Energy, Utilities and Chemicals the way we see it

The Capgemini SmartMeter Valuation Model

How to measure the value of implementing smartmeters for Distributed Network Operators

� Minimize network management costswhile maintaining the quality andsecurity of supply and service

� Promote Demand Response—demand side management and easierinsertion of micro-generation.

Furthermore, the EU Directive onEnergy End-Use Efficiency and EnergyServices requires new solutions forproviding customers with accuratedata (e.g. bills based on real consumption,information on consumption profiles,historical data, etc.).

Historically, the compliance-basedindustry in which utilities operate,have not offered enough incentive forconsumers, regulators or, for thatmatter, to utilities themselves to takethe difficult steps necessary for makingelectrical energy markets operateefficiently. So, it is no doubt that allthese ambitious political objectivesand regulations are “shaking up theindustry” and require radical changesin utility infrastructures andconsumption (on both industrial andresidential levels).

Smart meters have the potentialto contribute towards thepolitical goalsSince the recent inception of electricityderegulation and market drivenpricing around the world, government

In March 2007, the European UnionMinisters asked Member States tocommit to the recently developed3x20 objectives by 2020 (reduceenergy consumption and GreenhouseGas (GHG) emissions, and increaseuse of renewable energy sources). Theunderlying assumption is, of course,an improved security of energy (andelectricity) supplies as well as agrowing European economy withsustained tertiary and industrialemployment.

Developments within the utilityindustry and especially in electricityinfrastructures are considered asimperative in the contribution towardsmeeting the 3x20 EU objectives:

� Energy savings: Slow down electricitygrowth (+2% CAGR for 2002-2005)

� GHG emissions: Electricitygeneration produces 56% of CO2emissions (ETS – 2006)

� Renewable energy sources: By 2020,2/3rd of new generation power willrely on non-schedulable sources(resulting in challenges regardingexisting network infrastructure).

In line with this, national regulatorsgenerally want to:

� Improve the functioning of theelectricity market, in particular, inthe interest of consumers

There is an increasing pressureon the Energy & Utility sectorthroughout Europe in regards toembracing, contributingtowards and meeting politicalgoals and visions.

1

Figure 1: Legal framework and main orientations of smart metering experience inselected countries

Countries Legal framework

§ None (notmandated by law)Sweden

§ Draft bill ofFebruary 2006The Netherlands

§ Deliberation292/06Italy

§ No specificlegislationGermany

§ No specificlegislationUnited Kingdom

§ Energy Action PlanI & IICalifornia

§ Directive (conversionof meters)

§ Deployment plan§ Energy conservation

responsibility plan

Ontario

Institution involved

§ Parliament

§ Ministry of Economy

§ AEEG (Regulator)

§ VDN (Association ofElectrical operators)

§ OFGEM

§ CPUC (Regulator)

§ Government§ OEB (Regulator)§ Parliament

Main orientation

§ June 03: monthly billing on basis of actual datafrom July ‘09

§ DNOs to inform cust. of power outage & to indemnify them§ Deployment to all cust. needs to complete prior to July ‘09§ All LV customers will have smart meters incl. communi-

cation and connection to AMM on commercial option§ Smart meters mandatory for all new electricity contracts

§ Directives for the installation of smart meters on the LVelectricity network

§ Smart metering working groups that created the eHZprogram

§ Business case demonstrating the absence of economicallyviable solutions

§ All DNOs required to submit business cases§ Financial aid for deployment§ Goal is completion of a 20 mill. deployment prior to end 2012

§ Schedule for conversion of LV meters (2007-2010)§ Deployment of 5 mill. meters prior to 2011§ Creation of a smart meter entity to drive integration of the

smart meters and data collection systems

The Capgemini Smart Meter Valuation Model 2

Energy, Utilities and Chemicals the way we see it

regulators have been looking for waysto match consumption with generation.

Traditional electrical meters onlymeasure total consumption, and assuch provide no information of whenthe energy was consumed.

Smart meters, on the other hand, willchange this and provide newopportunities which will improve theway electricity is distributed andconsumed. A smart meter systemallows two-way communicationbetween the distributor, energysuppliers, energy consumers, and theenergy meter.

When looking beyond the meter-to-cash process, smart meters have thepotential to generate value for allparticipants in the electrical energymarket (including generators, systemoperators, DNOs, retailers, consumersand governmental institutions).

This potential will be fully realized byapplying a wider strategic mindset tosmart meter programs, andconsidering the investment as thefoundation of smart grid or intelligentnetwork initiatives.

