margolis, 1995).

Capital Intensity
Another characteristic, emphasised by a number of authors, is the capital-intensive nature of the
distribution grid business and most other network infrastructures: Since usually extensive areas need
to be covered, investment and maintenance are bound to involve large financial sums (Short, 2004
and Lassila et al. 2011). The effect of the high degree of capital-intensity of an industry combined
with the high average replacement time of assets brings about another characteristic: "lumpiness" of
investments. Lumpiness refers to the fact that Distribution System Operators (DSO's) rarely invest in
a constant, linear fashion but instead in a heterogenous, one-time manner which spends a lot of
capital at one point and then little for a prolonged amount of time. In the costs graph, this shows up
as spikes in the investment function. This leads to higher amounts of capital needed at those points
in time which may complicate capital raising. When deciding on how much to invest at a point in
time, DSO's therefore find themselves in a trade-off between minimizing costs for upkeep and
ensuring the availability of enough capital to meet their needs (Stoft, 2007).

15

Other examples of network infrastructure industries with similar questions are: Natural gas transportation
networks, landline telecommunication networks, water supply infrastructure, railroad infrastructure

19

An example where a closely related tendency to lumpy investments in the electricity generation
sector led to complications ("blind-alley") when being combined with macroeconomic dynamics and
regulation features has been observed within the US generation sector in the years around 1970. A
System Dynamics investigation of this occurence (Ford et al., 1997), is detailed in the literature
review in section 3.4.

Impact of Regulation/Market Design on AM and Costing Formula

Another characteristic which scholars point out, is a considerable amount of regulation for market
design in network infrastructures. The situation in Germany has been touched upon in section 2.1.
briefly. In liberalised and competitive electricity markets, the regulatory framework that is being used
critically influences the investment approach of the active companies.
In most modern approaches to DSO Asset Management, the process of making investment decisions
for the electricity distribution grid is therefore based on a cost-optimisation approach. For the Asset
Manager, this often means that all factors concerning the decision are monetized and determined
with some financial goal in mind, e.g. the intention to either minimize costs or maximise return on
asset value. Here the scientific literature (e.g. Lassila et al, 2007a and Wenzler, 2005) is consistent
with the experience of the practitioner experts involved in the making of this thesis (Consultation Dr.
Gaul).
The scientific literature is remarkably uniform regarding this part. Lassila et al. (2007a&b, 2011) and
Wenzler (2005) describe this standard approach to cost-based strategy as minimizing the sum over
time of total costs. Total costs to the DSO consist of capital expenditures (CAPEX), operational
expenditures (OPEX) and Outage costs, warranting the following function:

Function 1: Standard Formula for Cost-based Asset Management

Function 1 approximates the concerns of asset managers in DSO's. Consequently, minimizing this
sum over the defined length of consideration gives a good indication of DSO behaviour. It represents
DSO's goal to minimize costs while keeping the system in satisfactory condition, to avoid outage cots.
To achieve this, DSO's will choose from a large variety of parameters such as time of investment,
maintenance/replacement decisions, type of assets to be used, etc16. Naturally, asset management
decisions have an effect on the indicator of transmission reliability, which section 3.2. discusses.
Evaluation of AM strategies usually happens in the "Magic Triangle" consisting of Costs,
Quality/Reliability and Risk (EPRI, 2000; Bartlett, 2002; and Kostic, 2003). There is a tendency to
define acceptable bounds for other evaluation criteria like reliability and then minimize costs. This
will also be reflected in the simulations.

16

See also Fig. 5 in section 3.2.

20

Model Use in Asset Management: Past and Present

In order to cope with the mentioned complexity in Asset Management decisions, the usefulness of
simulation models is evident, as has been stated setting out. Lassila (2011) shows how the evolution
of Asset Management went parallel with the evolution of the models designed to support the
decisions to be made. He explains how in the past (during the electrification process), models used
for determining infrastructure investments typically oriented themselves at the growing demand for
electricity. In contrast to this, nowadays electricity demand is relatively stagnant and at least in a
conventional (e.g. non-smart grid) environment, the needs for investment in the grid are usually
based on the deterioration of the existing grid structure. Therefore now the "target of long-term
planning is to determine the economically best solution in terms of network structure and the type
and schedule of investments" (p. 457). This growth in importance of the economic dimension of
decision-making needs to be reflected in the models which are being used.
An explanation for the appropriateness of the System Dynamics method through its defining features
will be given in section 3.3.

21

3.2 - Grid Quality Indicator: Service Reliability

Reliability of grid functioning is of central to importance to all involved stakeholders, and will
therefore be one of three central evaluation criteria for the simulation runs (section 5.3). In the
following section it will be defined scientifically, with an explanation of all necessary aspects for
understanding the simulation results.

Definition
Grid reliability is one aspect of grid quality. While there are other aspects to the quality of electrical
power supply which matter to some customers, reliability is seen as the most important one, since all
customers are affected by it, in contrast to some electrical current quality aspects which may matter
only to a smaller set of consumers. To simplify matters, we will therefore concentrate the quality
discussion on the aspect of reliability.
Simply put, reliability means the ability of the distribution grid to fulfil its purpose of bringing
electricity from its connection with the high-voltage transmission grid to its customers within defined
standards. This is known as the adequacy element. There is also some degree of consensus between
scholars with a practitioner perspective (e.g. industry associations) to further break down the term
into components adequacy, security and current quality. In this framework, security means the
ability of the system to withstand adverse events. Current quality refers to more technical aspects
like frequency and voltage (EPRI, 2000).
The most important factor in reliability of individual assets is their physical condition, indicated by
their age relative to their average lifetime 17 (Short, 2004).
For the electricity grid there are two kinds of reliability analysis: Steady-state reliability, which is
concerned with outages of high probability and low consequence and extreme events reliability,
where outages have small probability but high consequence. Typically, decisions in the latter
category go together with policy for risk mitigation (EPRI, 2000). For our purposes (distribution
system operators), the focus is on steady-state reliability, as extreme events and cascades are less
probable.

Measuring Steady State Grid Reliability

When it comes to measuring reliability, the EPRI(2000) repeatedly stresses the probabilistic nature of
reliability indicators. Reliability is expressed in the statistical chance of an event happening (e.g.
outage of electricity supply), over a span of time over the entire grid. There are several standardised
indicators in use for measuring reliability of a grid's performance over time. These indicators differ in
which exact event they measure and to what they set the occurence of the event in relationship.
Short (2004) distinguishes between Customer-Based and Load-Based reliability indices. Customer
Based indices focus on the duration and frequency of an outage for a given number of customers.
They take a customer view since they focus on the perceived repair time for the customer which is

17

. Other factors which influence the reliability of the grid are: The degree of circuit exposure and load density
that a single circuit has to bear (with its limited capacity), the amount of voltage used on the grid, supply
configuration structure that is being used ( radial, circuit or network), length of lines as well as redundancy of
lines through parallel distribution systems

22

different from the actual time it might take to repair damage. This is where decisions about response
strategies come in.
The most common customer-based index for non-availability is the SAIDI index (System average
interruption duration frequency index18). It is comprised of the average time of a service interruption
(CAIDI, Customer average interruption duration frequency index) and the average interruption
frequency (SAIFI, System average interruption frequency index). Together they form function 2:

Function 2: Definition SAIDI

During recent years SAIDI in German Distribution Grids has averaged at around 1000 seconds per
year, as can be seen from Fig. 4, with slight differences between rural and urban distribution grids
(Bundesnetzagentur, 2013c)

Development SAIDI 2006-2012 (seconds/year)

1400
1200
1000
800
600
400
200
0
2006

2007

2008

2009

2010

2011

2012

Figure 4: Development of Average SAIDI 2006-2012. Data from Bundesnetzagentur (2013c).

18 Load-Based indices focus on actual load that is being lost through the outage. They are therefore
appropriate to represent reliability concerns of larger customers (e.g. industry), which take up a higher load
than small domestic customers. However, since utilities generally focus more on customer based indicators,
they will be used in this thesis as well and we will ignore load-based indices.

23

The role of reliability in cost planning and asset management process

The Electric Power Research Institute names a roughly U-shaped relationship between reliability and
cost. The total cost of reliability consists of the utility costs (CAPEX and OPEX) and customer costs or
outage costs. While a very low level of reliability leads to high outage costs, a very high level of
reliability will lead to high utility costs. This means that there exists a cost-optimal spot in the middle
of the reliability spectrum, as shown in Fig.5 (EPRI, 2000).

Figure 5: Relationship Between Level of Grid Reliability and Cost. Adapted from: EPRI (2000). Reprinted with Permission.

Outage costs are dependent on duration and frequency of outages. Hence, for truly integrated asset
management, decisions about maintenance policy and response capability (e.g. manpower or
response time) matter and need to be discussed together with investment decisions19.
Reliability as a measurements has to be distinguished from measurements of risk, which will be
another key indicator. The two indicators are closely related, as both are a consequence of physical
asset condition. However, the former is used with a customer perspective while the latter is used
from an investment and management perspective. This will be detailed more in section 5.3.

19

A subcommittee of the Institute of Electrical and Electronics Engineers names that there are in
principle four lever points which DSOs can use for the goal of increasing reliability. They are (in order
of decreasing effort of capital):

An increase in base system capacity (e.g. stronger lines)

increasing redundancy of parts
installing more reliable components
improving maintenance strategy as a tool to help reach reliability goals (IEEE, 2001).
24

Maintenance Strategies
When concerned with maintaining grid reliability, a survey among industry practitioners distinguishes
two basic strategies. First, there is the approach of maintaining the grid at a fixed interval, with some
additional maintenance when need for it is discovered. This approach can be called "Fixed Interval +
x". Secondly, there is the option of "Reliability Centered Maintenance". This strategy can be
described as the desire to get the most value out of an asset base, by maintaining assets only, when
the grid reliability will be affected strongly. Practitioner literature describes a shift towards the latter
approach, especially in Europe. The cited reasons for this development are rising labor cost, increase
in competition among the industry and growing sophistication of AM models . The approach used by
the fictional DSO modelled in this thesis can be subsumed in the latter category as well (IEEE, 2001).

25

3.3 - Modelling Methodology: System Dynamics

In this thesis, System Dynamics modelling will be used as the main methodology for analysis: A
simulation model of a DSO's assets and their aging is constructed, and then optimised using
Evolutionary Algorithms. The model includes all relevant technical and economic parametrizations
which are to be considered in AM decisions. In the following paragraphs the first methodology - SD will be explained with its features and underlying assumptions, arguing for its appropriateness to the
problem.
Features and Assumptions in SD and their Relationship to Asset Management for DSO's
System Dynamics is a methodology for analysis of complex and interdisciplinary issues. The system is
represented in a simulation model with its features and decision rules expressed mathematically and
conjoined to a coherent structure - a dynamic hypothesis about system functioning. The
development of this structure over time is calculated using differential equations (Forrester, 1971).
Using Maier's scheme for classification of mathematical simulation models, System Dynamics takes a
macro-level or top-down perspective and uses continuous progression of time in which it calculates
variables dynamically to give deterministic results dependent on model assumptions(Maier, 1996).
As both interdependence of decisions and development of a system over time classify asset
management, we can note this as a first point of support for the method's appropriateness.
The implicit assumptions when taking the decision to model an issue using SD methodology are, that
the defining criterion for the state of a system is the relative size of its accumulations (stocks) of
various types. Classical System Dynamics assumes that the relevant dynamics of the problem at hand
arise especially out of causal feedback loops (reinforcing and balancing) which act on these
accumulations. All system behaviour (including the problematic behaviour) is seen as a consequence
of its structure, which consists of these previously mentioned parts (Forrester, 1971; Sterman, 2000).
Table 1 contrasts examples of common structures and behaviour patterns.

26

Structure Components

Examples of Behaviour

Cause-effect relationships

Development of individual variables over time

Parameters

Long-term system behaviour patterns (e.g.

Equilibrium, Goalseeking Behaviour,
Exponential Growth, S-Shaped Growth,
Oscillation, Location of Attractor & Repellor
points)

Stocks and flows (accumulations and their

changes)

Pattern specifics (e.g. amplitude height in

oscillation, relative dominance of feedbackloops)

Time delays between cause and effect

Reaction to exogenous/one-time events (e.g.

Shocks to the system)

Feedback loops (reinforcing and balancing)

Nonlinear cause-effect relationships
Table 1: System Structure and System Behaviour

In case of the electricity system, the relative size of stocks corresponds to the number of assets in
one quality condition relative to those in a different condition. Where the modelling approach of this
thesis differs from standard SD is, that inside the boundaries of our scope, no relevant feedback
occurs for answering our research question. Dynamics rather occur from the aging processes.
A typical feature of problem formation which is assumed to be of relevance in SD practice is distance
between cause and perceivable effect. This means distance in temporal (time delay), spatial
(location) and organisational (responsibilities) sense. This assumption leads to a special focus on
recognizing those interdependencies and including them in the analysis. In the case of AM, delays are
present when considering investment decisions and their effects, e.g. when it comes to how
replacement strategy influences maintenance needs at a later point in time.
It is also assumed in standard SD practice, that quantities of agents (e.g. people) or items (e.g.
equipment assets) can be aggregated into categories (e.g. stocks) and treated as equivalent without
losing critical information. This also means that we assume, there are no emergent phenomena
which we need to capture, stemming from the interaction of agents' individual behaviour rules or
attribute rules of items (Holland, 1995 and Sterman, 2000).20 For our purposes this is true, as DSO
assets among individual categories do not interact significantly with each other and can therefore be
aggregated.
Previous applications in which academics or practitioners have used System Dynamics to issues
concerning the electricity system are discussed in section 3.4.
20

Bonabeau (2002, pg. 7280) points out, that emergent phenomena occur when decision-rules of agents or
attribute rules for items are heterogeneous and non-linear, e.g. characterized by "[...]thresholds, if-then rules,
or nonlinear coupling". This would be the case for example, if assets among the same category would age and
behave heterogeneously or influence each other. While this is certainly the case to some extent, standard AM
practice has found it negligible for the decisions to be supported by the use of models.

