Dynamic Cost–Benefit Analysis of Digitalization in the Energy Industry

Abstract

Assessing the benefits and costs of digitalization in the energy industry is a complex issue. Traditional cost–benefit analysis (CBA) might encounter problems in addressing uncertainties, dynamic stakeholder interactions, and feedback loops arising out of the evolving nature of digitalization. This paper introduces a methodological framework to help address the intricate inter connections between digital applications and business models in the energy industry. The proposed framework leverages system dynamics to achieve two primary objectives. It investigates how digitalization generally influences the value proposition, value capture, and value creation dimensions of business models. It also quantifies the financial and social impacts of digitalization from a dynamic perspective. The proposed dynamic CBA allows for a more precise quantification of the benefits and costs, associated with evidence-based decision-making. Findings from an illustrative case study challenge the static assumptions of conventional methods. These methods often presume continuous operation, neglecting reinvestment and operational feedback loops, and resulting in negative net present values. Conversely, the outcomes of the proposed method indicate positive net present values when accounting for factors such as reinvestment rates and the willingness to invest in digitalization projects. The principles outlined in this paper can enable a more accurate assessment of digitalization projects, thus catalyzing the development of new CBA applications and guidelines for digitalization.