All in all, the implementation of smartmeters has the potential to contributemassively towards the EU 3x20political objectives. However, eventhough regulatory bodies often agreeon general objectives for smartmetering, there are no two similaranswers to incentives and legalframeworks.

The question of who should payfor smart meter investments is acentral theme in the debatesbetween governmental bodies,market players, energyassociations and mediaWhen governments realize that thesetypes of investments are elementaryfor meeting political objectives and forthe functioning and security of thefuture energy infrastructure, criticaldecisions are sometimes made on alegislative level which result in massiveimpact on key stakeholders.

However, the discussion is notstraightforward, and the business caseis by no means trivial:

� The owners of the meters aretypically DNOs who are also itsnatural investors, though otherbeneficiaries of the smart metersinclude generators, system operators,

consumers, retail companies and thegovernment

� The complexity is multipliedbecause the potential value of thesmart meters is not necessarily beingpaid back to the investor, butunequally distributed between otherbeneficiaries

� It is complex to measure the ROI,include possible new meterfunctionalities/potential benefits,manage various data transmissionsystems, integrate with existingsystems as well as maintain smartmeters

� In the traditional ownership model,all the utility functions had a singleowner, and benefits that crossedmultiple business segments (e.g.distribution, transmission, andgeneration for electricity) could be paidfor by the single owner of the utility

� As the utility companies get partlyand fully unbundled retail anddistribution businesses, it becomesunclear how the DNOs can justifytheir investments in smart meters

� How much of the cost has to comefrom internal savings? How much ofthe cost is considered new capital ornew Operations and Maintenance(O&M)? In the end, of course, thecustomer will ultimately pay the costas they always do.

Unfortunately, the discussions aboutwho should pay often seem to boildown to only one or two parties andthe potential costs and benefits theyface in the case of a smart meter roll out.

While it might be a necessarydiscussion to have, it has its pitfallswhen limited to only few parties.

The first pitfall is that if one party isgoing to pay the whole cost, they maychoose a cheaper variant with fewerbenefits for the whole value chain thanif everyone either shared the coststogether or the costs were allocatedsuch that the installing party got paiddirectly by the customer for the addedvalue that they hopefully willultimately benefit from.

Figure 2: An example of how cost and benefits are varying between stakeholdersdepending on where in the value chain they belong.

+ Control ofconsumption

+ Pre-payment: unpaid bills+ Peak smoothing, Sourcing+ Reduction of Technical Losses

+ Customer presencenot necessary

+ Reduction of NT losses+ Reduction of NT Losses

+ Service Customer,Malfunctions

+ Customer Service, Part. Op.+ Malfunctions andrecommissioning + Change of

supplier easier

+ Customer Service, Reading+ Particular operations

+ CO2Operatingbenefits

+ Network Optimisation+ GenerationInvestmentsavoided

- Operations IS- Maintenance IS- Concentrators, Communication- Concentrators, Maintenance

- Operations, Services- Meters, Communication- Operations IS- Meters, Maintenance

Operating costs

- Costs incurredCosts incurred- Metering Information Systems- Concentrators, Installation- Concentrator, Equipment- Meters, Customer Service- Meters, Installation

- IS frontend- Meters, Equipment

Investments

Generation DNOs Energy suppliers Customers

3

The second pitfall is that if too muchcost savings are pushed on to theinstalling party, they may choose tostall the installation as long as possibleor may end up with an incompletesystem that does not really offer all thebenefits—i.e. the meters are installedbut the systems and staffing requiredto support the operations may getshort changed.

On this type of stakeholder discussion“shortlist,” DNOs are likely to befound due to their natural or logicalnetwork equipment ownershipposition. These DNOs are often facingchallenges in defending themselvesagainst external pressures dictatingthat the DNO alone should pay for theentire smart meter investment.

A clear and transparentbusiness case is fundamentalfor decision making andmaximizing value on theinvestmentIn a situation like this, where there aredisputes regarding the distribution ofcosts and benefits and who shouldpay, consensus-driven development ofa detailed business case becomes anessential tool for clarification,negotiation and decision-making.

In instances where a decision to rollout smart meters has already beenmade (e.g. through legislation), thedevelopment of a detailed businesscase can still add significant value, as itwill help the relevant stakeholders inshowing them how, where and whento capitalize on the investment, bothin the short term and long term, andthereby maximize its value.