27

Benefits
The benefits of conducting an analysis based on SD are numerous. Most important is surely, that
dynamic relationships of system elements need some special methodology to be captured
effectively. More so, it is obvious that a higher degree of logical coherency in the sense that all
fragments of a theory must fit together and make at least some degree of sense. In this way, using
the method coerces the scientist/analyst at least to some degree to logical consistency. Also, by
visualizing all assumptions that went into a theory, modelling also makes them discussable and open
to review, which leads to better scientific grounding. The integrative nature of SD (and other
modelling methods) is another benefit. This concerns the integration of different organisation parts,
academic disciplines as well as scales of analysis (e.g. micro- & macro and short-& long-term). As we
have noted during the outset, that Asset Management functions often span through many different
organisational departments, we see the value of this.
Another benefit of using quantified SD models is the ease of manipulating them, which enables the
user to experiment with the model. Experiments often include modifying assumptions to perform
scenario tests on results. This is of value in areas where experimentation in the real world would be
costly, time-consuming and possibly irreversible. One such area is Asset Management, especially
when large financial sums are involved, like in network infrastructures. An example where this can
provide valuable foresight would be the desire to avoid financial "blind alleys" which practitioners
mentioned in the consultations (Consultation Gaul, Consultation Wernekinck).
SD Models also enable the user to overcome perceptual limitations, especially where (as previously
mentioned) cause and effect are distant in time, space and organisational responsibility. This builds
understanding and leads to higher likelihood of informed decisions. As Asset Management decisions
often have effects long into the future and frequently affect different organisational parts of the DSO
than the one taking the decisions, this is a key benefit (EPRI, 2001).
One sees how many of the capabilities and assumptions in SD apply to the problem we set out to
investigate. It is therefore easy to argue for the relevance of SD to the problem. A detailed
elaboration of the exact approach in use in this thesis can be found in chapter 4.

28

3.4 - Relevant Scientific Applications of System Dynamics

The next section aims to answer the question, how the simulation approach in this work relates to
other scientific work done in the same area. It is fortunate to have a broad literature review for
applications of System Dynamics to the electrical system already established (Teufel et al., 2013). It
makes therefore sense to proceed in two steps: First, to locate the position of the thesis you are
reading in the broader environment of SD works on electricity, given in the mentioned literature
review by Teufel et al. . Second, to give an overview of scientific works which use a modelling
approach that correlates specifically with the modelling approach that will be used in this thesis
(chapter 4).

Broad Literature Review: SD applied to Electricity System

System Dynamics has been applied in a significant number of cases to the overall Electricity System
(e.g. Policy - Ressource Base - Generation - Transmission - Distribution - End Use). In their literature
review, Teufel et al. (2013) survey more than 80 scientific applications of System Dynamics to model
various aspects of the overall electricity system. They classify models within the categories of
a) Descriptive models about investment decisions in strongly regulated or monopolistic markets
b) Normative models about general investment decisions in liberalised markets
c) Models specifically about grid issues
d) Models for testing of regulation frameworks
e) Larger macroeconomic models (often with policy focus).
Among these categories, they identify a dominance of models with a macro-economic view (such as
Naill, 1992 or Ford, 1997). It comes as no surprise, that in their literature review, academic literature
often takes a policy-oriented perspective, while practitioners usually view the electricity system from
a management perspective of the individual firm. The research objective for this thesis combines
both perspectives. Also, it can be stated from the literature review that the distributive grid segment
receives less attention than other segments of the electricity system, both from authors with
academic and practitioner perspective. The work you are holding in your hands can best be classified
into category b) and c), with some outlook on questions of category d).
Much of the work which has guided the thesis you are reading is mentioned in their literature review.
Other work which was influential in considerations about the simulation approach however has not
been included. Therefore, in the following paragraphs the most closely related works to the
simulation approach and the topic itself of this thesis are reviewed.

29

Overview: Scientific Works with Direct Relation to our Approach

Having positioned this thesis in the broad literature review by Teufel et al. (2013), we can now
investigate deeper for works which are comparable either in their chosen modelling approach or
their exact research problem. Table 2 provides an overview, which will then be explained in the
coming paragraphs. 21

System Dynamics
for Electricity
System
Alborzi, 2008
Crisp, 2003
Dyner, 1996 & 2004
Eksin, 2005
Ford, 1997
Gaul, 2005 & 2007
Kwakkel & Pruyt, 2013
Pereira & Saraiva, 2011
Sholtes, 1994
Sterman, 2000
Verweyen & Spitzer,
2011
Warren & Thurlby, 2012
Warren, 2002
Wenzler, 2005
Ycel & Barlas, 2011

DSOCentric

Combination with
Evolutionary Algorithms

Use of Aging
Chain

X
X
XXX

X
X

XXX
X

X
X
X
XXX

X
XXX

X
X

X
X
XXX
X

X
X

X
= Key element of the publication
XXX = Defining element of the
publication
Table 2: Literature Review for Simulation Approach

SD approaches that inform the background considerations for our own approach
Background considerations for the approach in use and the value of using System Dynamics for
answering our research questions have come through work by Andrew Ford, who specializes in using
System Dynamics for the entire electricity supply business (generation - transmission - distribution).
A prime example of investigating techno-economic interdependencies using SD, which informed the
conception of the work you are reading, is his study about a critical situation in the electrical system
of the United States of the 1970ies ("Electricity Grid Death Spiral")22. Compared to his work, our
21

Some of these works overlap with the literature review by Teufel et al. (2013), others are undescribed by
them.
22 During this time, investment demands of capital-intensive industry like electricity generation were not able
to be met because of adverse dynamics stemming from a delay in price adjustment due to ineffective
regulatory framework. This development put the larger electricity supply system at risk (Ford, 1997). Effects
like this one may happen in the present transformation of the grid as well and should be considered in policy-

30

chosen simulation approach uses more narrow boundaries (e.g. exclusion of macro-economic
dynamics) and a more disaggregated view of individual assets. However the strong parallel is the
concern for answering questions for actors such as DSO's on how to balance technical and
economical considerations in a strongly regulated environment.23
Theoretical Foundations of key parts of the approach
Sterman (2000) and Warren (2002) both contribute to the theoretical foundation of the simulation
with an in-depth analysis of the asset aging-chain, which is the central feature of the approach. Also
some general aspects of modelling the intricacies of critical infrastructure and their vulnerability for
disruptive events informed the choice of dynamically relevant properties of the new Smart Grid
assets (Warren & Thurlby, 2012).

Applications of System Dynamics specifically to Asset Management

In Asset Management practitioner circles, SD is a commonly used tool. While not frequently, some of
these applications do percolate to the academic sphere, mostly in the form of case studies.
An application of SD to dynamics of Asset Management in the transmission part of the energy supply
industry comes from Crisp (2003). In her doctoral dissertation, she takes an academic perspective on
a wide variety of factors influencing asset management policy choice.
Coming from a practitioner perspective, Gaul et al (2005, 2007) describe the process of Asset
Management in the electricity distribution grid using System Dynamics. They link an aging chain with
larger dynamics such as revenue and investments. For the distributive segment of the electricity grid,
this work seems to be the most explicit application of System Dynamics.
Another practitioner perspective on using SD for asset management in network infrastructures in
general comes from Wenzler (2005). He details in a case study, why simulation is necessary for
decision-making in modern asset management, explains some crucial steps to take in the process and
which key parts an asset management model requires. While not revealing the actual model layout
used for obtaining results, his work also informs our simulation approach.
No literature was available at the time of writing of this thesis on the specific goal of using SD to cope
with a transition phase in a pool of electricity grid assets.

making. For the direct aim of answering our research questions they are out of scope, however when
interpreting our simulation results we need to be aware of the larger macroeconomic integration of our topic.

23 More background on using SD to investigate electricity supply issues came from Isaac Dyner. His
contribution centres around investigation of effects of deregulation and competition in the electricity supply
industry and appearance of bounded-rationality in a regulatory framework. Risk to reliability of supply due to
those effects is a central part of investigation in his research. (Dyner & Franco,2004; , Dyner & Bunn, 1996)

31

Usage of Evolutionary Algorithms for Parameter Choice in System Dynamics Models

While normally, parameters are derived from data and policy choices are simple enough to be tried
manually, there is a small subset of scientific papers in the System Dynamics community which deals
with the combination of the SD method with Evolutionary Algorithms. Roughly these works can be
distinguished by their purpose of the use of algorithms:
Some work uses the algorithms to estimate uncertain parameters by trying to match indicators in the
model with empirical data (Alborzi, 2008; Ycel & Barlas, 2011 and in essence Kwakkel & Pruyt,
2013).
Other applications take the opposite route of using algorithms to find parameters for policy
decisions, to make a real world system fit the desired goals (e.g. background theory coming from
Sholtes, 1994 and Eksin, 2005). Our approach can be found in the latter category. Some applications
here also can be found for similar problems as the one we are trying to investigate, e.g. electricity
generation (Pereira & Saraiva, 2011) or DSO grid optimisation (Verweyen & Spitzer, 2011).
It can be concluded, that there is some constant publication activity about the use of algorithms with
SD. However some more elaboration of reliable theory would be helpful, since much of the literature
comes from practitioner perspective.

32

3.5 - Method: Evolutionary Algorithms for Parameter Optimisation

Evolutionary algorithms are the second analytical method we use for exploring the topic of this
thesis, in combination with the System Dynamics model. An overview over the functionality of this
method and its application is therefore appropriate. The description in this section is based on the
work of Bck, 1996; Rechenberg, 2000 and Weicker, 2007.
Background
Evolutionary algorithms are a computational approach for finding solutions to optimisation problems
that has been inspired by the Darwinian theory of evolution in nature. The approach has been in use
since the 1950ies (Fraser, 1957), and has by now evolved into a variety of different schools of
thought. Sanchez et al (2012) name Genetic Algorithms, Evolutionary Programming, Evolution
Strategies, Classifier Systems and Genetic Programming as other prominent schools. All schools rely
on a variation of the basic process - the evolutionary cycle - which will be explained shortly.
Depending on the optimisation problem at hand, the algorithm is modified from the basic approach
to fit the problem and to reach results time-effectively.
Natural evolution can be conceived as a process to solve an optimisation problem to ideally adapt an
organism to a niche in its environment. The discipline of evolutionary algorithms in computer science
copies this approach to use it for a wide variety of non-biological optimisation problems. While in
nature, the organism's biological features can be understood as the operators, optimisation
problems usually have technical or mathematical operators, which combine to form a possible
solution to a problem (Rechenberg, 2000).
To provide some perspective on derived solutions, stating the following is necessary: Sanchez et al.
(2012) warn against the tendency to see the result of an algorithmic optimisation as the one perfect
solution - this cannot be proven. However solutions by a well-developed algorithm are usually
remarkably good. For the purposes of this thesis we conclude, that exact numbers are not our goal.
Instead, we seek for general insights into key features of the adopted strategies, as there is a
significant likelihood that real DSO's will behave similarly as the synthetic DSO of our case study.
The field of problems for which evolutionary algorithms have been used is wide. In principle, any
field in which an optimisation problem can be expressed mathematically by a system of
interdependent variables can be solved by evolutionary algorithms. In practice, this ranges from
purely mathematical problems (e.g. "Travelling Salesman" ) over industrial design problems
(Rechenberg, 2000) to concrete problems like temporal or spatial optimisation (train timetables,
placement of mobile phone antennas - Weicker, 2007). Evolutionary algorithms have also both been
used for general investment problems (Pereira, 2000) and specifically investment problems in
electricity distribution grids (Gaul et al., 2010; Verweyen & Spitzer, 2011 as well as Diaz-Dorado &
Cidras, 2002).
Evolutionary Cycle
The basic process - a single evolutionary cycle - which all manifestations of evolutionary algorithms
adhere to in some form, is as follows:
Outset

33

There exists a population of individuals which represent possible solutions to the problem we are
seeking to optimise. These individuals differ in their operators. In the case of this thesis, the
operators are those decisions which make up the Asset Management strategy, e.g.

Number of assets in the Metering Segment in Condition 3 to repair in year 5

Number of conventional switchboards to replace with Smart switchboards in year 10
...

From testing their operators as a solution for the problem, the individuals are assigned a degree of
"fitness". While originally a biological term, fitness refers to the quality of the solution to the
optimisation problem. In our case it represents the solution's performance on a defined objective
24
and its relative error to constraints we defined. (Weicker, 2007)

Selection
From this population, a subset is chosen which forms the "mating pool". The process of choosing
from the larger population is done with a statistical process, in which the chance of a solution of
being chosen depends on the fitness of the individual compared to the average fitness of the whole
population. The higher the fitness, the higher the chance of the solution to be part of the next parent
generation, thereby shaping the path of the algorithm towards an optimum. At the end of this stage,
individuals which do not make it into the mating pool are discarded.

Recombination
Inside the mating pool, the individuals are paired up either randomly or with some preference and
their operators are exchanged. This is analogous to the exchange of genetic information when
recombining genetic material to form a new organism.
Mutation
Lastly, a defined number of changes to the operators are made at random places, similar to random
mutation in biological organisms.
From these individuals, a number of offspring is produced, that is equal to the initial population
(from which we chose the mating pool).The offspring then make up the new population and a cycle is
finished. The cycle will be repeated until a termination criterion is reached (for example a number of
rounds in which the optimal result has not changed).

Restrictions
A key element when designing the optimisation using evolutionary algorithms is the use of
restrictions. Restrictions guide the algorithm as to which possible solutions are acceptable and which
are not.

24

Such as "minimise total costs" or "maximise reliability"

34

In practice, restrictions can be used for two purposes: First, using restrictions can be used to exclude
possible solutions which would go contrary to reality. In case of our combination with a System
Dynamics model, this allows for the possibility to exclude solutions whose inadequacies stem from
features that have not been modelled in the underlying SD model. An example of this would be
investing in big lumps which would require unrealistic amounts of budget. Using a restriction keeps
the simulation realistic. Second, restrictions can be used to coerce the algorithm to try possible
strategy pathways in which we are interested to see their effects, even when followed optimally. This
is relevant in our quest to assess the differences between active and passive transformation
strategies as well as to investigate finer details of the transition (see section 4.1).

