Ultility Metering - MyConsultingCoach
Case

Case prompt

The Government of the Republic of Ireland is considering a combined project to fit smart meters for both water and electricity nationwide in a single project spanning both these utilities.  Historically, tap water has been free to citizens in the Republic of Ireland. However, in recent years, the Irish Government have experimented with some water charges and are now planning to introduce full volume-of-use billing for water in the same way electricity is charged for.


Utility providers across many nations have been moving towards usage of modern "smart meters" in recent years, and the Irish Government is interested in potentially moving strait to this most advanced form of metering for its water provision. This will allow Irish Water to more accurately plan around fluctuations in supply and demand, as well as to more accurately locate leaks by being able to track water throughout the system. Billing will also be fully automated. All of this combined is expected to lead to significant cost savings.


The electricity sector in the Republic of Ireland is privatised, but the government have also been looking at partnering with energy companies to roll out smart metering for electricity. The Government will establish and maintain the metering network, with this financed by the electricity providers. As in many other countries, Ireland has struggled to keep up with rapidly growing demand for electricity, especially when combined with quickly changing usage patterns, making it even more difficult to match generation with consumer needs. This is especially problematic in the case of electricity, as it cannot be easily stored between generation and usage.


The Government have asked us to assess the viability of going forward with both water metering and electric metering as a combined project, sharing infrastructure. Political commitments around government spending and the requirements of the energy companies in providing finance mean that any metering project which is undertaken should pay for itself and begin to generate profit within a decade. Our job will be to establish whether this is feasible and provide recommendations for next steps.



Detailed solution

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Identifying the Problem

The candidate should be asked:

- Do you understand the case prompt?

- Do you understand what smart meters are?

- What equipment and infrastructure will be required to operate smart metering?

The function of these questions is to make sure the candidate has the knowledge required to engage with the rest of the case. As such, the third question above will only be applicable if the candidate already understands the basics how metering technology works. If the candidate lacks this knowledge, they should be helped to understand that smart metering will require a communications infrastructure in order to relay data back to the utility providers, as well as an IT system to receive and interpret that data.

Structure the Problem

The candidate should be asked how they will plan a feasibility analysis for the nationwide implementation of this water and electricity smart-metering in the Republic of Ireland.

The candidate should ask for additional information where necessary.


The plan should include an initial estimation of the number of meters of each type required, analysis of the relevant costs and sources of cost savings and additional revenues deriving from smart metering. Finally, this should lead to assessment of the feasibility of the project and recommendations going forward.


Exhibit one should be shared with the candidate if they are having any problems coming up with their own plan

Magnitude of the Project

The candidate should begin by working out the number of meters which will be required to account for all the domestic dwellings and business premises across the country. They will need to make reasonable assumptions to arrive at an answer.


Assume that the number of domestic dwellings requiring meters will be equal to number of households.

Assume that the population of Ireland is 5m (the actual value is ~4.8m)

Assume that the average Irish household has two members. This is a reasonable average across families and single occupant households.

Number of households is therefore ~2.5m


Number of business premises can be estimated as a function of population.

With an agrarian economy and a lot of other smaller businesses, as can assume that the number of business premises will be 40% of the population.

5 x 0.4 = 2m business premises.


One electricity and one water meter is required per domestic dwelling or business premises.

Therefore, we require 2.5 + 2 = 4.5m each of water and electricity meters.

This is 4.5 x 2 = 9m meters in total.


Note that there are other reasonable methods for making these same estimations. The interviewer should lead the candidate to the same results regardless of the specific route they take.

Costs

Knowing the magnitude of the project, we are now in a position to analyse the costs associated with it.


First, the candidate should break down the various Capex and Opex costs associated with the project. Then they should calculate the relevant values.


