Barry Dyson
Partner, Financial Advisory Services and Power Performance Improvement
Deloitte CIS
Three key CEO questions
The business of power is a uniquely complex and real time challenge. Traditionally the power company role was to keep the lights on. Today, the objective is to make returns for the owners. What three things in connection with the financial health of a power company should be on the CEO’s mind when he comes into his office each morning? In the new world of deregulated markets he probably – ideally – wants to know, with a reasonable degree of confidence:
» how much the company made yesterday;
» how much it could have made;
» what it should learn from that to be smarter tomorrow.
These are relevant questions, but with often interesting responses. In most power companies, the first question might be answered on the day, the second maybe within a few days and the last could take a few weeks to answer. This is too much time for companies to optimize the making of good decisions about their business when they have the challenge and opportunities of near real time markets.
With a few exceptions, power cannot be stored. Markets exhibit volatility and risk. They present opportunities for significant gains – and losses. So, how should we learn to continuously optimise the business?
The answers – innovative technical and human support
Technology and new business processes can come to the CEO’s help in providing those answers. The CEO needs this help now more than ever, as he is surrounded by a turbulent and volatile market, increasing real time business pressure and involving an already stressed workforce. Enough near real information to allow rapid and effective analysis, as well as decision support tools, to improve asset performance and optimize commercial results, are now all within reach. The ubiquitous information infrastructure can hide the complexity, simplify the business decision making processes and turn data into knowledge. Imagine you would be the one to whom the CEO would address himself with these three questions every morning; imagine that he may want relevant, intelligently presented information about your business health as well; in that case, you might have also some questions, for example:
» what is our current performance?
» how does it compare with what we planned?
» what is the trend?
» are we getting better or worse?
» who owns the problems and when will we get resolution?
» what is management doing to deal with these problems?
» What can we learn to avoid them in future?
DIKDAR – Find and operate best practice in the power plant and it’s market
The power market has interesting and unique dynamics, as has each individual power plant. – so how do we start? Except where there are old or under-invested plants, there’s usually no shortage of data and no shortage of knowledge. Utilities with older assets need to invest in measurement, data collection, validation and monitoring as a first step. Also, in Russia, there is no common methodology, for example, for calculating online performance. So, converting data into knowledge has mostly been achieved by individuals using their brainpower and as a result the know-how is locked up in employees’ heads and therefore difficult to access! In mature developed power markets, some companies have learned “best practice” in the achievement of their business objectives. These will include the integration of technical, operational and commercial processes within their market facing company operating model. As an example, learning how to maximise profitability, not reliability, requires different measures and skills, as it is a major change from the days of “keeping the lights on” at all costs.
This new approach we call Turning Engineers into Businessmen. To do this we have to use another best practice to provide them with the information, tools and key indicators of success, so that they can trade the plants profitably, opportunistically and without breaking them. Investment in the right information infrastructure can largely protect the plants from abuse – silently monitoring and watching operations and events – providing a level of protection not possible with purely human oversight. This also provides added triggers for operational and maintenance functions, anticipating events before they become disasters and providing triggers to support the required equipment maintenance and diagnostics.
One advanced company found they could push the plant to achiever much higher commercial availability, while reducing maintenance and outage costs and made this real time information available to both its insurers and its outage repair contractors, making the investment pay back in just months. It particularly reduced outage times and repair costs and improved plant efficiency. It also provided quality operations, avoiding many expensive surprises for the traders and system operators and the consequent underperformance penalties. Unit control systems were tuned, using the new information infrastructure, so that loading instructions could be followed within a 0.2% accuracy, at the same time as maximising operational flexibility and thermal efficiency.
Returning back to our three questions, their value lies in their visibility to engineers and management. Instead of everyone searching for answers in paper, charts, logs and possibly peoples heads, let’s imagine what could be going on behind the scenes – and imagine if only we could do it automatically!
Data – we may have no shortage of this – with some investment, there will be more than 20,000 bits of it on big power units, it needs verification to make it reliable and comparable – and then we can turn the key pieces of data (often 300 to 500 signals) into -
Information – which includes learning and needs some processing to add value, before it turns into -
Knowledge – which can support our operating model, KPIs and key processes for us to take some -
Decisions – in order to produce -
Actions – and achieve the best -
Results, so we optimize our business model and ensure we are smarter today than we were yesterday!