The algorithm repeats the evolutionary cycle over a large number of iterations, arriving at better and
better results in the process. It usually starts out in an area of the parameter which is restricted
(shown as red in Fig. 6), and then moves into an area which is theoretically allowed (green), seeking
to move as far into the direction of the objective as possible. After running the cycle for a large
number of times, the algorithm arrives at a set of operators compared to which it cannot find any
other solution of a higher quality. It then finishes the process .

Figure 6: Example of an Optimisation for Cost, Using Restrictions on Grid Quality

In the case of this thesis, these operators are parameters for investment strategy in the underlying
System Dynamics model (described in section 4.4). Thus, we receive the algorithm's best solution to
the question of

how much we invest for upkeep of the grid

through which means (e.g. repair or replacement)
how much we invest for transition towards Smart Grid
working on which asset segment in which condition
at which point in time

35

This concludes the scientific background for our simulation. We can now describe the simulation in
actual detail.

36

4 - Description Simulation Approach

We now know the scientific literature describing the issue as well as for the method we chose to use
for our analysis. Therefore we can now develop a plan for the actual application of the methods to
gain insight into the problem.

4.1 - Overview: Approach & Scenario Groups

As mentioned earlier, this thesis combines the two previously described analytic approaches to
answer the research question: System Dynamics and Evolutionary Algorithms.
SD Model & Analysis Using Evolutionary Algorithms
The core of the modelling approach is a simplification of an existing model that has had extensive
practical application in DSO asset management25. It consists of a standard System Dynamics aging
chain (explained in detail in section 4.2), which simulates DSO assets, their deterioration through
aging and the measures for their upkeep (flows back into initial condition). It is represented
graphically in Fig. 7.

Figure 7: Conventional Asset Aging Chain

A key feature which differentiates our approach from standard SD practice is, that there are no
feedback loops acting in the model structure. Therefore, while still formed endogenously, the model
behaviour results from aging behaviour of the different assets. This also means for our investigation
of the issue, that emphasis is more on detailed analysis of effects than on finding and validating
structural theory.

In the next step, parameter optimisation using evolutionary algorithms under the assumptions of a
given scenario is performed on the aging chain model. This analysis proceeds in scenarios, which can
be integrated into groups.
Grouping of Cases
To see the effect of Smart Grid equipment more clearly, our analysis will happen stepwise in 18
cases, divided up in 7 groups: We compare a Business-as-Usual case to 17 cases in the 7 groups
which each investigate different questions.26.
Base Case
25
26

Through use at DSO consultancy "entellgenio"

The choice for cases is based on experience of DSO consultancy Entellgenio and work by Mallet (2012).

37

At first we are looking for strategies which are likely to be followed by DSOs, assuming no changes
will be made to the current SG rollout regulation. This represents the base case, against which any
other results will be compared.
Introduction of Smart Grid
Next, the new Smart assets are rolled out, bringing with them some modifications to the aging chain
to account for the dynamically relevant features which Smart Grid assets are expected to have,
compared to conventional equipment. 27
All of the 17 implementation cases simulate the transition period from the present distribution grid
system in equilibrium towards the desired state of a new equilibrium, in which conventional assets
have been replaced with Smart assets. We investigate them in groups, aimed at answering different
questions. Groups are as follows28

Group 1:
Group 2:
Group 3:
Group 4:
Group 5:
Group 6:
Group 7:

Passive Transition (When assets fail)

Passive Transition (When assets arrive in state 3+4)
Active Transition (Fast, preserving limits on risk and quality)
Active Transition (Slow, preserving limits on risk and quality)
Active Transition (yearly cost limit)
Transition with Adequate Yearly Cost Limit (No decay of assets)
Active Transition Full (Variable yearly cost limit)

Variations
Having established this, we can then try variations of the cases, which are assorted in groups. In the
first two groups, the analysis of permeation will be simulated in a passive manner. A passive
approach means that conventional assets will be replaced only at the end of their lifetime or when
they enter risky conditions. In contrast, Groups 3-7 represent an active approach to the transition. An
active approach means that a DSO establishes a goal as to when the transition period has to be
completed (either for themselves or through regulatory means like the directive described in section
2.2). We then try this active transition under different circumstances and goals.
Some groups distinguish the degree of Smart Grid implementation, in order to gain deeper insight.
The degree of Smart Grid implementation in a case rises with the number of asset segments for
which Smart Equipment needs to be implemented.

27

Please refer to section 4.5 for a detailed and graphical analysis of differences in asset characteristics.

28

For a full overview of simulation details in the groups please refer to the Appendix

38

Representative examples chosen for the standard asset segments are:

1)
2)
3)
4)

Switchboards
Transformers
Distribution Stations
Metering Assets

Table 3 elaborates a key characteristic of any scenario: The degree of Smart Grid rollout. It depends
on the choice of segments which they transform (painted green).
Asset Groups to be Replaced with SG Equipment in Case
Scenario Name

1 - Switchboard 2 - Transformer 3 - Station

4 - Meters

A - Business as
Usual
B1
C1
D1
E1
Table 3: Simulation Cases A1-D1 with Different Permeation of Smart Grid Rollout

Therefore, Case B1 represents a rudimentary implementation of Smart Grid while Case E1 represents
a full rollout of Smart Grid technology through all segments of the distribution grid. While it would
not make practical sense to implement Smart technology in only one or two segments of the grid,
using the permeation approach allows us to estimate nuances in the strategies.

From this analysis, policy recommendation can then be given for DSOs as well as for regulators
(chapter 6).

Assortment of the approach into scientific use of scenario-making

To answer the question on how this approach can be classified scientifically, it makes sense to refer
to Brjeson et al. (2006), who give a comprehensive overview over the scientific use of scenarios.
According to their framework, there are predictive, explorative and normative forms of scenario
usage in science (shown in Fig. 8). In this thesis mainly two approaches will be used: a "normative preserving" approach and an "explorative - strategic" approach.

39

Figure 8: Forms of Scenario Usage in Science. Adapted from Brjeson et al. (2006)

This approach is characterised by the desire to reach a certain goal within an established system,
without a fundamental change in underlying system structure (in this case the aging chain). In our
case this means the implementation of Smart Grid into the existing electricity system. The second
approach to scenario-making - the "explorative-strategic" approach in general tries to answer the
question "What can happen?". This is the case in the thesis, as different routes of the transformation
process are investigated for their effect.
Our goals in this thesis overlap remarkably well with Brjeson et al's (pg. 723, 2006) statement of
purpose for scientific uses of scenario-making: They point out, that scenario techniques can
"[...]denote both descriptions of possible future states and descriptions of future developments [...]".
This correlates with the two goals of describing the end state of the Smart Grid and describing the
design of the implementation phase.

40

4.2 - Detailed Model Description

As mentioned, the model on which we perform optimisation is a distillation of a standard model for
Asset Management in DSO's. This section describes all aspects of it, now that we know the approach
in which we are going to use it.

Core Structure: Aging Chain

The structure at the heart of the model is the aging chain. It is one of the key structures being used in
System Dynamics modelling and has therefore been well researched, with a thorough analysis
coming from Sterman (2000).
Being an SD representation, it is a dynamic hypothesis of a given issue, which entails certain
assumptions. Using an aging chain implies that the issue can be represented by a number of agents
or items which take several attributes in a given order. The aging chain then represents the process
of how those agents adopt the attributes over time, which in the model takes the form of a chain of
accumulations (stocks). Therefore, agents enter the chain, transfer through the stages over time and
finally exit the chain after an amount of time we call "delay". The amount of agents that adopt an
attribute at a given point in time is called a "cohort size". A generic example of an aging chain is given
in Fig. 9.

Figure 9: Schematic Example for a Generic Aging Chain

Possible applications for the aging-chain structure are manifold. Especially population dynamics
where agent/item behaviour is age-dependent (e.g. human, ecological or material agents as in AM)
can be modelled effectively using the aging chain. Other applications for the aging chain are
organisational processes like workforce development and project management. In the social
sciences, the aging chain has been used to describe very diverse processes like development of
industries or recidivism of undesirable behaviour (Sterman, 2000).
41

For our purposes, the aging chain lends itself as a representation, since aging and quality state of
assets is the central feature which determines their reliability (EPRI, 2001 and Short, 2004).
Moreover, aggregating assets into condition states (represented by stocks) is uncomplicated as for
our purpose of investigation, assets of one stock don't interact among each other29. This makes the
analysis clear and concise, while losing little relevant detail.
As it is assumed that system structure determines dynamic behaviour (Forrester, 1971), there are
several features of an aging chain which determine overall system behaviour. The most important
ones are

the number of stocks being used to model the system (which translates to the number of
possible attributes which an agent can assume)
amount and location of additional inflows and outflows to the chain (apart from beginning
and end)
time parameters, which define the delay (e.g. residence time of assets in a given cohort)

Consequently, changes to structural features will affect the behaviour of the system. We will keep
this in mind when judging structural changes through the Smart assets (section 4.4).

Actual Model
Overview
The model parameters have been aggregated from several actual DSO's with the aim to represent
the typical German DSO. This concerns the following aspects30
size of the asset pool
initial age structure of the assets
budget and cost structure
To make results of the analysis more concise, the model has also been simplified from an original
DSO model which is currently used by many DSO asset managers31. Simplification has occurred in the
number of assets modelled. Also, overhead costs such as accounting or insurance have been
excluded, so that costs derive only from asset-related aspects.

29

This would be different if our goal was to represent the actual technical functioning of assets
Some of these points differ between urban and rural DSOs (e.g. upkeep measures such as cable renovation
are more complicated and therefore more costly in the city, grid size is larger in rural DSOs) - concerning these
aspects, the model reflects a rural DSO.
30

31

The mentioned model is the core of the consulting services of entellgenio GmbH, a German consultancy
which specializes in the field of DSO's.

42

Figure 10: Asset aging chain

The model distinguishes four states of asset condition - "One" representing new assets and "Four"
being assets in critical condition (Fig. 10). It also allows for a) renewing assets and b) replacing assets
at all points in the asset condition chain.32 A key structural distinction between those two measures is
that renewal measures are planned in advance while replacements are unplanned measures (repairs
of assets which are failing in regular use). Unplanned measures result in outage times, which a DSO
wants to avoid. Differentiating these categories is therefore relevant in day-to-day DSO planning and
decision-making.

Assets
The number of asset groups has been simplified for simplicity and clarity's sake: While the standard
DSO model distinguishes about 20 asset types, the model in use for this thesis has been distilled to 4
assets, which can all be converted to a Smart version (see Fig. 11). In declining position in the grid
these assets are "Switchboard", "Transformer", "Station" and "Meters". They each represent one of
the grid segments we set out in our definition, making this model a distillation of the original model
being used in day to day DSO practice. The smart assets are modified versions of their conventional
counterparts with the dynamically relevant features that section 4.5 specifies.

Figure 11: Assets modelled

32

The accumulations ("stocks") of assets are modeled as conveyors, which is a more realistic representation of
throughput time than normal stocks.

43

It is worth pointing out, that as well an element of "Grid" has been included at medium voltage and
low voltage level. This represents those assets which will not be exchanged by Smart assets (e.g.
cables) in an aggregated way. They are included to assess indirect effects on their condition, when
their budget for upkeep will be affected during the transition period.
The assets in the model are fleshed out in great parametric detail for both technical and business
aspects (see Table 4).
Technical Parameters

Business/Financial
Parameters

Average overall lifetime / Times for

progression through quality states

Yearly cost for asset

operation

Statistical deviation of individual

assets from average lifetime

Cost for measures

(Maintenance, Repair,
Replacement)

Yearly accounting
Statistical rates of unexpected failure,
depreciation rates based on
dependent on condition state
EnWG regulation
Number of Customers served
Table 4: Model parameter categories with key examples

The assets that move through the aging chain also show a statistical variance in their aging
behaviour. For example a conventional switchboard may enter the stage with management risk
(condition 3) on average at an age of 35 years. However there is a certain fraction of outliers, on both
sides (Fig. 12 shows an example of this.): Some switchboards enter the 3rd condition only at 45 years
or later, conversely, some switchboards enter this stage earlier. This holds implications for the
planning process. The variance for conventional assets is derived from DSO data, for the new Smart
assets the fractions are assumed to be the same.

Figure 12: Effects of Variance in Asset Aging Behaviour

Modelling of Grid Reliability (SAIDI)

44

Due to its central role in the evaluation, an explanation of the modelling of the reliability index SAIDI
is appropriate: There is no representation of the physical topology of the grid in the model. Instead
the number of customers which a given asset serves is calculated without assuming any
redundancies. We then divide this number with the total number of customers and multiply by a
fixed value we derive from experience on how long it takes on average for maintenance personnel to
find and repair the damage.
While the real system is not as completely linear and static, this approximation is workable for
practical purposes.

45

4.3 - Use of Evolutionary Algorithms for Optimisation

The role which optimisation plays for this study is such, that it enables us to find a likely solution
which DSO's may choose for their investment strategies in a given scenario under the assumptions
we make. As many relevant properties of assets are still uncertain (e.g. exact decrease in lifetime and
exact increase in cost), we will have to rely on assumptions. Also, as mentioned in section 3.5., we
should not think of the algorithmic solution as perfect, but as a good approximation of DSO's reaction
to the specified situation. The simulation is therefore a rough schematic illustration of the transition
process.
While not all DSO's use dynamic modelling or advanced optimisation methods for their asset
management, we can however expect a rough convergence of the various DSO's in Germany towards
the strategic suggestions of our optimisation. This gives us an idea of the DSO investment strategies
to expect for the future as well as the development of their financial and technical indicators.
There are two types of inputs for an optimisation: Objective and restrictions. Objectives are the
request for the algorithm to either minimize or maximize a specified parameter. They allow us to
specify a direction for which the algorithm tries to find the best solution, while adhering to the
restrictions. Likely examples for directions are cost minimisation or to maximise reliability. From this
we can see the effects on the evaluation indicators we chose (section 5.2).
Restrictions for our purposes fall into three categories: First, there are restrictions, which force the
optimisation algorithm to find solutions to accomplish an (otherwise financially undesirable)
transformation towards Smart Grid. Secondly, there are those restrictions which allow to factor out
scenarios that would be unrealistic. This includes investment strategies (both for grid transformation
and upkeep) which would be unrealistic, as they assume unlimited availability of budget. While such
a solution may be cost-efficient in theory, in practice gathering capital would be a problem. Lastly,
there are those restrictions which allow us to define limits for desirable criteria of the grid which we
are not willing to have sink beyond a certain threshold. This includes indicators like "average age of
assets" and "percentage of assets in a critical condition". These restrictions also help us to conduct
deeper analysis for aspects about which we are curious, e.g. "what happens when..?".

