Utility Financial Planning: Designing the Best AMI Business Case

By Nicole Griffin and Kara Truschel

Advanced metering infrastructure (AMI) technology can be thought of as the foundation of a smart grid. But good utility managers know that a sound business case must be at the root of any utility capital budget decision, and decision to proceed with implementation of an AMI program often rests with the results of a cost/ benefit analysis. It is important to understand the financial implications of the project in order to communicate the expected value to stakeholders. In this article, we will explore the basic considerations in a cost/benefit analysis and key takeaways from over 10 years of AMI deployment project experience.

Cost Estimation

Estimates for the cost in purchasing an AMI system can be broken down into up-front capital costs and operational costs. Capital costs for AMI will typically include:

• Hardware: Meters, endpoints, AMI Network equipment, servers, retrofit parts, etc.
• Software: AMI Head-end System, Meter Data Management Systems, Pre-pay, Customer Web-Portal, Analytics software, etc.
• Professional services: Meter installation services, project management, training, etc.

Operational costs include ongoing fees and expenses to run an AMI program, such as: AMI program salaried or contract employees, Software-as-a-Service (SaaS) fees, and network operations & maintenance fees. The cost of support staff is often overlooked or underrepresented. The automation of meter reads will reduce dedicated staff time for some functions, including meter reading and billing; yet, to fully realize all expected benefits of an AMI system, there is an uptake in the need to manage more complex data, reports and devices in the field and across many utility departments.

Many system costs will vary based on IT preferences and selection of software and hardware. On-premise solutions have higher capital costs due to the need to purchase hardware, while hosted/SaaS solutions typically have higher ongoing operational fees. There is a range of IT options available, depending on the vendor and availability of utility resources. In the most extensive support contracts, a contractor can manage all day-to-day aspects of the system.

Benefits Estimation

Utilities miss big benefits if they view AMI as an advantage for meter reading only. When designed and integrated to other utility solutions, AMI technology can improve planning for CIP, facilitate reductions in outages, and enhance customer relations. Common benefit areas for AMI technology include:

• Meter reading and re-reads – reduced truck rolls and staff time for manual reads
• Billing exception handling – reduced staff time for billing exceptions and estimations
• Customer inquiries – self-serve tools to assist customers with near-real-time alerts, improved understanding of consumption
• Move-in/move-out – ability to perform remote disconnect and obtain final read
• Metering service orders – eliminate door tags and physical visits including non-pay disconnects, and ability to remotely interrogate meters to troubleshoot
• Outage management – decreased downtime due to near-real-time outage alerts
• Theft identification – near-real-time theft/tamper alerts
• Asset management – improved efficiency in electric distribution systems, voltage optimization
• Capital planning – improved system planning with transformer load analysis
• Meter replacement budget – offsets any annual meter replacement costs during the business case cycle
• Meter accuracy – replacement of aging, inaccurate meters

Business Case Results

Once all costs and benefits are defined in the business case model, a utility manager can analyze the results. Some standard metrics used by utilities in evaluation of the business case may include:

• Net Present Value is the cumulative benefits minus the costs of a project, while accounting for the time value of money. A positive NPV means that the project is a good investment for the Utility.
• Internal Rate of Return equals the percentage rate by which the net benefits are discounted until the point in time that they equal the initial costs. Some organizations may have minimum IRR for a project to be initiated.
• Payback Period describes the length of time it takes for the investment to show a profit (often in months or years).
• Return on Investment (ROI) is calculated by looking at total profit divided by the total investment over a specified period.

The true value of an AMI business case may be found in understanding all of the offerings that are available, and assessing the technologies and implementation strategies that are most viable given the business context at the Utility. Other financial metrics and model assumptions (including discount rate) should be determined by those with intimate knowledge of Utility project financing.

Key Takeaways from Industry Experiences

Ultimately, taking the time to build out a better business case allows utilities to prioritize the solutions and deployment schedules that will have the highest ROI. In summary, utilities should take a rigorous approach to identify costs and benefits in order to appropriately decide which AMI program(s) to pursue and when. Consider the following observations and key takeaways from recent AMI business cases:

• The cost assumptions should be both holistic (all-inclusive) and conservative (no overlapping benefits) in order to appropriately account for all program benefits.
• It is common for a project lifecycle to be considered over a 20-year period to align with most vendor warranty periods. Alternative scenarios can consider the effects of different deployment paces and timing of expected benefits.
• The most robust financial models will allow a utility to compare several scenarios with a simple toggle to turn the programs on or off and automatically recalculate the financial metrics.
• Often ignored for municipal utilities are financial savings benefits for City-owned departments or facilities. For example, providing City accounts with access to electric consumption and power quality information can help drive down costs. Remember that this is easy to identify and estimate financial benefits, but there are social and environmental benefits to many of these technologies as well. Quantify these whenever possible.
• The industry trends seem to indicate that most utilities are moving towards a preference for hosted/SaaS solutions. Ultimately, the decision process should consider IT strategic plans, budget and resource availability at the Utility.

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