innogy Case: Smart Meters

Problem Definition

The municipal utility Hamburg Energized is a local energy retail (power and gas) and distribution grid company active in the city of Hamburg. The majority of shares of Hamburg Energized is held by the city itself. As the distribution system operator of Hamburg, Hamburg Energized is responsible for the operations and maintenance of the gas and electricity grid on customer level.

In the course of the energy transition in Germany, the responsible board member for the technical grid operations, Jan Bremer, thinks about deploying Smart Meters in the gas and electricity grid. He approaches you with the request to conduct a feasibility analysis and to give a clear recommendation whether or not Hamburg Energized should use Smart Meters in its gas and electricity grid in the future.

Short Solution

The candidate should develop a multi-step approach to solve the case. This should include the following:

  • Identify the scale of Smart Meter deployment in Hamburg
  • Analyse costs allocated to Smart Meter deployment
  • Identify suitable business models on the basis of Smart Meters
  • Analyse revenue streams stemming from the identified business models
  • Compare the cost and revenue side and provide a recommendation

Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

Warm-up questions:

  • Have you understood the case up to this point?
  • Can you explain what Smart Meters are?
  • Which technologies are needed for Smart Meters to work?

The last question should be asked to candidates who already know what Smart Meters are. The interviewer should either lead the applicant towards the understanding or explain that Smart Meters require an IT backbone and a communication infrastructure to work.
Information about Smart Meters:
Smart meters are meters that are connected via a communication path from the users home to the IT backend of the utility, which provides electricity, gas or water. The meters measure the usage of the commodity and send the meter data to the utility to create fully automated billing processes of end consumers. This can either be done actively by requesting data from the smart meter or passively by having periodic push messages with meter reads.

Task 1: Please describe, how you would structure a feasibility analysis for the deployment of Smart Meters in Hamburg. Ask clarifying questions if needed.

The candidate should develop a multi-step approach, which includes an analysis of the scale of Smart Meters deployment in Hamburg, an analysis of allocated costs, a consideration of suitable business models on the basis of Smart Meters with allocated revenue streams and a comparison between the cost and revenue side, leading to a final recommendation.

Feel free to share Figure 1 with a bestpractice approach if the interviewee seems to be stuck or lost.

Task 2: Please go ahead with your chosen structure and identify the scale of Smart Meter deployment for us at Hamburg Energized based on appropriate assumptions.

Calculation: # households/commercial property in Hamburg * Smart Meters per households/commercial property

Result: 2.7m Smart Meters

Assumptions to help the candidate, if necessary: ​

  • ​Hamburg Energized delivers power and gas to all inhabitants of Hamburg
  • The analysis considers both private and business customers
  • Number of inhabitants in Hamburg: ~ 1.7m
  • Share of households: ~ 60% (-> ~1m)
  • Number of commercial properties in Hamburg: ~ 0.35m
  • 1 gas and 1 electricity meter per household/commercial property
Other approaches are also valid. As an interviewer, you should focus on leading the candidate to the same end result as indicated here.

Now that we have the rollout size, we need to determine the associated costs. Please calculate them. Ask clarifying questions, if necessary.

Questions to guide the candidate:

  • How can you sub-divide costs for an investment decision? Divide costs in Capex and Opex.
  • Which elements of Smart Meters would you allocate to Capex and Opex?
    • Capex
      • Smart Meters
      • IT infrastructure
      • Telecommunications infrastructure
      • Installation cost
    • Opex
      • Maintenance

If necessary, please remind the candidate of required technologies for Smart Meters to work (see task 1).
Available information for the cost calculation:

  • Capex
    • Cost per power Smart Meter: 100€
    • Cost per gas Smart Meter: 150€
    • Cost for IT infrastructure: 9€ per household/commercial property
    • Cost for telecoms infrastructure: 12€ per household/commercial property
    • Installation cost: assumed 10% of overall Capex
  • Opex
    • Smart Meter maintenance costs: 0.1€ per month and meter
    • IT maintenance costs: 20% p.a. of IT related Capex
    • Telecoms maintenance costs: 0.2€ per month and household/commercial property
Test the candidate on two or three calculations, then provide the rest of the
information in Table 1.

Task 3: Now that we have the costs associated with the rollout, please name some possible revenue streams or cost savings, which can be allocated to Smart Meters.

Possible new revenue streams:

  • Value added services, e.g. comparison of own consumption to neighbour
  • New time-dependent tariffs

Possible cost savings potential:

  • No more meter readings by staff
  • Full automization of billing process
  • Less grid expansion due to better load management

We expect additional revenues and cost savings stemming from Smart Meters to have an accumulated potential of about €31m per year. Knowing this, please give us an indication on whether or not we should deploy Smart Meters. The investment should be fully amortized within 15 years.

Total Costs = Capex + Opex = 402,435k + 15 * 8,910k = €536,085k
Total revenue and cost savings = 15 * 31m = €465m
Total savings = 465m - 536,085k = € -71,085k

Important: The calculation should not be based on NPV.
Share the results in Table 2 with the candidate.

Task 4: Seeing this analysis, it does not seem adequate to deploy Smart Meters. Do you see opportunities to still create a positive business case?

The candidate should be guided towards the cost side of the investment. The vast difference between the prices for gas and electricity Smart Meters should give enough indication.

Questions to guide the candidate:

  • Is there a position on the cost side we can leave out? The deployment of gas Smart Meters.
  • Which other positions would be influenced?
    • Cost side
      • Capex for gas Smart Meters
      • Capex for installations
      • Opex for Smart Meter maintenance
    • Revenue and savings side
      • Share of revenue streams from gas Smart Meters

Please calculate whether or not taking out gas Smart Meters turns the business case positive within 15 years.

Available information for the new calculation:

  • New installation costs: assumed 8% of overall Capex
  • New Smart Meter maintenance costs: 0.1€ per month and meter
  • Savings and revenues from gas Smart Meters: €10m p.a.
Share the results in Table 3 with the candidate.

Task 5: Please give a short presentation on your case including your recommendation.

The interviewee should summarize the most important facts and come up with a clearly structured recommendation wether or not Hamburg Energized should deploy Smart Meters. Both cost and revenue side should be considered.

Difficult Questions

Which economic KPI would you need to know in order to calculate the business case more accurately?
The discount rate in order to calculate the net present value of the investment.

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Ex BCG | MBB Specialist | #1 Expert for coaching sessions (1300+) and recommendation rate (100%)

Hi Anonymous, To answer your questions, I will first describe the theoretical correct valuation approach, and then the simplified approach you can normally apply in consulting interviews. Full D... (more)

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McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

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Hallo Anonym, also um da mal ein wenig Ordnung reinzubringen muss man zunächst einmal klarstellen, dass es unterschiedliche Arten gibt, Kosten zu klassifizieren. Die lassen sich dann gegebenenfalls p... (more)

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Case exhibits