Having successfully chosen the objective and the necessary restrictions, the output of any
optimisation is a set of parameters which make up an investment strategy. This investment strategy
can then be applied to the model of the assets and the consequences evaluated.

46

4.4 - Dynamically relevant features of Smart Grid Equipment compared to

conventional assets
Following we will investigate, which features of the new equipment we expect to have an influence
on Asset Management for the electricity grid.
As experience with the topic is still scarce, there is little scientific literature available on the exact
characteristics of the new assets. Our assumptions are therefore based on expert consultations with
three people closely involved with asset management at the DSO branch of a large German Energy
supplier, specifically in the metering segment. Many of those experiences come from a roll-out
project of Smart Grid metering in a mid-sized German city. (Consultations Dr. Gaul, Dr. Wernekinck,
Consultation 3)
Technical assets with Smart Grid functionality are characterised by being permeated with electronic
circuitry. This takes the form of sensor equipment, data processing capacity and electronic
communication technology, which accompanies the more conventional, solid electrical engineering
parts like cables, wires, fuses, etc.
By its nature, electronic circuitry is more delicate and more vulnerable to malfunctioning than
traditional electric equipment. The functionality of the new assets however depends on integrity of
both capabilities of the equipment, similar to a chain which is only as strong as its weakest link.
In the simulation approach, 4 grid segments of assets are modelled. Usually the most visible asset to
end customers is the electricity meter (Smart or conventional). This makes it a good example to
explain the dynamically relevant differences between conventional assets in the four segments and
those which are Smart.
Lower Lifetime
One feature which has been observed in the new Smart Meters (and can therefore be expected in
the smart assets in other segments) is a lower average lifetime of the asset. This is due to the higher
overall vulnerability of the electronic parts in the asset.
We see an especially strong reduction in lifetime in our example of making smart the metering
segment: While conventional electricity meters have a long average lifetime of 50 years, the lifetime
of the new smart meters is estimated at a much shorter 10 years.
The costs for replacing a defective meter are derived from the cost of a new asset and the costs for
the man-hours necessary to make the replacement. Modelling this is simple and includes only a
change to the lifetime parameter. For the model we assumed a more moderate reduction of 50% in
the lifetime of all other asset segments.

Changed Repair and Maintenance Possibilities

Another probable effect of infusing electric engineering parts with ICT technology which would be
dynamically relevant, is a different, and most likely lowered, reparability of assets.

47

Figure 13: Modifications in the Aging Chain to Represent Changes to Reparability of Smart Assets

Continuing with our example: A conventional electricity meter can often be recalibrated when it
loses measuring precision or be repaired manually when it breaks down. In the model this would
count as "renewal" (Fig. 13). Conversely in the Smart Meter, this may be harder to do when
electronic parts break down or not possible at all, similar to other electronic equipment (e.g. mobile
phone).
We can model this by eliminating the possibility of repair, which leaves the asset manager (and the
optimisation algorithm) only with the option of replacement.
How prevalent this will be in the new assets is still unclear at this point. For the model, we assumed
this non-reparability for 3 of the 4 segments (Metering, Switchboards and Transformators)

Different aging behaviour

Another feature which Smart Meters (and other Smart assets) exhibit, is a modified aging behaviour.
While conventional assets move relatively predictably through the four condition states, it may be
more difficult to assess the quality state of the electronic part of an asset. Consequently, it is much
harder to predict at which point in time it will break down and at which point in time maintenance or
replacement should be scheduled. Capacity for planning is reduced.
While a short period of malfunctioning is not so much a problem in the metering segment, this has
strong significance in grid parts which are more central in the grid system and therefore influential
for its functioning (e.g. assets in the segments with higher voltage, closer to generation).

Figure 14: Modifications in the Aging Chain to Represent Changes in Possible Quality States of an Asset (Example Smart
Meter)

We can model this by shortening the aging chain from traditional 4 quality states to 2 quality states,
as shown in Fig. 14 (e.g. "functional" and "non-functional"). For the model we assumed this feature
at the metering segment only.
48

Higher Cost
An important feature is a higher cost of an individual new asset. This is due to the electronics which
have to be implemented in the assets.
While a conventional electricity meter costs relatively little (e.g. 30), the costs for the new Smart
Meters are higher (presently up to 250). The fractional additional cost for the DSO is small for those
assets of which are small in number and high in capital (e.g. distribution stations). For those which
are high in number however, this change is significant. While the additional costs for smart assets
may sink in the future through economies of scale in production, at least in the beginning of the
rollout (e.g. transition phase), the higher cost presents a significant burden.
For the Model we therefore assumed it to take effect in the metering segment. Modelling this also
requires only a change to the cost parameter.

49

4.6 - Evaluation categories for Simulation Results

The following section gives an overview of the three indicator categories which we will use to gauge
results, when we have simulated the model.
The standard approach to scenario evaluation in infrastructure asset management is based on a
"magic-triangle" of goals, shown in Fig. 15 (Kostic, 2003). These goals are costs, management risk
from asset condition and service quality (indicated by grid reliability).

Figure 15: Magic Triangle for Asset Management Goals

These three indicators are mutually dependent. One cannot grasp the issue from only one of the
perspectives without considering the influence of the others. This is especially true in cases where
tradeoffs need to be made. Often, solving issues at one end leads to problems appearing at another
end. Nevertheless, it makes sense to divide the analysis into judging three sides individually (EPRI,
2001 and Kostic, 2003).

Grid Reliability (Service Quality)

Our indicator for reliability of supply will be SAIDI33, as investigated in section 3.2. Its role for the
analysis is, to give a measure of quality of service from the perspective of the end customer.
Naturally, a lower value of SAIDI is more desirable than a higher one.
Risk
To assess the broader managerial risk stemming from the overall condition of assets in the system,
we will use the percentage of assets which are in the condition state 3 and 4 of the aging chain. Here,
a considerably higher statistical likelihood of malfunction has been observed. Even more importantly,
this indicator stands for the likelihood of financial strain in the near future, since assets in this
condition will need to be replaced at some point in the near future, making availability of capital
necessary (EPRI, 2001).
At times the managerial risk is therefore also expressed in absolute monetary terms of the assets in
risky condition as the replacement value of those assets. This gives an indication of the actual size of
33

System average interruption duration frequency index

50

the DSO's investment backlog. Risk indicators are monitored closely in order to avoid the "blindalleys" mentioned by practitioners in section 3.1.
Another indicator which is sometimes worth considering in conjunction is the average age of assets.
However here, when looking at aggregates, assets with a shorter normal lifespan (such as observed
in the new Smart Assets) can distort the view.

Cost
The cost indicator we will use is the total yearly cost for grid upkeep. It is defined as the capital
expenditures (CAPEX) and operative expenditures (OPEX) necessary to reach the specified goals for
the grid.
Here we will also watch out for the level of investment discontinuity, which we called "lumpiness"
earlier on. This is important because it is harder to get funding for discrete investment event. A good
example for this is the work of Ford (1997), in which he describes a crisis in the US electricity
generation industry during the 1970ies. During this time, the designs for power plants had grown in
size to realize scale effects, which lead to a much higher investment volume. Naturally, these
investments were made at discontinuous points in time. This combined with adverse macroeconomic
dynamics and a unfavourable regulatory framework lead to an inability of the generation utilities to
finance the needed power plants. Only after reverting to smaller plant designs, this deadlock could
be solved. We assume similar adverse effects of investment discontinuity for DSO's when faced with
grid investment needs.

51

5 - Simulation Results and Evaluation

Having explored the simulation approach and its assumptions, we can now simulate and derive
insights from the synthetic case study.
We start by assessing the "Business as Usual"-case. We are then interested in seeing the impact of
the transition towards smart grid on the indicators we specified. We do so using active and passive
approaches to account for the uncertainty concerning whether a finishing date will be specified in
the coming regulation. Lastly, as this is a crucial point, we are also interested in assessing the
consequences of pursuing a transition in short time under limited financial conditions.
For an interpretation of the validity of the simulation output, please refer to Chapter 7.

5.1 - Business as Usual / No SG Integration

The business-as-usual scenario is the only scenario in which Smart Grid is not implemented. Its role is
such, that it provides a point from which we start, and a reference scenario against which the
scenarios with implementation can be compared. It is derived by reproducing the standard approach
of DSO's mentioned in section 3.1 - keeping the grid in an acceptable condition while minimizing
costs to do so.34
Consequently, the simulation aims to minimize total cost over the whole grid for the simulation
period, while keeping in the bounds of a maximum SAIDI of 1000 seconds per year (23 minutes/year)
and the fraction assets in critical condition (condition 3+4) not exceeding 25%.
As one sees from Fig. 16, it is necessary to exert a yearly cost of somewhere below 10 Million in
most years to reach these goals, with occasional spikes due to bouts of renewal. This refers to the
described tendency towards "lumpiness" in investments.

Figure 16: Total Cost in Base Case

34

Derived through model run A. Please see Appendix for details

52

Average age of grid assets slowly declines from 20yrs to 15 yrs. The fraction of assets in critical
condition behaves such that it reaches the specified bounds (maximum 25%) once, before upkeep is
performed (Fig. 17). SAIDI usually stays well below its Limit of 23 min/year (Fig. 18).

Figure 17: Percentage of Assets in Risky Condition in Base Case

Figure 18: Grid Reliability Base Case

53

5.2 - Impact of the Smart Grid Transition

In this work we have explored the transition from a passive and an active angle. We will now
investigate both scenario types through the standard asset management lens of the "magic triangle",
which consists of the development of the three indicators for costs, management risk and service
quality. As we shall see shortly, an active transition is more likely to happen in reality, therefore this
section spends more time on it.
Passive Transition
In the cases of the passive transition, optimisation is not yet necessary. We assign a fixed rule for the
model to replace assets depending on their progress on their lifespan, usually at its end. There are
two ways to accomplish this: First, to replace them only when they actually malfunction and need to
be replaced anyways - this is represented in Cases B1-E1. Secondly, to replace them when they enter
the category where they provide managerial risk (condition 3 and 4). Cases B2-E2 describe this
scenario.
In both cases the advantages are obvious: We avoid to a large extent the removal of assets which are
still in good condition, therefore lowering cost for the overall transition. For this reason the system
shows a development of costs which is very manageable (Fig. 19).

Figure 19: Development Cost in Passive Cases

In the first case(E1), costs are significantly lower compared to the base case, in the second case (E2),
costs are about similar. This is the case, as the transition is equated with the normal activities for grid
upkeep. Grid quality and the percentage of assets in risky condition are similarly manageable
(explained at a later point in the section).
The problem however with this approach is the long amount of time it requires for the
transformation to occur, as Fig. 20 shows: Until the end of our simulation (year 2065), replacing on
malfunction transforms only 35% of the grid, while transforming when assets enter risky conditions
reaches the goal just so.

54

Figure 20: Progress of Transition in Passive Cases

This fictitious scenario clashes with integration plans described earlier, since the benefits of Smart
Grid we are seeking to realise only can be realised at a higher level of penetration. We are therefore
forced to adopt some form of a more active approach. This means that we will have to convert assets
which have not yet reached a mature stage of their lifetime and we cannot use their full value (for
which we already have paid).

55

Active Transition: Impact on Costs

Having seen that passive transformation is too slow for the current rollout plans, we will now
investigate active scenarios, where we set ourselves a goal as to when the transition has to be
finished the latest. A goal like this may either be self-set or coming from the regulation. This means,
that we have to accept the inefficiency of replacing conventional assets which would otherwise still
be in acceptable condition.
Cases without Budget Cap
We are simulating DSO's standard approach to minimize costs while keeping the grid in acceptable
condition and achieving a transformation of 90% smart assets35. The time frame we have chosen for
those cases in accordance with industry practitioners is 15 years in the fast cases (I1, until 2030) or a
larger time span of 25 years in the slow cases (I2, until 2040). Here we do not assume any limitations
on capital availability to satisfy the costs.

Figure 21: Cost Development Active Transition (No Budget Cap)

Fig. 21 shows how in both cases (I1 & I2) overall costs can be expected to rise considerably,
compared to the base case and the passive cases. When there is a time limit but we are not
constrained financially, the algorithm usually chooses to invest strongly early on. This is the case, as
doing the investment early on in a lumpy way allows to use the assets for a long time span. The
shorter the time available, the higher the initial spike.
Especially in the fast case (I1), costs rise up to about 500% of those in the base case (an absolute of
50 Million/year). After a few years of stark spending (about 1/3rd of the time available for the
transition), yearly expenses decline until they reach a constant value around the year 2030 which is
similar to the one in the base case. In the slower transition (25 yrs), the initial rise is not as high and is
spread out over a longer time: Transition starts early, but only on those parts which are already in
decayed condition. The fictional DSO waits for the new assets to age as long as possible, before
having to replace them.
The resulting investment strategies for individual asset groups are highly disaggregated. This
illustrates a general trade-off, which DSO's navigate, when faced with the situation that they have a
time limit for transition: Generally when there is a time limit for the transition, Investing early lets
them use the new assets for a longer time, getting all their value out. However this means also that
they might have to replace conventional assets which would still be in an acceptable condition. This
35

The number of 90% is due to technical considerations, i.e. increasing the chance of the algorithm finding a
viable solution. Usually in the discovered strategies the level of integration reaches 100% soon after

56

illustrates the dependence of DSO strategy on the time the regulation specifies for the transition.
Having a longer time available for the transition (in these cases 25 years, compared to 15) reduces
the fraction of assets in good condition which have to be exchanged, as is visible when comparing
strategies in Fig. 22.
0.45
0.40
0.35
0.30

Transformation of New
Assets in Case I1

0.25
0.20
0.15

Transformation of New
Assets in Case I2

0.10
0.05
0.00
0

10

15

20

25

Figure 22: Percentage of Conventional Assets in New Condition Being Replaced for Transition (Example Stations)

Also, we see that lumpiness of investments (shown by spiking behaviour in the graphs) is more
extreme in the transition phase of the fast strategy.