It is essential to provide a window or portal on key indicators of business performance and risks – operational, technical and financial. Second, behind this dashboard, the key performance indicators (KPIs) thus measured can be cascaded down to the decision makers and knowledge workers in your business in a performance framework. In this way, their success is also yours.
It is possible to build timely, high quality information and knowledge and to find and automate best practice. We can use the DIKDAR infrastructure to understand which practices, skills or operators produce the best result at the lowest risk and cost. Quality of engineering, operational and commercial decisions are the goals – whether you are investor owned or regulated; generator, system operator or wholesaler. For example, tests on starting, loading, adjusting and shutting down the plant quickly and safely at the cheapest cost have shown a wide variability until the information is available to analyse and understand what produces the optimum. This can then improve our trading performance significantly while lowering cost and guiding maintenance and investment. One operator reduced the time and cost of start ups and shut downs by more than 50%, using these techniques.
From technical to commercial key performance indicators
As an example, take the average large power plant. Often 20 to 45 years old, historically underinvested because of the regulatory background, with up to a thousand staff and costing up to $1 billion or much more to replace. The highly trained and skilled engineers and managers do their best to maximise performance.
However, they need help to transition from being engineers to being businessmen, so they can be as effective in the new markets at maximising commercial performance, as they were at keeping lights on in the old utility world. They need to know what the measures of success are. As we have shown, they need to change their key performance indicators from technical to commercial. We can use technology to help them optimise performance decisions while “tuning” the plant to the market – so when they reduce cost and “get in the money”, meaning the price at which they would bid the plant to the market is less than the available market price, they do not leave that money on the table and maximise quality commercial performance at every opportunity they get.
If plant operators are asked about becoming businessmen, they usually relish the challenge, provided they have the tools and decision support techniques to simplify all the complexity of translating technical KPIs to financial ones and showing losses and problems in commercial terms. They will tell you they understand the commercial impact of the decisions they take to run their plant. They may go so far as to say that their asset maintenance and optimisation colleagues also need access to this translation of technical to business information, so they can support the operator in his mission to extract every cent of margin while still maintaining plant integrity.
The answer lies in new training and then refocusing their team work, so that the overall measure of maintenance and operator success – their KPI – shifts to commercial availability: maximising margin when “in the money” (when their cost of sales is below the market price and when the plant is running).
The Three C’s
Let’s return once again to our three questions which we started with:
» how much profit did the company make yesterday – or what was its contribution margin?
» how much could it have made – in other words, can commercial losses (both actual cost and lost opportunities) be quantified?
» what can the company learn – does it have the knowledge to learn from that and be even smarter and more effective tomorrow, in other words, to improve the commercial availability?
Commercial availability as a term has been around for many years and has many definitions. With the help of real time information from the company’s IT infrastructure, the statistics can mean much more. Success in maximising the financial contribution from power generation energy sales, as $/MWh, in a competitive market is a result of minimising the cost of production and maximising the sales revenue. Maximising capacity payments and avoiding revenue losses and underperformance, as $/MW, is just as important.
To make this indicator more meaningful, and independent of units of measurement, we can use the two ratios as follows, related to the optimisation of the operation of a power plant:
» actual thermal efficiency/design thermal efficiency provides a quality indicator of the conversion of fuel to electricity, or minimising the cost of production;
» actual units sold in the period/units instructed or contracted to sell provides a quality indicator for maximising available revenue when in the money and contracted to sell.
Multiplying the two provides an indicator that a business is both minimising controllable cost and maximising controllable revenue – and therefore margin. Although technical problems and limitations can limit how much actual influence the plant operators have in real time, ultimately they are both a function of good decisions, investments, maintenance and operation.
Market-based maintenance
This brings us to the concept of Market-Based Maintenance. MBM is a concept that refers to the prioritising of maintenance and investments based on their impact on limiting loss of revenue earning capability, whether planned or unplanned. It also biases attention towards minimising controllable costs and deviations from design heat rate and efficiency.
