Joint Research Centre - European Commission

The European Commission's in-house science service
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Cover of the report

JRC Reference report: Guidelines for conducting a cost-benefit analysis of Smart Grid projects© EU, 2012

How to analyse the costs and benefits of smart grid projects


The JRC has released a set of guidelines for conducting cost-benefit analysis (CBA) of smart grid projects. The report extends to smart grids the recent JRC work on guidelines for CBA of smart metering deployment, which served as a technical basis for the European Commission (EC) Recommendation on smart metering deployment, adopted in March 2012.

The study serves as key input to the definition of an eligibility assessment framework for "common interest" smart grids projects, according to the provisions of the EC proposal for a regulation on guidelines for trans-European energy infrastructure.

The proposed approach to the cost-benefit analysis comprises three main parts:

  • the definition of boundary conditions (e.g. demand growth forecast, local grid characteristics) and of implementation choices (e.g. roll-out period, chosen functionalities)
  • the identification of costs and benefits.
  • a sensitivity analysis of the CBA outcome to variations in key variables/parameters (e.g. discount rate, peak load transfer).

To this end, the report aims to provide:

  • insights to choose key parameters
  • a systematic approach to link deployed assets with benefits
  • formulae to monetise benefits
  • an indication of the most relevant cost categories.

The study also provides guidance on the identification of externalities and social impacts (e.g. consumer inclusion, competitiveness) that can result from the implementation of smart grid projects but that cannot be easily monetised and factored into the cost-benefit computation.

A European smart grid project (InovGrid, led by the Portuguese distribution operator, EDP Distribuição) has been used as a case study to fine-tune and illustrate the proposed CBA approach.

Background information

Smart Grids are a key component of the European strategy towards a low-carbon energy future. According to the International Energy Agency (IEA), Europe requires investments of €1.5 trillion from 2007 to 2030 for the renewal of the electrical system from generation to transmission and distribution. A fair allocation of short-term costs and long-term benefits among different players is a precondition for reducing uncertainties and incentivising investments. This calls for a common methodological approach to estimate the costs and benefits of smart grid projects.

The European directive on the internal market in Electricity (2009) encourages Member States to deploy smart grids and smart metering systems. As mentioned in the text, such deployment might be subject to long-term cost-benefit analysis.

The recent EC Communication on smart grids (2011) explicitly stated that the Commission intended to come up with guidelines on the CBA of smart grids and smart metering deployment to be used by the EU Member States