Concerning the sequencing of segments it is interesting to note, that in both scenarios (I1 and I2), the
algorithm arrives at a solution which transforms many segments early on and keeps the
transformation of the metering segment until the last moment, as seen in Fig. 23. Most likely, this is
due to two factors: a) the large number of assets in the metering segment and b) the high proportion
of those, which are still in good condition in this specific example (condition 1 or 2), therefore
presenting potential to phase out.

57

Figure 23: Progress of Transition in Different Asset Segments (Active Case, 15 years - I1)

Cases with Budget Cap

Since infinite availability of capital is unrealistic, we shall investigate cases where yearly costs receive
a cap. In principle, in the case of our synthetic DSO, the yearly cost limit for achieving a fast transition
(15 years) while preserving acceptable quality and percentage of assets in risky condition lies around
a cap of maximum 17 Million per year, which roughly translates to an increase in yearly costs of
70%. This is explored in Case I4. In this scenario, grid quality is still improved through the new assets,
as Fig. 24 shows. An noteworthy detail however is, that already there is some increase in percentage
of risky assets in the conventional part of the grid, which only drops, after the transition is finished,
hinting at a relocation of budget during the transition(Fig. 25). This is easy to overlook, as aggregated
risk over the entire asset base stays relatively stable.

Figure 24: Development Grid Reliability Case I4

58

Figure 25: Percentage of Assets in Risky Condition Case I4

Continuing the investigation, it has been found, that with a yearly budget below this point (
17Million), we cannot find any solution which satisfies all conditions to the "magic triangle" as they
were in the base case (cost cap, risk maximum of 33% and minimum service quality of 23 minutes
SAIDI). The algorithm comes up empty handed. When budget is more scarce than this and we decide
to give budget preference to the transition (instead of upkeep of the conventional parts of the grid),
service quality and risk situation deteriorate.
This deprivation of budget takes effect at two points: a) For the newly installed Smart assets, when
they have already reached their end of their first lifetime needing to be replaced, while others assets
in the segment still need to be replaced. And b) in the conventional assets, which are not due to be
transformed and therefore ignored by the algorithm in an attempt to cut costs. This is visible when
comparing spending for upkeep of conventional parts with the Base Case (Fig. 26): While in the Base
Case a refurbishment of the conventional parts would be necessary around 2025, in the case I4, this
investment is not possible at this point in time, through the budget demand of the transition. The
algorithm still sets a spike for upkeep before the critical phase of the transition, most likely in order
to fend of the strongest effects. In the case with the tightest cap on yearly costs (Case I5, 20% above
Base Case budget), the activities for upkeep of the conventional part cease almost completely, as all
the available budget is spent on the transition.

59

Figure 26: Spending on Upkeep of Conventional Assets: Base Case, I4, I5

We conclude, that budget unavailability may lead to adverse effects, when preference is given to the
transition. We shall investigate these effects more in the sections on risk and reliability.

60

Active Transition: Impact on Asset Management Risk

Next, we will investigate how the transition in the different scenarios impacts the grid system from
the lens of managerial risk.
Risk in Base Case & Passive Cases
The grid in our reference point without transition (Base Case, Strategy A) averages at 20% of assets in
a risky condition, with slight oscillation, due to the tendency to do the investments for upkeep in a
lumpy fashion. The associated monetary replacement value for all risky assets lies at around 70
Million, which is about 7 years of cost budget for upkeep ( 10 Million). Average age of the assets is
20 years. This makes it a grid in acceptable condition - not very good but manageable. Thus
managerial risk is not too great: If it were necessary to have serious investments quickly for some
exogenous reason, it would be feasible to raise the required capital.
In contrast, the passive transition cases are lower in their costs, as we have seen earlier. They present
a more risky strategy, because we wait until assets fail or are in risky condition until we replace them
(Fig. 27). That means if we suddenly change our strategy, investment demand will be high.

Figure 27: Fraction of Risky Assets - Base Case and Passive Transition (E1 & E2)

In the more moderate scenario, when we replace assets already when they enter condition state four
(case E2), the management risk fraction rises to roughly 30% of assets. In contrast, replacing assets
only when they actually malfunction (case E1) practically leads to a cease of upkeep activities, which
means that the fraction of risky assets will rise starkly.

61

Risk in Active Transition Cases

As it became clear earlier, how the passive approaches take too much time for the transition, the
next paragraphs investigate the active transition cases from the risk perspective.

Figure 28: Fraction of Risky Assets - Base Case and Active Transition (I1 & I2)

Fig.28 shows how the cases with active transition towards Smart Grid without budget limitations
have strong reducing influence on the risk state, since all the assets we are implementing are in a
new condition. In a sense the DSO thereby takes care of any investment backlog that may have
amassed earlier (16% of risky assets in the base case). In the cases with unlimited finances (I1, I2) this
leads to a percentage of between 5-10% of assets in risky condition, which is less than half of the
value in equilibrium. Average age of grid assets is equally halved to 10 years .
Seeing with an isolated lens, the transition then means a positive development - the grid is being
renewed thoroughly, leading to less risk (and related, more quality for the end customer). However if
we integrate the lens of budgeting, it is clear that this comes with great financial strain, which may
not be cost efficient, considering the actual customer value of a slightly better functioning grid. An
integration of this into the theoretical background can be found in section 5.3.1.
However next, since infinite availability of capital is unrealistic, let us consider the situation of a
limited yearly budget. We will do this analysis slowly raising the yearly availability through cases I4-I9.
A full conversion in 15 years is possible without losses to risk percentage, with a yearly cost budget
of roughly 17 Million (Case I4). Below this point, funds which would normally go into the upkeep of
assets which are not to be transformed (in our model the asset segment "Grid"), need to be used to
fund the transformation process. This budget reallocation drives the increase of number of assets in
risky condition and the average age of these assets.

62

This means an increase in the fraction of conventional assets in risky condition with each million of
yearly budget less. The further the transition progresses, the higher the fraction of assets in risky
condition rises, since assets move along the aging chain without any measures for upkeep being
performed on them. We see this in Fig. 29: In the base case, a period of investment starts shortly
around 2018, bringing the risk fraction down and stabilising it at 15%. In the other scenarios, budget
is to tight for this to happen, with almost no budget in case I5 (as we saw in the earlier section).
Here, the fraction of conventional assets in risky condition rises until between 40% and 55% in the
year 203036. At this point then, the available budget can be divided between the upkeep of the
transitioned parts and the refurbishment of the decayed conventional parts.
Percentage of Total Assets in Risky Condition
80
70
60

I9

50

I8

% 40

I7

30

I6
I5

20

I4

10
0
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Figure 29: Development of Risk Fraction in Active Cases with Budget Cap

Average age of conventional assets increases from 35 years to 40-50 years in the different cases until
the transition is finished. We also see a slight increase in effects between Case I6 and I7: In our
example this means a cost cap of between 130% and 140% of the normal budget. This suggests an
importance of spending at least a small sum on the assets in risky condition.
Another feature of this situation is the heterogeneity of asset risk structure, visible in Fig. 30 (the
example here is case I6): The grid may become polarised in the sense that there are some assets in
very good condition and some in quite bad condition. This is exemplified by the gap of percentage in
risky condition between two asset classes: The grid average fraction of assets in risky condition is
roughly 20%, while it is much higher at around 40-50% for those assets which are not to be
converted.

36

Methodological caveat: The simulation of cases I5-I9 is only valid until the transition has been accomplished
(Year 2030), as there is some free budget after this point, which the algorithm does not use. This leftover
budget could in theory be used for the investment backlog in the grid components. The evaluation of
simulation data has therefore been cut at the year 2040 and a different method of graphing was chosen for
software functionality reasons

63

Development of Fraction "Assets in Risky Condition"

60
Grid Average

50
40
%
30
20

Conventional
Assets

10
0

Figure 30: Heterogeneity of Asset Risk in Case with Budget Cap (I6)

This heterogeneity requires special managerial awareness37. Otherwise it may present issues, as
information about this can get lost through aggregation and transferring through points in the
organisation. We will talk about this in the policy advise for DSO's in section 6.1.

37

If not dealt with carefully, this may present one of the ways of how financial "blind alleys" come to be, which
are feared by practitioners. For instance in a heterogeneous risk situation, asset risk percentage may rise for
one category, however when other parts in the grid are all new and therefore keep the average number low,
aggregated investment backlog rises relatively little. It is easy to overlook this level of detail, especially when
information is lost during transfer between organisational departments. Special attention is therefore
appropriate, the tighter the budget conditions are for the transition.

64

Active Transition: Impact on Service Quality

Both grid reliability (as an indicator for service quality) and management risk stem from the physical
condition of assets. Since the two topics are related, the development of service quality for the end
customer therefore takes a similar development to that of asset condition risk.
Fig. 31 shows, how in cases of passive transition (E1 & E2), SAIDI rises to stable level in E2 and
significantly in E1 , as we only replace assets when they actually malfunction (leading to increase in
outage time)

Development of Grid Reliability

40
35
30
Base Case

25
SAIDI
20
Mins/Year
15

E1

10
E2

5
0
2015

2025

2035

2045

2055

Figure 31: Development of Grid Reliability in Passive Cases (E1 & 2)

The cases with active transition and unlimited financial supply have better quality, since parts are
new and malfunctions are unlikely (Fig. 32). SAIDI declines from its value of around 15 minutes/year
to around 6 minutes/a. The absolute number of damages develops similarly.

Development of Grid Reliability

SAIDI
Mins/Year

20
18
16
14
12
10
8
6
4
2
0

Base Case
I1
I2

2013

2023

2033

2043

2053

Figure 32: Development of Grid Reliability Active Cases without Budget Limitation (I1&I2)

65

2063

As long as budget is unlimited, we see, that the faster the transition, the faster the decline in SAIDI,
as the new parts installed have lower likelihood of failure. The SAIDI of the parts which are
unaffected by the transition stays the same. Again, this represents an all around overhaul of the old
grid.
In the cases with a cap on the maximum yearly budget, we see that SAIDI still declines in the
boundary case (I4, maximum 17 Million yearly cost budget). Lowering the budget stepwise, SAIDI
rises to a value of 30 minutes per year (Fig. 33).
Development of Grid Reliability
30
25
I5

20

I6

SAIDI
Mins/Year15

I7
I8

10

I9
I4

5
0

Figure 33: Development of Grid Reliability in Active Transition with Budget Cap

This increase is due to the aging of conventional parts, which can be seen comparing the SAIDI of
smart parts and conventional parts. However, similar to the sources of management risk, this is an
aggregated number as well - reliability of the parts is heterogeneous and higher than the average in
the neglected conventional parts.

66

Integrated Perspective
It becomes clear, that we will need to integrate the three perspectives to gain a clear view of the
issue. Having established them individually, we can now do so.
Perspective and Conclusion
Overall, the transition can be seen as a large-scale refurbishment of the grid, which comes with
increased functionality in those parts which are affected by it. However, it also entails a considerable
investment of time and financial resources. In the first years of the transition, the costs can easily
reach multiples of the normal yearly budget.
In case that either of those resources (or both) are scarce, as is likely, some sort of trade-off for how
to shape the transition needs to be made. The choice for the exact design for the trade-off lies with
the regulator first, as we have seen earlier the importance of time limit and choice of segments to be
affected. Second, the choice lies with the affected DSO's for a plan on how to use that time. It has
been evident that especially the cases in which we are trying to force the transition to happen in a
relatively short time while operating in a limited budget may have significant effects on grid
structure. This is due to using resources for the transition which would have been budgeted for the
upkeep of the conventional parts which are not set to be transformed. Effects which are likely in such
a situation is a diminished condition of assets, larger investment backlog and heterogenisation of
asset conditions. While not simulated in the model, it is easy to imagine a strain on equity and
liquidity situation of the DSO.
In our synthetic case, implementation was possible without stark effects under a cost budget cap of
170% of the normal budget. Lowering the cap, the effects became most pronounced at a cost cap of
130% or less of the normal cost budget. The range of 30-70% seems to be realistic for an estimation
of the increase in yearly DSO spending.
The effects of decreased budget were noticeable in both management risk and service quality
(reliability). In tendency, the effects were comparably stronger on the indicator of risk than on the
reliability indicator, indicating a higher noticeable impact of the transition on DSO's than on the
actual end customer. This would be a promising starting point for further research, as it concerns the
question of who would shoulder the impact of the transition.

67

Example of Feasible Compromise

Lastly, in order to find a realistic trade-off between all categories, the author has calculated a case,
which seems realistic. In this case, transition time has been increased to 20 years (compared to 15
years), as implementation time has been shown as crucial. Equally, using a 15 million cap on yearly
costs (50% increase) seems reasonable. This might present a feasible compromise between the three
goals of the triangle.
Under this scenario costs remain somewhat close above the costs in the base case (Fig.34).

Figure 34: Development of Costs in Trade-off Case

Service Quality develops with a moderate increase in SAIDI (Fig.35).

Figure 35: Development of Grid Reliability in Trade-off Case

68

Figure 36: Development of Risk in Trade-off Case

Merely the fraction of assets in risky condition rises over time in this scenario (Fig.36). However,
considering that the algorithm left some budget untouched in the years after 2040, it would be
possible to lower this with reasonable effort.
This concludes the analysis on the impact of the transition towards smart grid. We can now evaluate
those insights in relation to a larger theoretical framework.

69

5.3 - Theoretical Evaluation of Results

Having performed the analysis to explore how DSOs are likely to cope with the transition, we can
now compare its results to several larger theoretic frameworks. First, we will concentrate on the
economic side. Then, we will assess the results in front of the actual plans for the transition rollout,
including a consideration of the larger political situation (e.g. energy transition).