In some companies, plant operators have used IT infrastructure and applications to provide the real time dashboard showing the operator controllable costs and actual production against that required. Algorithms monitor these and trigger “events” when the deviation reaches a threshold value and start a train of information and a log that records not only the event, but also a set of data and information which may be relevant to it.
If we now go back to the first two of the three questions (how much did the company make yesterday; and how much it could have made), we find that the new information and associated processes discussed provide ways of answering our third question (what can management learn from this to be smarter tomorrow), because the combined information reads as an on-line report of the day’s events – commercial event logs. These can have great impact on improving performance (commercial availability), because the maintenance planners and schedulers use them to prioritise activities.
It follows from the above that companies can use MBM to direct resources, to minimise controllable losses – or use the information to judge how effective maintenance or investments in plant performance have really been, so they can invest more wisely and so maximise market performance at minimum cost.
Maximise market capabilities – thanks to MBM
Experience shows that using Market Based Maintenance to “tune” plant performance to maximise market capabilities improves revenue from all three sources relevant for a power plant:
» potential sales of energy, which cover variable costs;
» potential payments for capacity, which cover fixed costs;
» payments from ancillary services, such as improvements to minimum shut down times, minimum stable loads, times to change load on the units, reactive power and voltage control capabilities, which are usually very profitable as some have no fuel cost.
It is possible to shift the focus of the plant performance to optimise market performance. Traders and risk managers like this approach as it will improve asset optionality, thus allowing more flexible and better quality operations, better quality performance and cost visibility and certainty of actually running the plant as the available margin in the market incentivises it.
This experience has also shown the “window” on performance and the process of using dispatch load management event logs for tuning the plant using MBM. It has allowed operators in mature markets to produce better margins and to be more reliable – optimising expenditure for better performance results.
Active risk management – technical, operational and commercial risks and fines
As developments advance to liberalise markets, there are other considerations for the business men running the assets. Risk in its many forms is becoming top of mind, since a business not carrying out active risk management, can suffer potentially huge financial impacts, even if the cost factors are aggressively managed. Active risk management comprises not merely having a risk process or even producing risk KPIs. It is an essential part of the new business management process and involves extensive, and automated in some case, use of the new information infrastructure. Measured or calculated risk KPIs are presented and updated on the management information portal home page. Risks are assigned to individuals who are required to optimise these against their commercial effects. Such active risk KPIs become visible to all and are important for both internal and external stakeholders to ensure the good “stewardship” of the business and give owners, operators and investors confidence.
Active risk management uses almost real time KPIs to provide visibility of these accountabilities and ensure that assigned risks and their economic consequences are within the limits acceptable to the Board of the business. Otherwise, market forces, financial pressures and profit opportunities might lead to unacceptable risks. Technology can again be used to quietly monitor and help us manage these risks and avoid unacceptable outcomes.
At the same time, expensive unplanned losses of performance must be avoided. System operators will use compliance monitoring of their market participants and impose penalties for under-performance, in order to minimise their use of more expensively bid plant to make up for poor operation. In response, one operator of large plant re-tuned his base load assets to make them flexible and more reliable, getting them “in the money” more by lowering their variable costs and at the same time extending their life and value.
The same infrastructure used to monitor the contribution margin, commercial losses and commercial availability, as well as automated commercial event logs, can provide the plant operator with his own view of compliance monitoring, so that he can not only avoid penalties in most cases, but also maximise revenue within market rules.
Conclusion
Investments in IT, KPIs and changes in process as well as the business operating model, are all necessary to make this work. Such investments have shown rapid paybacks, in less than a year in some cases. Information technology provides transparency of performance and with decision support tools enable much more automated, consistent and optimised performance management.
These improvements have been brought about by the need to make adequate returns despite changes in the market structure, where regulators are mandated to find ways to improve competition, quality and performance while maintaining reliability and actively managing risk. We can now plan for both lower prices and improved returns, by using IT, new KPIs, processes and skills, to tune our business to the market. Business efficiency is energy efficiency.
The pragmatic approaches discussed enable these changes not only to be implemented, but the real innovation is that they can be implemented alongside strategies that enable owners of assets to reduce fixed and variable costs faster than the fall in market revenue, while still improving performance. If the new business technology and processes are implemented effectively, everyone wins.
