The cost-benefit analysis of an AMI project compares the costs of meters, communications, systems and operation with the benefits it produces: fewer losses, fewer field visits, better collection and better fault handling. Everything is brought to present value and the benefit-cost ratio is calculated. Some regulators set a long horizon, such as 15 years, for the utility's rollout plan.
What the analysis is for
An advanced metering project costs a lot and pays back over years. Before deciding, you have to show with numbers that what it produces exceeds what it costs, and which assumptions support that conclusion.
Regulators in some markets ask the utility for a rollout plan that includes a benefit-cost analysis over a long horizon, identifying the parties, the costs, the benefits and the assumptions. An industry or an owner of several metering points can apply the same logic to its own metering system; if your points are settlement or revenue-metering boundaries, start from the applicable metering code and from the energy meter it already requires.
The analysis does not replace engineering: it takes its results as inputs. First it helps to be clear about what will be installed; see AMI architecture and what smart metering is.
Costs
| Cost | What it includes |
|---|---|
| Meters | Purchase, acceptance tests, storage |
| Installation | Labor, materials, correction of installations where needed |
| Communications | Concentrators, repeaters, modems, backhaul links, carrier fees |
| Central systems | Head-end system, data management, billing integration |
| Security | Cybersecurity controls and information security certification |
| Operation and maintenance | Support, replacement of failed equipment, licenses, network handling |
| Replacement | Changing equipment at the end of its service life within the horizon |
| Change management | Communication to customers, training, handling of complaints |
A common mistake is to include only the purchase of the meter. Communications and central systems, and above all operation over the whole horizon, often weigh as much as the meters.
Benefits
| Benefit | How it is measured |
|---|---|
| Fewer non-technical losses | Energy recovered times its price; estimated with the energy balance before and after |
| Less manual reading | Cost of meter readers and routes that disappear |
| Fewer visits for disconnect and reconnect | Cost of avoided crews; see remote disconnect and reconnect |
| Better collection | Lower receivables thanks to more timely suspension |
| Better fault handling | Less locating time with the «last gasp» notice |
| Fewer billing complaints | Actual readings instead of estimated ones |
| Better grid decisions | Data to size and plan with real curves |
| Benefits for the customer | Information on their consumption, ability to manage their demand; with self-generation, separating what is imported from what is exported |
The benefits must be justified with data from your own network: how much energy is lost today, how many visits are made, how much each one costs. Taking figures from another country or another utility without adjusting them leads to conclusions that do not hold up.
How it is calculated
The calculation uses three ideas from financial mathematics.
- Cash flow per year. For each year of the horizon the costs and benefits are noted.
- Present value. A dollar ten years from now is worth less than a dollar today. Each flow is divided by (1 + discount rate) raised to the year, to bring it to today’s value.
- Indicators.
- Net present value (NPV): present benefits minus present costs. If it is positive, the project produces more than it costs.
- Benefit-cost ratio: present benefits divided by present costs. Greater than one is favorable.
An example with made-up figures only to show the method, with a 10 % discount rate and a short three-year horizon:
| Year | Costs | Benefits | Costs at present value | Benefits at present value |
|---|---|---|---|---|
| 0 | 100 | 0 | 100.0 | 0.0 |
| 1 | 20 | 50 | 18.2 | 45.5 |
| 2 | 20 | 60 | 16.5 | 49.6 |
| 3 | 20 | 70 | 15.0 | 52.6 |
| Total | 149.7 | 147.7 |
The benefit-cost ratio is 147.7 divided by 149.7, that is 0.99, and the NPV is −2.0. If year 4 repeats the flow of year 3, the project becomes favorable. This kind of result shows why the horizon matters: the cost is concentrated at the start and the benefits come later.
- Define the scope. Which customers, which meters, which systems
- Estimate costs per year. Includes operation and replacement
- Estimate benefits per year. With data from your own network
- Set the discount rate. And justify it
- Calculate NPV and benefit-cost ratio. Over the full horizon
- Test the assumptions. Vary recovered losses, costs and timing
- Present the result. With visible assumptions and who pays and who receives
Prioritizing where to start
Not all customers give the same benefit. A rollout plan usually prioritizes customer segments using indicators such as the duration and frequency of interruptions (SAIDI and SAIFI) and consumption. The logic is financial: where each meter moves more energy, the benefit per meter is larger.
Who pays
In many markets regulation limits what can be recovered through the tariff. For the technical analysis it is enough to know that the utility’s revenue stream may be bounded and that the analysis must show whether the project fits within that limit.
Frequent mistakes
- Benefits without support. A figure for recovered losses with no basis in the real balance of the circuit is not an assumption, it is wishful thinking.
- Incomplete costs. Leaving out operation, replacement or cybersecurity inflates the benefit-cost ratio.
- Unjustified discount rate. Small variations change the result; several must be tested.
- Counting the same benefit twice. Recovered energy can appear as fewer losses and as higher collection.
- Not testing scenarios. A single scenario hides the risk. Calculate a pessimistic one, a base one and an optimistic one.
To go further, see AMI communications: PLC, RF mesh and cellular, remote reading, disconnect and reconnect, the causes of non-technical losses and how to reduce them, the energy balance of a distribution network and how to implement a smart metering project.
How Tiza Group can help
The costs of communications, integration and security of a metering system come from prior engineering. At Tiza Group we do it: communications engineering and grid connection studies, remotely and worldwide. If you are going to evaluate a metering system for your industry or plant, contact us and we will quote.
Related guides
- Smart metering (AMI): what it is and how it works
- AMI architecture: meter, concentrator and central system
- AMI communications: PLC, RF mesh and cellular
- Energy meter and multifunction meter
References
- Local regulation and utility requirements: analysis horizon, customer segmentation and cost recovery limits vary by market.
Frequently asked questions
What horizon is used for the cost-benefit analysis of AMI?
It depends on the market. Some regulators require a long horizon, such as 15 years, for the benefit-cost analysis of the rollout plan, identifying the parties, the costs, the benefits and the assumptions. Check the format your regulator or utility requires.
What does a benefit-cost ratio greater than one mean?
That the present value of the benefits exceeds the present value of the costs. With a value below one, the project costs more than it produces, measured with those assumptions. The result depends entirely on the assumptions, so they must be shown and you must test how the result changes when they vary.
Are the benefits of AMI only savings for the utility?
No. There are benefits for the utility, such as less manual reading and fewer losses, but also for the customer, such as billing on actual readings and seeing their consumption, and for the system, such as better data for operation. A serious analysis states who receives each benefit and who pays each cost.