5.3.1 - Results Compared to Theory on Corporate Investment in General, Asset

Management and Reliability
First, we will hold the results against several theories of investment (ranging from broad to specific
for DSO asset management).
Integration in Econometric Theory
To assess the Smart Grid transition from a broad econometric perspective, investment decisions
could be analysed under the classic general theory of corporate investment by Jorgenson (1963 and
1967). Here the assumption is such that firms choose their investments in a way which optimizes
accumulation of capital. This theory therefore describes both the amount of the spending and the
(desired) increased re-accumulation of capital as a result of the spending. A key characteristic in our
situation is however that income for DSO's is fixed through the market design regulation. Therefore,
the decisions of DSO which we simulate concern only the amount of the outflow of capital in form of
spending, which they are trying to minimise. Insofar, our approach and results fit this theory. For
more detailed comparison we have to look elsewhere.
Another broader perspective on infrastructure investments specifically in regulated environments
comes from Joskow (2007), who points out problems when trying to apply econometric theories to
regulated markets. Coming at the issue from a perspective of the high voltage transmission part of
the grid, according to him, different theories are necessary for these industries. One such theory has
been elaborated Bushnell & Stoft (1996a, 1996b & 1997), who state that in transition processes in
the transmission grid, markets alone often do not find the most efficient solution on their own and
are prone to short term-investments, which may prove detrimental for the overall transition. They
state lacking decisiveness stemming from uncertainty over development of the environment as a
reason for this. Our results correspond to their theories such, that they are an approximation of the
ideal path: Our results assume a decisiveness which may be unrealistic. While it would be efficient to
act in the way we described, an asset manager would have to be sure of many exogenous factors (eg.
technical standards, actual enforcement of goals etc.) to act this decisively. If this is not certain,
there may be some doubt whether DSO's will actually react like this.
This insight leads Bushnell&Stoft to recommend special regulatory framework for the time of the
transition, to make it more likely that Transmission System Operators choose the most efficient
investment path to reach goals. This takes the form of special contract forms, which reward early
investments and provide income such that investments can be shouldered. Seeing how the most cost
efficient solution usually had cost spikes early on (to transform the conventional assets in bad
condition and to diminish investment backlog for the last years before the deadline), this seems
reasonable. Literature about optimal transition regulation for the DSO industry in particular is scarce,

70

however some insights from the transmission grid might be applicable as well, seeing the long time
necessary for the transition and the high investment volumes.38

Integration in Asset Management Theory

Sharpening the focus, it is helpful to compare the simulation results against the theoretical
framework of Asset Management in long-life network infrastructures, which was laid out in section
3.1. Generally, the results can be integrated well.
The patterns we observe from all three evaluation perspectives (e.g. time to completion, necessity to
replace conventional assets in good condition) are fundamentally due to the generally long lifetimes
of the assets which are already installed. The capital-intensive and interdependent nature of making
investment decisions for the transition becomes clearly visible in the question on how to shoulder
the costs most effectively. Differences in the situation in the EU compared to the US (where the grid
actually IS in need of a refurbishment) can be seen as an effect of the tendency for lock-in, when
technology choices have been made. The theory about DSO's following a tendency to do investments
in a "lumpy" fashion is supported by the results, and we have pointed out the increase in significance
of this lumpiness, the higher the absolute need for capital is.
The methodological theory for use of models in Asset Management can be confirmed as well: Our
case can clearly be seen as an example of a situation where experimentation is costly, in which it
pays to make future scenarios visible to support decisions that have to be taken in the present. We
can also confirm the observation of Lassila et al. (2007) about the growth in importance of the
economic dimension when building models for decision support for DSO's since the results of this
work are clearly a further step in this direction.
Integration in Theory of Reliability Cost
Comparing our results specifically against the theory of reliability cost yields additional insight.
We have stated in section 5.2, how the transition can be seen as an overall refurbishment of the grid,
which comes with an improvement in grid quality. This improvement comes along with a significant
cost. The theory about total cost of reliability adds perspective to these findings.
Having stated in section 2.1, that the German grid is in a good condition, we would assume that the
level of reliability is somewhere to the right of the minimum point of the function for Total Cost of
Reliability: Our level of reliability is somewhat higher than would be cost-optimal and we pay some
amount of premium for this. When the DSO starts implementing Smart Assets, it comes with a
further improvement in reliability, since all the parts are new. This increase in reliability leads to
smaller outage costs which is positive. However this cost decrease alone cannot alleviate the
comparatively higher cost for the new assets (the grey curve in Fig. 37). As the function for Total Cost
of Reliability increases exponentially and we are already positioned at a higher level than would be
cost-efficient, this effect becomes even more pronounced the more aggressively we pursue a

38

One of the industry practitioners during the consultations summed this up, saying "Can we reap
benefits at a later point, if we concentrate our efforts early in the process?"
71

transition of conventional assets which would still be functional otherwise. This explains well the
strong increase in cost in the cases without budget cap. (EPRI, 2000)

Figure 37: Increase in Cost Through Higher Reliability. Adapted from EPRI (2000)

5.3.2. Comparison of Results against Transition Plans

Assessment of the simulation in front of the planned trajectory of transition needs to happen from a
customer perspective as well as from a political perspective.
As mentioned earlier, any financial strain on DSO's would most likely be transferred to customers in
the end. From a customer perspective, this cost has to be compensated by the value which
customers derive through the new functionality of the Smart Grid, mentioned in section 2.3. It also
needs to be visible (e.g. argued clearly).
From a political perspective, public resistance against the topic seems likely, in case this
compensation of cost is not achieved. This may also affect the public acceptance of plans for
integration of renewable sources, which is seen rightfully as a related topic. The political challenge
here is to assess the immediate strains of different rollout scenarios and weigh them up to the larger
benefits of the Smart Grid. Doing so in a quantified and therefore reliable and transparent way gives
a political role to the simulation results. Lastly, it is necessary to successfully argue this case (King &
Kraemer, 1993).
Referring back to the EU recommendation for 80% transformation of the metering segment until
2020 (explained in section 2.2), our analysis comes to a result which makes the shape of the
trajectory seem unlikely and in some ways counterproductive for the acceptance of the Smart Grid
endeavour. This is clear, as the "fast active case scenarios" which already come with considerable
strains are defined with 15 years of transformation time. Compared to this the EU directive would
allow for merely 6 years of transformation time at the time of writing of this thesis. This seems highly
72

unlikely, when comparing to our resulty. Next, considering the choice to start legislation for
transition with the metering segment is understandable from a point of visibility of the endeavour to
the end customer. However, the optimisations of most scenarios usually show the metering segment
as the one which reaches full transformation last. This is due to the sheer number of installed
conventional meters and their associated replacement value still in place.
A simulation of this scenario, accomplishing the transition as detailed in the EU recommendation,
with no cap on maximum yearly spending, supports these reflections: Through the short time, the
initial cost peak reaches up to 7Million, for transforming the metering segment alone, even while
achieving only 80% transformation.

73

6 - Policy Recommendations
We will now derive concrete policy recommendations for both DSO's and regulatory bodies from the
simulation insights.

6.1 - Policy Recommendations for Distribution System Operators

In the question on how DSO's should adapt to the transition it has become obvious, how much the
transition (and the necessary adaption) depends on the regulatory design chosen in the end. Basic
recommendations can be given nevertheless.
General Advice: Ideal Sequence etc.
DSO's should be aware of the strong impact of this transition. It is necessary to start saving budget
early. Generally, the financial impacts come early on, while the physical impacts (failing assets, rising
average grid age) come towards the middle and end of the transition, when there have been some
years with little investment for grid upkeep.

Shaping the transition should be faced the following way: The decision to start with the transition
process should be taken as soon as possible, even though uncertainty about coming regulation and
technical features is high. This is due for the large amount of time necessary for the transition, as we
saw in the simulations. However this does not necessarily mean to start replacing assets, at least not
at random. DSO's should avoid adding any other conventional assets. Conventional parts that need to
be replaced anyway should be replaced with their Smart equivalent as soon as there is one available,
to save budget when needed. Generally DSO's should convert assets from a single segment from the
oldest to the newest assets. The metering segment should be transitioned last, regulation allowing,
as the simulations showed it to have considerable aging potential. Investments should be done in a
lumpy way, as far as this is possible, to use the cost efficiency potential. Timing the position of lumps
of investment relative to each other is necessary, which needs detailed liquidity planning.
Strategy Finding and Data Availability
The strategies found in the optimisation have been very inhomogeneous, with considerable
differences in investment activity from year to year. Information and data availability about the grid
therefore will be crucial for being able to manage the transition, as undifferentiated investment
decisions would be too costly.39 DSO's need to find ways to be very well informed about the
reliability condition of their assets and their expected development over the whole time horizon of
the transition. The more detail the data has, the better. At minimum, this means location of batches
of assets in a given condition in the grid, the time of their instalment and their expected lifetime. If
not available yet, data gathering needs to start as soon as possible, to not delay further the decision
on a coordinated plan. As mentioned in section 5.2, the need for availability and quality of
disaggregated data is especially high in heterogeneous asset risk situations, especially towards the
end of the transition goal. Loss of information depth needs to be avoided when enriching data for
decision support throughout organisational levels. The potential capacity of the new assets to
communicate their position and (if possible) quality state should be used to minimize the cost for the
upkeep of the transformed part of the grid, therefore freeing up budget.
39

A related development adding to the importance of data availability is the probable increase in reliability
centred maintenance strategies, as mentioned in section 3.2, in order to save costs. To use these strategies
well, reliable data is necessary.

74

As stated, the average SAIDI in Germany is usually very good, therefore some degree of increase may
be acceptable. Improving the response capacity to damages especially towards the end of the
transition, in order to achieve a lower average duration of an outage may be a cost efficient way to
cope with higher SAIDI without needing to invest.
Coping with Increased Percentage of Risky Assets
With limited budget (as is realistic to assume), DSO's have to expect a significant increase in
investment backlog, during the time of transition. The challenge to cope with this longer period
where an increased percentage of assets contributes to management risk (investment backlog) is
perhaps the hardest one for DSO's. It is also the one challenge which offers the least manoeuvring
space for adaptation.
It is likely, that this growing investment backlog will become a central criterion for financial and
strategic decisions in DSO's during the time of the transformation and in the first years after its finish
date. Whether the impact of the transition on the DSO's will be as profound as in our synthetic case
study depends on whether the assumptions we made about the parts turn out as correct. It also
depends on the exact specifications in the directive to come. However regardless of the exact
scenario, DSO's are likely to have little extra budget for any non-grid investments.
Hence, it is necessary to not increase the investment backlog any further than already necessary. Any
non-grid related investments need to be checked for necessity by the value they add. Also, the timing
for such investments needs to be scheduled well: It makes sense to either get those out of the way
before the main activities for the transition or to postpone them after the transition has finished.
Therefore, early awareness and planning for the transition is key.
Debt capital long-term availability also needs to be planned early on. This needs to be flexible, as our
simulation shows large fluctuations in the capital needs. Depending on its availability and the time
span specified in the regulation, it would be best to take up a lot of capital in the early phase, as this
seems to be ideal in the simulation (visible in Fig. 21).
A bright spot is, that once there exists a plan, and barring exogenous events, the transition is
relatively foreseeable. This makes it possible to incur long-term partnerships in the financing of the
debt capital. Some forms of hedging financial risk may be applicable as well for both unexpected
events in the physical part of the transition and for uptake of capital. This may cost a premium but
add stability and planning security.
An insight coming from the strong spiking during the transition: Maintaining control of the process
and keeping options open can be used as a good guideline for the short-term decisions and
adjustments to the plan. Even though the dynamics of capital uptake and management risk were not
part of the simulations of this thesis, it seems wise not to - in an attempt to cut corners - let the grid
degrade to a point where there is an urgent need for renovation. This recommendation holds, even
though early renovation of assets in condition 3+4 (maybe making necessary the costly uptake of
additional debt capital) may cost more overall. However, choosing the risky option may result in
urgent renovation needs, coinciding with plans for another lump of investment or some difficult
exogenous condition like high interest rates. Paying some amount of premium to steer clear from the
75

most risky scenarios allows one to take advantage of the efficiency of lumpiness while still operating
in a reasonable risk framework.

76

6.2 - Policy Recommendations for Regulatory Bodies

In their vision for the electricity networks in Europe the EU energy commission aims for high levels of
flexibility, accessibility, reliability and economic viability (ETP:Smart Grid, 2010). This investigation
focussed on the two last ones of those goals. Therefore, we will now clarify the question how
regulatory bodies (at the German level and at the EU level) can shape the transition towards the new
Smart equilibrium in the most efficient way, while avoiding major setbacks in service quality.
Perspective
It is especially necessary that Policy regulators are aware of the strong impact which such a transition
has on DSO's, depending on its features (e.g. transition time, segments to be transformed, ...). It is
crucial to strike a balance between two goals: First, to get the process of technology implementation
underway without any more delay where it is possible and efficient to take leadership. Second, to
then choose the exact shape of the regulation such, that the adverse effects are minimised. Since the
present regulation is relatively inexact, some more detail would be beneficial.
Regulators also need to be aware of the tendency in DSO's to make the transition efficient through
lumpy investing (as discussed in section 6.1) and the possible effects of tight budgets on asset risk
and reliability.
For this reasons, the regulatory perspective needs to be one of a grid refurbishment as far as
possible, where old parts at the end of their lifetime get refurbished with different (Smart) parts. This
view is contrasted by the perspective of a complete 1:1 replacement of the whole grid. Regulators
need to shape the transition such, that the transition is combined with needs for refurbishment, so
that the number of conventional assets in good condition which are being transformed is minimal.
Shape of the directive
Concerning the actual shape of the transition directive, the following can be said: Regulators should
specify all aspects in dispute such, that the amount of assets to be removed without necessity is as
little as possible while still achieving the desired benefits of a Smart Grid. This means several things.
The regulation should account for regional differences in grid condition as we saw from Pavel (2011),
that the grid landscape and their average age of assets is inhomogeneous. The author therefore sees
it as reasonable to account for this. This may take the form of regionally different regulations.
Instead of the present Top-Down-Regulation which mandates a concerted and simultaneous
overhaul of the entire grid, it would allow for more nuances, depending on needs for grid
refurbishment. Thereby, the perspective of a refurbishment with new technology instead of a
complete exchange of assets would be respected. A stepwise approach to introduce Smart Grid
functionality seems reasonable: Depending on the need for grid refurbishment in a given region,
Smart Grid can be introduced when it is time for refurbishment. Depending on the development
state of the distribution grids in the region, those parts of Smart Grid functionality (for the customer
and industry) can first be introduced, which only require a regional level of rollout (e.g. demand side
steering). Then, as more distribution grids roll out the new assets, those new functionalities can be
introduced which require a large percentage of the grid to be smart (pricing models etc.). This would
also allow for market "pull"-factors among end customers to become active, when new
functionalities are developed in some regions and spread on the market (Chidamber, 1994).

