The bottom line: The business case for smart cities
A study by Siemens and Arup proposes a methodology for quantifying return on investments in digital urban infrastructure, based on an analysis of five European cities.
Municipal planners have an unenviable job. Amid conflicting interests, they must allocate limited resources and identify infrastructures in need of maintenance or upgrades, making judgment calls on investments whose consequences may only be felt decades later. It is all the more important that they have a factual base for providing the funds to make their cities future-ready and competitive.
The digital revolution is a case in point. IT and data analysis can increase the quality and efficiency of services and save money. But smart city technology does not always come cheap, and planners must consider a vast array of variables in calculating expenditures and return on investment (RoI). Which solutions make sense for their specific context? How can planners identify tangible and intangible, immediate and long-term benefits to convince lawmakers and budget directors that an investment will pay off?
Five cities under scrutiny
A new study by Arup and Siemens lays out a systematic approach for how to build a business case for smart urban environments. Based on a research program involving five European cities over an 18-month period, the authors developed a methodology for calculating the RoI in digital infrastructure. The study looks at the areas of energy, transport, buildings, security, harbors, and connectivity in the real-life urban environments of London, Brussels, Aberdeen, Alba Iulia, and Kartal, a suburb of Istanbul.
The methodology, based on more than 350 inputs, revolves around the concept of a “digital value sphere” that encompasses not just ordinary cost-benefit assessments, but also the additional benefits to investors, the city, and other stakeholders, as well as the value of the data and the digital economy.
Once the benefits from digital infrastructure have been used to build a techno-economic model, this can be compared to business-as-usual values as an aid to planning and prioritizing investments. Such benefits include those that can be directly monetized, but also less tangible ones such as public health and lower crime rates. The following sections will look at some technology fields and how they were leveraged by the participating cities.
Energy: Cost savings and resilience
The energy sector offers many opportunities for harnessing the power of the digital age. Smart grids offer more capacity, resilience, and efficiency. This allows demand to be managed through dynamic response pricing and integration of renewables. London’s electricity grid, for example, is operating close to capacity, placing stress on 40 percent of substations. Digital solutions such as flexible AC transmission systems (FACTS) can optimize existing distribution infrastructure to gain capacity without requiring new investment in the grid itself.
Virtual power plants, where multiple generators are digitally linked, can minimize the need for baseload generation. Smart meters provide real-time information to energy providers as well as consumers, while intelligent LED streetlights can respond dynamically to their environment using motion sensors, reducing not just energy costs, but also emissions and light pollution. The study found that in East London’s “Arc of Opportunity” development scheme, energy measures would result in a digital dividend of €304 million in benefits over 35 years, more than half of them indirect benefits from new energy delivery models, consumer behavior change, and carbon reduction.
Transportation: Mobilizing the city
When it comes to getting around town, the main aims are safety, speed, and good customer experiences. In cities where individual mobility in private cars is the norm, integrated traffic control centers can reduce accidents and ease congestion, as can road pricing schemes. Parking management systems make best use of available space, while monitoring public transport assets reduces insurance premiums and helps optimize maintenance patterns. These benefits, too, can be quantified. In London, for instance, an investment of €12 million over four years in smart measures to boost transport connectivity in the Royal Docks could return up to €251 million in long-term direct and indirect gains.
Buildings: Home, smart home
Sensors and smart control solutions can make buildings more pleasant, safer, and more energy-efficient. State-of-the-art technology for commercial and residential buildingscreates a digital overlay that delivers data while driving down cost, e.g., by improving the specification of efficiency measures. It’s not always about comfort, either: In Kartal, a district of Istanbul on the earthquake-prone Bosporus, smart sensors are potential life-savers in addition to managing energy efficiently. This program would pay off within five years, while the overall value of return from investment in smart buildings could reach an impressive rate of 24:1.
Security and efficiency
In politically uncertain times, security expenditures are often the easiest ones to justify. Nevertheless, these too must be based on solid calculations and a convincing business case. The study found that Brussels, for instance, could save up to 8 percent of its policing costs, a digital dividend of €30 million, through predictive policing based on algorithms and surveillance cameras. Another example where existing resources could be deployed more efficiently is the oil and gas port of Aberdeen in Scotland, which contributes more than 30 percent to the country’s GDP. Here, digital upgrades could make energy use more efficient and reduce traffic congestion. They could also increase the capacity and operational efficiency of the city’s harbor; as in many port cities, energy use and pollution are concerns in the “Granite City”, with alternatives to diesel desperately sought.
Connectivity: Linking people and assets
In Alba Iulia, the capital of Alba County in Transylvania, Romania, researchers found that enhancing internet connectivity can boost business, tourism, and public transportation. Providing free citywide WiFi would enhance visitors’ experience in the ancient town, which counts cathedrals, a citadel, a palace, and other historic attractions among its landmarks. Here, the potential digital value sphere encompasses benefits such as raising Alba Iulia’s profile as a destination, making it more competitive as an event location with good internet speed, and boosting mobility through a rental e-bike program or e-ticketing in public transport.
Author: Christopher Findlay, journalist based in Zurich, Switzerland
Picture credits: Siemens AG
- €1.56bn: Average value of cumulative return – both direct and indirect benefits – from smart energy measures across five cities
- 4x: Average return on investment from energy measures across five cities
- 20 GWh: Average annual energy savings from smart street lighting
- €110 million: Average net direct benefit from smart street lighting, representing an average ROI of 5x
- 20x: Average return on investment from transport measures across four cities
- €566m: Average value of total cumulative return from smart transport systems across four cities
- 74% of the benefits from transport measures come through reducing delays and time savings
- 7 years: Average payback time on investment in smart on-street parking (including full detection technology and payments system implementation)
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