Capital Expenditure (Capex)

- Meters

- Telecommunications infrastructure

- IT systems


Operating Expenditure (Opex)

- Maintenance

The candidate should now begin the process of calculating the values associated with these costs. The following data can be shared with the candidate upon their request:


Capital Expenditure

- Water meter unit price = €60
- Electricity meter unit price = €15
- Communications infrastructure = €6 per domestic dwelling/business premises
- IT system cost = €2 per domestic dwelling/business premises
- Installation cost = 20% of total capital expenditure


Operating Expenditure (per annum)

- Meter maintenance =  €0.05 per month for each meter
- Communication maintenance =  €0.10 per month per domestic dwelling/business premises
- IT maintenance =  15% of initial IT capex per annum



The candidate should be assessed on up to three calculations before providing the information in Exhibit 2.


Paying for the meters

The candidate should consider some of the ways in which the smart meters might pay for themselves. These might be in terms of cost savings or additional revenue which might be generated via use of the meters.


Cost Savings

- Staff do not need to be employed to read meters at premises.
- Automation of the billing process also saves on staffing and running offices.
- For electricity in particular, total generation capacity and the fraction of that capacity online at any one time is governed by better data on the size of peaks in demand and when they occur will allow for more optimal management and development of the national grid as a whole - potentially saving large sums.
- For the water grid, meter data might make it easier to locate leaks and generally to manage the system.


New Revenue

Whilst most of the advantages of adding smart meters will be in terms of cost savings, there may be ways in which they can generate positive revenue.


One way of doing this is by using the electricity  meters to charge different rates at different times of day or week, charging more for electricity at times of high demand. Even if customers change usage to avoid high-cost times, this will save the energy company costs by flattening demand throughout the day or week, reducing the total generation capacity required by the company. This kind of activity will be harder to justify for water, as reservoirs provide such an obvious means of buffering fluctuations in demand at that time scale.


Premium services providing more detailed usage data to the customer themselves, allowing them more insight into their own energy usage.


Feasibility

The Government expects the total savings (across public and private sector) from the combined electricity and water metering project to be 

Recall that, to be considered feasible, the project must break even within 10 years.

Compare total savings over 10 years to  total costs over 10 years

Total savings =  42x10 = 420m

Total costs = total capex + total opex = 448.2 + (10x9.45) = 542.7m

Total savings - total costs = 420 - 542.7 = -122.7m

Note the value is negative, therefore the project has not broken even within the required time window and is not feasible in current form.


Note that calculations here should not be conducted in terms of Net Present Value

Alternatives?

With the revelation that the metering plan as it stands will not break even within a decade, as required, the candidate should consider alternative courses of action where there will be a positive result within the 10 year time window.


The candidate should be prompted to examine the costs associated with the project - in particular the difference in price between water and gas meter units.


If we do not install water meters, we will save on this substantial cost. From our points above, it also seems that the potential cost savings and new revenue sources are bias towards the electricity, rather than water, grid. As such, we might retain enough of the benefits of smart metering to make this reduced scheme viable.


Calculations


The candidate should now calculate the feasibility of installing only electricity smart metres

Should they request it, they can also be given the following additional information.

- Installation will now be reduced to 15% of capital expenditure.

- Meter maintenance is reduced to €0.02 per month per meter.

- Total savings and new revenues as a result of smart metering electricity only are €30m per annum.



New total costs = new capex + new opex


New capex = electricity meters + comms infrastructure + IT system + new installation costs

New capex = 67.5 + 27 + 9 + (0.15x67.5+27+9) = €119.03m


New opex = new meter maintenance + comms maintenance + IT maintenance

New opex = (0.02x12x4.5) + 5.4 + 1.35 = €7.83m 

New opex for 10 years = 7.83 x 10 = €78.3m


Therefore, new total costs = 119.03 + 78.3 = €197.33m


New net result of smart metering = new savings - new costs

New result = (30x10) - 197.33 = €102.67m


Note that the outcome of implementing electricity-only smart metering is both positive and relatively large.


Recommendation

The candidate should give a brief, top-down, executive summary of their conclusions and the rationale underpinning them. This should be as clear and structured as possible and consider both the cost and revenue side of smart meter roll-out.


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