77

Moreover, regulators should set the rollout time as long as possible, ideally as long as other
considerations allow. This is necessarily a dynamic question, as other strands of technological and
societal development are intertwined. Nevertheless, the longer the time the better, as

new parts can still phase out of the system

investment backlog will not be as high
Initial spike will not be as high, making capital uptake easier.

The possibility to allow for provisional solutions which enable very new assets to be phased out more
gradually should be reviewed for possible inclusion in the directive. This could happen with parts
which, from the engineering side, allow to be upgraded with some (reduced) level of the ICT
functionality which Smart assets would have, while not replacing the conventional asset.
Specifically for the metering segment, the question on technical lower limits on which connections
need to be smart in their metering should be reviewed on base of their contribution to the desired
Smart Functionality.
Also, the directive should specify standards for technical aspects as closely as possible, consulting
with the industry. This is important, as it makes planning possible, thereby avoiding problems during
the already complicated transition phase. Next, it prevents wasting precious time in the transition
with DSO's waiting for de-facto industry standards on technical aspects to emerge. And most
importantly it prevents the necessity to remove Smart Assets which have already been installed.
Further points: Similar to the direction for metering in new buildings, the directive should specify the
need to have any new assets to be smart. This is important to avoid further implementation delay,
costing valuable time, leading to high cost.
Communication
As cost being transferred to the end customer is likely, it is necessary to communicate the endeavour
well. The benefits of Smart Grid implementation have to be demonstrable and the environment for
new functionalities and services has to be such, that they arrive together at the end customer with
the strains of the transformation.

78

7 - Limitations and Further Research

There are several limitations to this work, where further research could continue to deepen the
analysis of the issue at hand. Broadly speaking, improvement here would take the work from an
exploratory to a more focussed research approach. The following paragraphs list these limitations
and suggest changes, ordered from little to significant change in the scope.

Limitations to Predictions
A limitation to the results is their validity only until roughly the year 2050. This is due to two factors:
First, there is a general tendency of errors in predictions to perpetuate over time, which means a
lower validity, the further into the future one projects. Secondly, the functioning of the evolutionary
algorithm plays a role: When optimizing a simulation with a certain end point in time and the goal is
to keep the system inside some kind of boundary (e.g. restriction on minimum reliability), it is often
cost efficient for the algorithm to cease all maintenance activity at the end. This is due to the fact,
that what happens with the grid after the simulation has ended is not important anymore to the
algorithm. Obviously, in reality this would make no sense. Hence, we have to be aware of this
limitation and discount the last 10 years of simulation in the analysis.

Data
For this thesis, some assumptions for data had to be made. At the point of writing of this thesis, the
degree of many of the dynamically relevant features of the model (such as, prevalence of the
dynamically relevant properties and lifetime) were not ultimately clear yet, making estimates
necessary.
It would make sense to complete the simulation for those parameters, when more reliable
information about them is available. It would also be realistic to assume that there may be some
form of economies of scale to introduction of the new assets, which actually make the cost of
investments less extreme. To increase the relevance of the work, it would also help to use data of the
financial and asset-related situation of a real DSO as the point of departure (as compared to synthetic
data).
Computational and methodological tools
Since the analysis for this work has been done on a desktop computer, using the entire parameter
space of a given optimisation for analysis was not an option. Instead, only one algorithmic strategy at
a time was the analysed in each case. This often made workarounds necessary, when looking to
analyse details.
Having more computing power available, would be a worthwhile improvement of the analysis. First it
would allow the use of many tools such as statistical analysis of the entire parameter space. Second,
the ability to use other algorithms to investigate the parameter space itself, with different analytical
goals than merely finding an optimal solution would be helpful. Combining these methods would
allow to use the intuition of the analyst for choosing promising routes of investigation and therefore
enable one to investigate disaggregated questions better and achieve more reliable insights.

79

Examples for such disaggregated questions worth investigating are a comparison of the effects of the
different dynamically relevant properties, further investigation of the ideal transformation sequence
of asset segments, finding detailed numbers about conversion fractions in the ideal strategies and
their coordination among condition classes.
Model structure
Also, there are several possibilities to extend the model itself which might prove helpful: First, it
might be interesting to actually model the inflow of capital back to the DSO dynamically, as opposed
to merely setting restrictions on cost for the optimisation. This would make it possible to consider
the situation concerning raising debt capital endogenously. Consequently it would allow to actually
see the emergence of "dead ends", which asset managers fear.
Secondly, including a dynamic representation of manpower necessary for the transition and its
associated cost would add realism, as this may be a source of strong delays for important
relationships in the system. The question on how manpower demands for the transition influence
the time for repairs (which define the service quality through the length of the outage time) is
especially interesting here. Third, as a broadening in scope, it would be interesting to research a topic
which has only been touched slightly in this work: the new equilibrium.
Lastly, this being a significant extension to the model, it would be interesting to consider the
macroeconomic implementations of the transition. This entails a situation where several DSO's which
are all faced with the transition are represented, and where the price of electricity depends on their
choices in a macroeconomic climate. This way it would be possible to assess the transition in a
context of many other scenarios on which neither the DSO nor the regulator have an influence, such
as macroeconomics, development of demand for transmission capacity of distributed generation.
Validity of Results
Overall it can be stated from the uncertainties we discussed setting out, that the exploration is valid
for broad characteristics of the transition (eg. cost increase, impact on conventional grid, time
dependence of transition, refurbishment perspective). The results for details (such as sequence of
assets, exact numbers, etc.) include some uncertainty and methodological limitations and should be
used as a rough guideline, possibly inviting further research.

80

8 - Conclusion
In this thesis, the impact of Smart Grid implementation on distribution system operators in Germany.
was assessed. The investigation started with clarifying the background situation, to achieve an
overview about the point of departure and the regulatory environment, as well as a sense of what
the rolled-out Smart Grid looks like. Also, the transition was pointed out as a move from one steadystate equilibrium to a new equilibrium.
The assumptions which a model of this issue would need to make were then clarified scientifically.
This included as well an argument for why the two methodologies in use - System Dynamics and
evolutionary algorithms for parameter optimisation - are appropriate for the investigation
The features of the new assets, which are responsible for the effects of the transition, were specified.
It was also specified, how to evaluate the resulting scenarios.
Then, several scenarios were simulated, divided into categories: Base case (no transition), partial
transition, passive full transition and active full transition. Consequently, their effects were evaluated
from the three standard perspectives of the asset management triangle.
The necessity to analyse the transition thoroughly was confirmed in our evaluation: A significant
increase in costs for DSO's was discovered as a likely outcome of the transition, resulting from
necessity to introduce large amounts of assets in a relatively short time. The time limit currently set
by the EU recommendation was seen as improbable under the assumptions of our model. Adaption
strategies were explored under different regulatory conditions. The researcher argued for a
concerted plan of Smart asset integration as an adaptation of DSO's to the transition, cutting costs
and orienting themselves at managing Asset Risk while taking advantage of lumpy investments for
cost efficiency. Time limit for accomplishing the transition was identified as the key regulatory factor
which determines the degree of impact of the effects. Conventional assets which are still in good
condition being replaced by Smart assets was seen as an indicator for these effects which drive costs.
The investigation went on to explore the declining condition of conventional parts as a possible
effect of scarce budget which is being spent on the transition. Heterogeneity of asset risk was
identified as a likely characteristic of a grid in transition and as a possible source of managerial risk.
The ideal perspective on the Smart Grid transition was defined as one which overlaps with
refurbishment activities as far as possible.
Doing this allowed one to derive policy recommendations for both DSO's and regulatory bodies.
Lastly, the limitations of the model were discussed, to identify promising opportunities for further
research of this issue.

81

APPENDIX
Appendix

82

List of Illustrations
Figure 1: Conventional Tree Shape of Electricity Transmission and Distribution. Adapted from Short
(2004). ..................................................................................................................................................... 8
Figure 2: News headlines per month featuring the term "Smart Grid". Derived from Google Trends on
22nd of June, 2014 ................................................................................................................................ 13
Figure 3: Transition from Conventional Equilibrium to Smart Equlibrium............................................ 16
Figure 4: Development of Average SAIDI 2006-2012. Data from Bundesnetzagentur (2013c). ........... 23
Figure 5: Relationship Between Level of Grid Reliability and Cost. Adapted from: EPRI (2000).
Reprinted with Permission. ................................................................................................................... 24
Figure 6: Example of an Optimisation for Cost, Using Restrictions on Grid Quality ............................. 35
Figure 7: Conventional Asset Aging Chain ............................................................................................. 37
Figure 8: Forms of Scenario Usage in Science. Adapted from Brjeson et al. (2006) ........................... 40
Figure 9: Example for a Generic Aging Chain ........................................................................................ 41
Figure 10: Asset aging chain .................................................................................................................. 43
Figure 11: Assets modelled ................................................................................................................... 43
Figure 12: Effects of Variance in Asset Aging Behaviour ....................................................................... 44
Figure 13: Modifications in the Aging Chain to Represent Changes to Reparability of Smart Assets .. 48
Figure 14: Modifications in the Aging Chain to Represent Changes in Possible Quality States of an
Asset (Example Smart Meter)................................................................................................................ 48
Figure 15: Magic Triangle for Asset Management Goals ...................................................................... 50
Figure 16: Total Cost in Base Case ......................................................................................................... 52
Figure 17: Percentage of Assets in Risky Condition in Base Case.......................................................... 53
Figure 18: Grid Reliability Base Case ..................................................................................................... 53
Figure 19: Development Cost in Passive Cases ..................................................................................... 54
Figure 20: Progress of Transition in Passive Cases ................................................................................ 55
Figure 21: Cost Development Active Transition (No Budget Cap) ........................................................ 56
Figure 22: Percentage of Conventional Assets in New Condition Being Replaced for Transition
(Example Stations) ................................................................................................................................. 57
Figure 23: Progress of Transition in Different Asset Segments (Active Case, 15 years - I1) ................. 58
Figure 24: Development Grid Reliability Case I4 ................................................................................... 58
Figure 25: Percentage of Assets in Risky Condition Case I4 .................................................................. 59
Figure 26: Spending on Upkeep of Conventional Assets: Base Case, I4, I5 ........................................... 60
Figure 27: Fraction of Risky Assets - Base Case and Passive Transition (E1 & E2) ................................ 61
Figure 28: Fraction of Risky Assets - Base Case and Active Transition (I1 & I2) .................................... 62
Figure 29: Development of Risk Fraction in Active Cases with Budget Cap .......................................... 63
Figure 30: Heterogeneity of Asset Risk in Case with Budget Cap (I6) ................................................... 64
Figure 31: Development of Grid Reliability in Passive Cases (E1 & 2) ................................................. 65
Figure 32: Development of Grid Reliability Active Cases without Budget Limitation (I1&I2) ............... 65
Figure 33: Development of Grid Reliability in Active Transition with Budget Cap................................ 66
Figure 34: Development of Costs in Trade-off Case .............................................................................. 68
Figure 35: Development of Grid Reliability in Trade-off Case ............................................................... 68
Figure 36: Development of Risk in Trade-off Case ................................................................................ 69
Figure 37: Increase in Cost Through Higher Reliability. Adapted from EPRI (2000) ............................. 72

83

List of Tables
Table 1: System Structure and System Behaviour ................................................................................ 27
Table 2: Literature Review for Simulation Approach ............................................................................ 30
Table 3: Simulation Cases A1-D1 with Different Permeation of Smart Grid Rollout ............................ 39
Table 4: Model parameter categories with key examples .................................................................... 44

84

Detailed Overview of Simulation Runs

Asset Groups to be Replaced with SG Equipment in

Case
Scenario
Name

Group 0

Transition Time
Optimisation
until
Goal
Implementation

Other
No. Of
restrictions
Iterations
for
performed
Optimisation

4
Minimise Cost
over the
No
whole Grid
Implementation
(CAPEX +
OPEX)

A - Business
as Usual

85

SAIDI < 23
Minutes
Fraction of
N/A
Assets in
Condition 3&4
< 25%

Asset Groups to be Replaced with SG Equipment in

Case
1Switchboard

Group 1
Passive
Transition
(When
Assets Fail)

2Transformer

3 - Station

Transition Time
Optimisation
until
Goal
Implementation

Other
No. Of
restrictions
Iterations
for
performed
Optimisation

4 - Meters
No
Optimisation
Performed
No
Optimisation
Performed

No
Optimisation
Performed
No
Optimisation
Performed

No set goal,
until finished

No
Optimisation
Performed

No
Optimisation
Performed

N/A

No set goal,
until finished

No
Optimisation
Performed

No
Optimisation
Performed

N/A

B1

No set goal,
until finished

C1

No set goal,
until finished

D1

E1

86

N/A

N/A

Asset Segments to be Replaced with SG Equipment in

Case
123 - Station 4 - Meters
Switchboard
Transformer

Group 2
Passive
Transition
(When
Assets
Arrive in
State 3+4)

Transition Time
Optimisation
until
Goal
Implementation

Other
No. Of
restrictions
Iterations
for
performed
Optimisation

B2

No set goal,
until finished

No
Optimisation
Performed

No
Optimisation
Performed

N/A

C2

No set goal,
until finished

No
Optimisation
Performed

No
Optimisation
Performed

N/A

D2

No set goal,
until finished

No
Optimisation
Performed

No
Optimisation
Performed

N/A

E2

No set goal,
until finished

No
Optimisation
Performed

No
Optimisation
Performed

N/A

87

Asset Segments to be Replaced with SG Equipment in

Case

Scenario
Name

1Switchboard

2Transformer

3 - Station

4 - Meters

Transition Time
Optimisation
until
Goal
Implementation

15 years (Until
2030)