Capgemini’s smart meterbusiness case approachTo match the challenges DNOs arefacing today, Capgemini has devised aunique smart meter business caseapproach. This approach leverages thevast knowledge base that Capgeminihas developed from experience inserving the business consulting,information technology andoutsourcing needs of more than 75%of the top 20 private and publicutilities in the world.

As the No. 1 consulting servicesprovider in the worldwide utilitiessector, and the No. 1 in the WesternEuropean utilities market for ITservices, Capgemini paves the waywith its innovative approach thatcovers:

1. Understanding of vision andstrategic context

2. Understanding of technical smartmeter setup

3. Business case setup

4. Quantification of costs and benefits

5. Business case calculation

6. Presentation to the decisionmakers.

This approach is built on theCapgemini business case framework,the Smart Meter Valuation Model, aswell as Capgemini’s benchmark catalogbase that consists of experiencegathered from more than 30international utilities running smartmeter installations.

Understand and translate thestrategic context into a set ofmeasurable goalsThe Smart Meter Valuation Model willprovide the DNOs with answers to thefollowing questions:

� Why should we implement a smartmeter system?

� Can the investment be justified?

� What are the real benefits?

� How should the benefits beprioritized?

� What are the costs to get thebenefits?

� How strong is the business case?

� What are the risk scenarios?

Success is based on a clear smartmeter vision that drives purpose,performance, energy and commitment.Having a powerful vision is key toinspire action.

Without it, any business case willdissolve into a list of confusing andconflicting statements, leading in awrong direction or nowhere at all.

Executives must translate the DNO’svision into tangible goals. Building abusiness case, and aligning individualand team targets will createcommitment and ensure focus on theachievement of smart meter objectives,and ultimately the DNO’s vision.

Business cases need to be tailored tothe DNO’s situation—one size does notfit all. The DNO’s current performancedictates what the numbers should be,and its appetite for change dictates thescope of the project.

One needs to understand the DNO’sbusiness plans and strategy—i.e. whatare the strategic reasons forimplementing a smart meter system, asopposed to the strategic implicationsof doing nothing?

The DNO has to define and agree onthe business rationale forimplementing a smart meter system.In doing so DNOs have to scopehypotheses (assumptions on changedrivers, business issues and solutiondirections) as a starting point.Furthermore the DNOs mustformulate "Why the smart meterprogram must be undertaken" in aqualitative statement, and try to findout about deeper and less visiblereasons for the program.

Capgemini has worked with a numberof DNOs around the world who haveinstalled smart meters and hasanalyzed the value that has beenactually harvested in the real world.Smart meters can have an impact onmore than 80 business areas, includingcustomer service handling, billing,construction and capital expenses,outage management, forecasting andsettlement, and vegetationmanagement.

The technological scope isclosely liked with the Return ofInvestmentThe benefit opportunities are fullyaligned with the technologicalambition and mindset.

The potential of a smart meter systemwill be fully realized when applying a

The Capgemini Smart Meter Valuation Model 4

Energy, Utilities and Chemicals the way we see it

wider strategic mindset to smart meterprograms, by considering theinvestment as the foundation of asmart grid or intelligent networkinitiative.

It is important to analyze thetechnological roadmap to understandthat technology and Return onInvestment are closely aligned.

New possible meter functionalitieshave related potential benefits in thesame way as various data transmissionsystems and integration with existingsystems.

Following is an example that indicateshow the benefit areas are linked to thetechnological setup, more specificallythe frequency of metering data.

Setting the functionality requirementfor smart meter systems is basicallyabout mapping the larger smart metervendors’ standard functionality to thestrategic intent of the DNO.

Following is a set of typical smartmeter functionality elements that theDNO has to define when choosing thetechnological requirements:

� Meter reading (frequency of loadcurve)

� Data sampling (frequency of datasampling)

� Advanced meter management

� Communication with externaldevices

� Acquisition and storage

� Meter resolution

� Dual and multi-utility meters

� Displays

� Communication architecture

� Back-end integration

� Web access

� Need-to-have and futurefunctionalities

� Market messaging.

In the business case setup, theDNO has to set the key basicassumptions and delimitationsA business case is a financialjustification. Therefore, the financialkey player in the decision team shouldagree with the setup and approach ofthe business case. This person is thefinancial owner (typically the CFO,Financial Director or Controller).

The financial owner of the businesscase has to agree on the financialframework and parameters of thebusiness case, which includes:

� The business case approach (cashflow based, before or after tax)

� The investment measure likepayback period, NPV and IRR

� Acceptable values or minimalrequirements for the selectedinvestment measures

� The evaluation period to take intoaccount.