F1

Group 3
Active
Transition
(Fast,
preserve
limits on
Risk and
Quality)

15 years (Until
2030)

G1

15 years (Until
2030)

H1

15 years (Until
2030)

I1

88

Minimise
TOTEX over
the whole
Grid (CAPEX +
OPEX)
Minimise
TOTEX over
the whole
Grid (CAPEX +
OPEX)
Minimise
TOTEX over
the whole
Grid (CAPEX +
OPEX)
Minimise
TOTEX over
the whole
Grid (CAPEX +
OPEX)

Other restrictions
for Optimisation

No. Of
Iterations
performed

SAIDI < 23 Minutes

Fraction of Assets in
70000
Condition 3&4 <
33%

SAIDI < 23 Minutes

Fraction of Assets in
70000
Condition 3&4 <
33%
SAIDI < 23 Minutes
Fraction of Assets in
70000
Condition 3&4 <
33%

SAIDI < 23 Minutes

Fraction of Assets in
70000
Condition 3&4 <
33%

Asset Segments to be Replaced with SG Equipment in

Case
Scenario
Name

1Switchboard

2Transformer

3 - Station

4 - Meters

F2

Group 4
Active
Transition
(Slow,
Preserve
Limits on
Risk and
Quality)

G2

H2

Transition Time
Optimisation
until
Goal
Implementation
Minimise
TOTEX over
25 years (Until
the whole
2040)
Grid (CAPEX +
OPEX)
Minimise
TOTEX over
25 years (Until
the whole
2040)
Grid (CAPEX +
OPEX)
Minimise
TOTEX over
25 years (Until
the whole
2040)
Grid (CAPEX +
OPEX)

25 years (Until
2040)

I2

89

Minimise
TOTEX over
the whole
Grid (CAPEX +
OPEX)

Other restrictions
for Optimisation

No. Of
Iterations
performed

SAIDI < 23 Minutes

Fraction of Assets in
70000
Condition 3&4 <
33%
SAIDI < 23 Minutes
Fraction of Assets in
70000
Condition 3&4 <
33%
SAIDI < 23 Minutes
Fraction of Assets in
70000
Condition 3&4 <
33%

SAIDI < 23 Minutes

Fraction of Assets in
70000
Condition 3&4 <
33%

Asset Segments to be Replaced with SG Equipment in

Case

Scenario
Name

Group 5
Active
Transition
(Yearly
Cost Limit)

1Switchboard

2Transformer

3 - Station

4 - Meters

Transition Time
Optimisation
until
Goal
Implementation

Other restrictions
for Optimisation

No. Of
Iterations
performed

F3

15 years (Until
2030)

Minimise
SAIDI

Max. TOTEX/Year =
12 Milllion

70000

G3

15 years (Until
2030)

Minimise
SAIDI

Max. TOTEX/Year =
12 Milllion

70000

H3

15 years (Until
2030)

Minimise
SAIDI

Max. TOTEX/Year =
12 Milllion

70000

I3

15 years (Until
2030)

Minimise
SAIDI

Max. TOTEX/Year =
12 Milllion

70000

90

Asset Segments to be Replaced with SG Equipment in

Case

Scenario
Name

1Switchboard

2Transformer

3 - Station

4 - Meters

Transition Time
Optimisation
until
Goal
Implementation

Other restrictions
for Optimisation

No. Of
Iterations
performed

Group 6
Active
Transition
with Yearly
Cost Limit

15 years (Until
2030)

I4

(No Decay
of Assets)

91

Minimise
SAIDI

Max. TOTEX/Year =
17 Milllion

70000

Asset Segments to be Replaced with SG Equipment in

Case

Scenario
Name

Group 7
Active
Transition
Full
(Variable
Yearly Cost
Limit)

1Switchboard

2Transformer

3 - Station

4 - Meters

Transition Time
Optimisation
until
Goal
Implementation

Other restrictions
for Optimisation

No. Of
Iterations
performed

I5

15 years (Until
2030)

Minimise
SAIDI

Max. TOTEX/Year =
12 Milllion

200000

I6

15 years (Until
2030)

Minimise
SAIDI

Max. TOTEX/Year =
13 Milllion

200000

I7

15 years (Until
2030)

Minimise
SAIDI

Max. TOTEX/Year =
14 Milllion

200000

I8

15 years (Until
2030)

Minimise
SAIDI

Max. TOTEX/Year =
15 Milllion

200000

I9

15 years (Until
2030)

Minimise
SAIDI

Max. TOTEX/Year =
16 Milllion

200000

92

List of Abbreviations
AM

Asset Management

ARegV

Anreizregulierungsverordnung (Pricing Law for Distribution System Operators)

DSO

Distribution System Operator

EnWG

Energiewirtschaftsgesetz (Background Regulation)

EPRI

Electric Power Research Institute

ETP:SG

European Technology Platform for Smart Grid

EU

European Union

IEEE

Institute of Electrical and Electronics Engineers

ICT

Information and Communication Technology

kV

Kilovolt

kWh

Kilowatt hour

Min

Minutes

PV

Photovoltaics

R&D

Research and Development

SAIDI

System Average Interruption Duration Index

SAIFI

System Average Interruption Frequency Index

SD

System Dynamics

SG

Smart Grid

Yr

Year

93

Research Ethics
The following presents an overview over the standards of research ethics followed by the researcher
during the elaboration of this thesis, influenced by the guidelines of the American Psychological
Association (available at http://www.apa.org/monitor/jan03/principles.aspx).

Expert Guidance
Next to guidance from entellgenio GmbH, the research process has been guided by three
practitioners of Asset Management in DSO's. The participants were informed about the topic,
purpose and likely topics of conversation beforehand, as well that their statement would be used for
a master thesis. Informal consultations were held by phone, after gathering informed consent. Input
by the participants was gathered in written form and acknowledged at a later point by the
participants. The researcher steered the conversation onto specific topics relevant to the research,
while ensuring that all input which was freely given was gathered. A check for any other statements
to be made at the end of an consultation was performed by the researcher. Consent was given by 2
out of 3 participants for both publishing their name and organisation. The third participant was not
available for commenting.
Data and Data Security
The model is a synthetic case study, not representing any DSO in particular. The data for the model
has been aggregated and averaged from several DSO's. Inferences on the identity of those DSO's
from the data can therefore not be taken. Also, the researcher is not aware of the exact choice of
DSO's, thereby preventing indiscretion.

Intellectual Property
A written agreement was formed at the outset of the thesis, concerning just distribution of property
rights between the researcher and entellgenio GmbH. The software in use ("Business Simulation
Framework") remains property of entellgenio after the end of the research process.
All intellectual property which went into the writing process has been listed in the references section.

Role of the researcher

The researcher has been aware of the double role in the issues, representing both the perspective of
DSO's and regulators. Special care was given to reflect both sides equally and fact-based.

94

Reports on Expert Consultations

Consultation Dr. A. Gaul - 12. 06. 2014

Attendants
Dr. A Gaul - Dr. H. Spitzer (HS) - Dominik Jung (DJ)

Topic
General review of modelling approach, worthwhile inquiries, scope choice
Aspects for asset properties
*******
-Depreciation time depends on Regulation. Strong Importance of

tax law
regulation law (ARegV)

-DSO's revceive revenue only for those assets which are still to be depreciated ("active for results")

-Significance for modelling approach: One option: We keep assets in the grid as long as they are
being depreciated in the books (passive approach)

-If active approach: Time frame 10-20 years for transition

Smart Meters

Lifetime: Roughly 10-12 years, similar to telecommunications equipment..

Questionable "how do the benefits justify the higher costs"?

-Possibilities for Technical approach to asset transition

Convert assets when they fail

Convert when assets move into conditio state 4

-Relevant question to answer: Does it make sense to force the transformation (eg. large investment
into an active approach) because we can save costs at a later point in time?
-Dynamically relevant properties of assets (Lower Lifetime, Different Aging behaviour, less
reparability) : Correct, and I would also add "higher initial cost"
-Your approach is very broad. Focus on the transformation and keep the new equilibrium for "further
research"
95

Results for Consultation Dr. Wernekinck - Telephone conference on

26th of June 2014

Attendants
Dr. U. Wernekinck (UW) - Dr. H. Spitzer (HS) - Dominik Jung (DJ)

Topic
Impact of Introduction of Smart metering on Asset Management strategies. Regulatory background.
Properties of Smart meters compared to conventional electricity meters.

General Statements
-Background UW: I have been responsible for metering assets at the DSO branch of RWE Germany
for about 10 years.
-There is little clarity about the final regulatory shape of the Smart Grid rollout. There are only
expectations, but not more. The situation is very unvertain.
-Our experiences with the new assets have been shaped through the rollout project "Mhlheim
zhlt"
-Lower lifetimes in meters are troublesome
-Smart Meters do not have direct influence on grid stability (they are only at the customer's side).
However there may be an indirect effect: When costs are higher, they need to be covered through
the overall budget for grid upkeep and that may affect those parts as well
-The rollout directive (to come) is the central element. Federal Ministery of Economic Affairs is
responsible for this Otherwise no one will start the rollout. It needs to include statements about the

Size of the rollout

Starting date
Potentially: A time until when the transition needs to be finished
Technical details: Thresholds, from which kWh/year a meter needs to be smart

-Also, it needs to be certified by the BSI (Bundesamt fr Sicherheit in der Informationstechnik). This
may be a problem, because

Delays the implementation further / brings disorder to plans

Another technical obstacle: "Steering box", which takes care of regulating energy
consumption etc. (The asset doesnt exist yet and therefore cannot be certified. Conversely,
this hinders setting up the regulation. In a sense a Chicken-Egg-Problem)
96

Comment on the Simulation Approach

-The three dynamically relevant properties you name for assets in general are correct.
-For the electricity meters:

Lifetime
Initial cost
Manpower Requirements

Normal Meter
50 years
30
"set up and forget"

Aging

Over time

Repairability

Can be recalibrated

97

Smart Meter
10 years, susceptible to failure
200-300
Needs
monitoring
and
manpower for implementation,
maintenance, etc.
Abrupt (Electronics)
Probably will need to be
replaced, recalibration not
possible. Plug and play not
possible either.

Results for Consultation 3

Telephone conference on 25. June 2014

Topic: Modelling aspects of Smart Grid rollout

Participants
Participant 3 - Asset Management at German DSO - Dr. Heiko Spitzer - Dominik Jung

General Statements
The discussion has to be centered around secondary technical equipment ("Sekundrtechnische
Einrichtungen"). The term "Secondary technical equipment" encloses the features for measuring,
controlling, counting of parameters including the transmission and computing of relevant
information.
Key Question: Who will own the new asset (and therefore pay the transition). This concerns
especially the assets in the hands of customers, which are relevant to process critical control
commands. Critical control commands are those which ensure grid safety.
Key Question: Where is the Threshold for Necessarity of Smart Metering
The secondary grid will change certainly. This means the size/amount of assets which will increase.
Functionality will not be altered.
Technically: Telecommunication elements are still missing. There is no new technology necessary,
however a choice of appropriate technology necessary. The broad use of those various technologies
is not ensured yet. Also an economic evaluation of those is still missing.

Feedback to Simulation Approach

-Smart Grid substations ("Ortsnetzstationen") will in the end amount to a percentage of 5%
-Size of the rollout may end up smaller than expected. This depends on the national support for
renewables integration (Erneuerbare Energien Gesetz) and on the national and EU-Market design. It
is therefore hard to anticipate. It is likely that the grid expansion will have to happen in waves. We
expect less expansion in the low voltage segment. If so, it will be primary expansion. In the mediumvoltage grid the expansion with smart technology concerns more the rural than the urban grids. In
the high voltage segment the assets are smart already, here it is more about enhancing primary
assets. This is delayed through the public discussion and the inclusin of cables in the high voltage
system. In the highest voltage segment only a handful of measures are required, which are however
subject to public debate.
98

-The assumptions you took about dynamically relevant properties of smart assets are correct (shorter
lifetime, different aging behaviour, decreased reparability)
-Especially lower reliability (= lifetime) of the assets is a big topic. It concerns especially the reliability
and the necessity for maintenance, i.e. putting grid parts on hold for inspection/maintenance or
renewal. Possibly those works may have to happen at night time.
-Assets in the high voltage segment are smart already to some degree. This means all grid nodes
measure U and I, all power switches are remotely controlled and monitored. This has to be however
distinguished from the individual assets which are of course conventional.

99

Software used for Simulation

This work has been done with the software "Business Simulation Framework", which has been
developed by entellgenio GmbH. Business Simulation Framework is a foundational software for
performing asset management simulations based on the System Dynamics methodology (A). Its
practical main applications are in network industries such as electricity or gas utilities.
It allows for holistic analysis and simulation of complex and dynamic systems. Which elements are
included is customisable The software acts as the base element from which customer-specific
additions and modifications can be included, depending on the requirements of a given customer.
Used in this thesis were the standard System Dynamics component, modified for the assumptions
that were taken and the optimisation element.
In this manner, effects of management decisions on the underlying system structure can be
calculated. This is possible over a range of parameters (C). Simulating a given system over time adds
to the understanding of system behaviour(D). For this purpose the software includes a user-friendly
graphic interface which steers the underlying System Dynamics model. Asset management decisions
can be defined by entereing parameters manually (E), or by using the optimisation element to define
parameters.
For judging DSO adaptation to a given scenario, the optimisation feature was used. It allows to define
goals(F) and restrictions as necessary (G). The process of strategic evolution over a given optimisation
can be displayed (H). Through exporting those data towards a spreadsheet, further insights can be
gathered .
Other relevant extensions in real-world applications are the integration with ERP systems of
customers (eg. SAP) and statistical measures for data management of technical assets.

More information can be found at www.entellgenio.de

100

101

102

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