� The cost of capital for discounting (itis best to get the DNO’s point of viewon the cost of money, as calculatingthe WACC is not straightforward)

� What to capitalize and how tocalculate stranded costs.

� The discounting interval (e.g. yearly,

quarterly, etc.) and what to use as“period zero”

� The preferred presentation format forthe business case

� Agree on how to present benefits,especially for sensitive benefits suchas labor cost reduction.

Furthermore, it is important to planhow to manage the expectation thatnon-financial benefits will also be partof the business case. In addition, it iscritical to consider any policy issuessuch as In-house versus outsourcingand lease versus ownership.

Based on the business case setup—including the technologicalrequirements—it should be possible toset the basic key assumptions anddelimitations:

Examples of basic assumptions:

� The business case is made only fromthe DNO’s perspective

� General infrastructure costs areassociated with DNOs’ activities aswell as shared services (includingbilling services)

� The business case is calculated for ascenario of 500,000 metering points

� It is based on a 3-level solutionarchitecture (includingconcentrators)

� High population density (90% ofmeters are placed in urban areas)

� Costs include installation,maintenance and running costs

� Benefits include only runningbenefits

� Costs and benefits period is 20 years

� Deployment period is 3 years

� The main investment is made duringthe first 3 years

� Full costs and benefits are realizedafter smart meters are installed.

Capgemini’s Smart Meter ValuationModel includes a list of assumptionsthat can be used as a framework foridentification and validation of aDNO’s most typical cost and benefitassumptions.

Figure 3: The value of meter data

ODS/MDMS

Month (s)

Maintenance PlanningDesign StandardsRate CasesTariff DesignLong-Term ForecastingIEEE Indices

BillingMeter ReadingSimulationGIS - Connectivity/LocationsCollectionsAsset Loading

Wholesale SettlementTOU BillingVegetation ManagementLoad SchedulingCurtailment PlanningAutomatic ShutoffDispatchTheftReal-Time Pricing

Closing VerificationRTO Forecasting

Service VerificationPower QualityAsset MonitoringSite/Line StatusRemote DisconnectOn Demand/Call Center

System SecurityOutageRestorationSystem Protection

Week (s)

Day (s)

Hours

10s ofMinutes

Minutes

Seconds

EventManager

5

The Smart Meter Valuation Model isbased on recent smart meter businesscase projects carried out by Capgeminiin US, France, Germany and Denmark.

The benefit logic is creating thelink between the costs, benefitsand components of the solutionIdentifying and quantifying the costand benefits is the heart of developingthe business case. In this activity, thebenefits logic is developed and thecost and benefit areas are identifiedand quantified. The quantification is infact performed by the DNO’s ownstaff. Capgemini’s task is to bring thesepeople in a position where they areable to come up with numbers.

In order to develop a business casewith commitment to act from theDNO, leadership involvement andownership is essential. Thiscollaboration is the real challenge ofsmart meter business casedevelopment.

Creating a benefit logic diagramestablishes the logical links betweencost, benefit areas and components ofthe solution.

By analyzing the benefits logic, anumber of cost and benefit areas areidentified (typically between 10 and 15).

The key design principle is to look forrelative independency between thebenefit areas. “Independence” impliesthat a benefit area can be implementedwithout much interference from otherbenefit areas. Benefit areas arerepresented in the benefit logic as agroup of drivers.

These areas will be the point of focuswhen developing the business casebecause of their substantial financialimpact.

The DNO should agree on the benefitand cost areas to make sure that thefocus is correct.

For each of the cost and benefit areas,the DNO has to agree and providedata for the underlying assumptions.

As illustrated by the benefit logic, thefinal quantification of the financialimpact is calculated by summarizingall the cost and benefit areas.

Many different consulting techniquesare used to assist the DNO in gainingconfidence in the numbers. Thesetechniques include workshops,benchmarks, best practices, analysis,desk research, simulation, referencevisits and interviews.

The financial model iscalculated in the CapgeminiSmart Meter Valuation ModelThe Capgemini Smart Meter ValuationModel contains the assumptions,benefit and cost calculations andanalysis sheets. In this way, it containsall assumptions, their effect on thecash flows and their ultimate effect onNPV, IRR and Payback Period.

Furthermore, the Capgemini SmartMeter Valuation Model includessensitivity scenarios that can bedeveloped for three purposes:

1. To evaluate different solutions: Ascenario analysis can provide abetter insight into the economicdifference of the different solutionalternatives (Will the extra benefits

of a more powerful solutionoutweigh the extra costs?). Thescenario analysis will help thedesigners in taking design decisionsand crafting the smart metersolution.

2. To evaluate different ways toimplement a smart meter solution:A given smart meter solution canbe implemented in many differentways; for instance, quick, with a lotof disturbance and risks but withearly benefits, or slower, less risky,but with the benefits accrued later.A scenario analysis can bring in theeconomic argument in thisconsideration.

3. To perform risk analysis: Potentialrisks are typically identified by theDNO’s own staff in a workshop.Scenario analysis can then beapplied to understand theeconomic impact of the differentrisks; for e.g. investment cost,running cost and benefit risks.

4. Smart meter lifetime sensitivity:A shorter lifetime period of smartmeters are reflected in a shorterinvestment horizon and acorrespondingly shorter annuitypayment period. The impact ofdifferent meter lifetime periods ismodeled in the business case.

Figure 4: Capgemini’s Smart Meter Valuation Model is built on a benefit logiccomposed of cost and benefit elements that are typical for a European DNO

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Benefit elements

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Cost elements Result

Financial impact for DNO

Costs

Benefits

Investment costs

Running costs

Network Optimization andTechnical Losses

Call Centre

Field Service Management

Customer Meter Reading

Material costs

Installation costs

Installation training costs

Information system costs

Stranded cost of meters

Customer service costs

Maintenance costs

Data transfer costs

Running benefits

The result of the business case iscalculated per meter as well as ona total project perspective

The results are displayed innominal as well as presentvalue of cash flows

Customer service costs

The Capgemini Smart Meter Valuation Model 6

Energy, Utilities and Chemicals the way we see it

The outcome of the analysis is fedback to the design team, to ensure thatthe solution is adjusted to mitigate therisks.

The target group for the smartmeter business case is typicallythe DNO’s managementThe main purpose of a smart meterbusiness case is to support a decisionabout whether or not to invest in asmart meter solution, as well as how,when and where to capitalize on theinvestment.

This decision is typically taken by theDNO’s management team, who willalso be the key audience for the finalpresentation.

The smart meter business casecan also be used as more thanjust a financial justification forthe DNOThis discussion has focused on thebusiness case from a DNO perspectiveonly. It has been used to describe howa DNO can develop a smart meterbusiness case and thus identify thecosts and benefits related to theinvestment. This gives the DNO a

good understanding of how tomaximize the value of the investment,which is vital for the DNO both beforeand after a decision to invest in smartmeters has been made.

The business case represents morethan just a financial justification; it isan essential negotiation, decision-making and communication toolwhich will increase and enablestrategic understanding of a smartmeter investment.

In order to bring the smart meterbusiness case to a higher value level,and increase the strategic dimension ofit even further, more stakeholders inthe utility value chain should beincluded in the process.

This will mean that the actualdistribution of benefits throughout thevalue chain will become moretransparent, and the costs mighttherefore be easier to allocate fairlybetween the stakeholders. In addition,it might become easier to understand,and more motivating to try to realizethe true strategic benefit potential ofan intelligent utility infrastructure.

There are examples of theoreticalsmart grid business cases whereattempts are made to estimate the fullpotential of intelligent infrastructures(including, for example, long termsocial benefits). These types of casescurrently exist on a theoretical level;however, the more stakeholders onecan actively include and cooperatewith in developing a smartmeter/smart grid business case, thebetter are the chances of realizing thefull potential of these technologies.

Figure 5: Examples of smart metersensitivity analysis

Investment Cost Sensitivity

Assumption-400

-300

-200

-100

0

-240 -220 -200 -180 -160

Investment Cost per meter (€)

Benefit Sensitivity

Assumption-300

-200

-100

0

8 9 10 11 12

Benefits per meter (€)

Figure 6: Percentages based on real savings by implementing fully integrated smartmeter system

Generation Distribution Retail Customers SocietyTransmission

Standards and construction (15-20%)

Settlement (2-4%)

Billing (2-7%)

System control (4-11%)

Asset management (4-19%)

Tariffs and regulations (1-4%)

Outage and restoration (3-8%)

Vegetation management (3-7%)

Demand management (2-22%)

Load forecasting (9-14%)

Metering (2-4%)

Safety (2-5%)

Field service management (3-7%)

Collection and theft (15-25%)

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Gord ReynoldsPractice LeaderSmart Energy Servicesgord.reynolds@capgemini.com+1 416.732.2200