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ExEcutivE insights Volume XVI, Issue 26

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under Pressure

Baseload coal-fired generators are increasingly under pressure

on multiple fronts. Market participants are battling a range of

encroachments, including:

• theimprovingcostcompetitivenessofalternativefuel

sources (e.g. gas in the U.S.A.);

• carbonpricing(e.g.Australia);

• sustainedenvironmentaldemandstoreducecarbondioxide

emissions; and

• thegrowingmarketshareofrenewableenergyinitiatives,

whichisdrivingbothgreaterresidualloadvolatilityand

pricing pressure.

Firing Up: Achieving Generator Full Potential was written by Simon Horan, Peter Walter and David Ogilvy, Partners, and Tim McGrath, Principal, at L.E.K. Consulting. Please contact L.E.K. at energy@lek.com for additional information.

These pressures are fundamentally disrupting the

operating regimes and economics of coal-fired generation –

manybaseloadoperatorscannolongerexpecttooperate

athighavailabilitywithwholesalemarketprices

consistentlyaboveproductioncosts.Tosurviveandthrive

inthisenvironment,baseloadcoal-firedgeneratorsmust

fundamentallytransformthemselves.

Minorcostimprovementsarenotenough.Movingtoa

materiallylowercostpositionandmaximizingvaluethrough

anappropriateavailabilityregimearenowessentialtosurvival.

Formanygenerators,thereisrealurgencytoachievethis

transformation. Already, greater than 21,000 Mega Watts (MW)

of coal fired generation capacity has been decommissioned in

theU.S.A.since2008,withanother30,000MWforecasttobe

decommissioned by 2022.

FirinG UP: Achieving Generator Full Potential

As market dynamics shift, generating maximum value from baseload coal-fired generators has become

an urgent priority. tinkering at the edges will not secure the future – only wholesale transformation

can create the value that will sustain the viability of baseload coal-fired generators. L.E.K. Consulting

has developed a generator Full Potential (gFP) framework that addresses the full suite of improvement

levers for generators, covering both cost efficiency (operating and capital costs) and availability

optimization. Moreover, it ensures the sustainability of results through building the necessary

supporting management practices, systems and performance management regimes.

ExEcUTivE inSiGHTS

l e k . c o mPage 2 l.e.k. consulting / executive Insights Vol. XVI, Issue 26 insights @ WORK®

Creating Cost efficiency

Substantiallyloweringcostsrequiresexaminingtheentirecost

base(e.g.opexandcapex,supportandoperationalcosts)–

piecemealcostimprovementsareinsufficient.Inaddition,itwill

requireareconsiderationofthefundamentalsofwhatwork

shouldbedoneandthebestapproachtodonecessarywork.

Quick Wins

Afundamentalreviewofcostdriversistimeconsuming.

However,anearlyquickwincampaign,focusingonitems

withlowrisktoassetperformance,canbuildmomentumand

A Way Forward

L.E.K.Consultinghasworkedwithbaseloadcoal-firedgeneratorstohelpdrivetransformationwithsignificantresults.Throughour

experiencewehavedevelopedarobusttransformationapproach–‘GeneratorFullPotential’(Figure1).

establishthecaseforfurtherinvestigations.Onceearlyresults

havebeenachieved,subsequenteffortscanfocuson

higherriskandmorechallengingimprovementcategories

(e.g. decisions around maintenance settings), but against a

backdrop of early successes.

Quickwincampaignsshouldavoidamindsetofdeferringor

descopingcapitalprojects–whileimprovingshort-termcash

flow,such‘successes’areinherentlytemporary(andpotentially

compromiselonger-termassetperformance).Movingtoa

sustainablylowercostbaserequiresaddressingtheunderlying

driversofcost.Followingareseveralsuchexamplesofaddressing

underlyingdriversofcosts.

Figure 1

Generator Full Potential (GFP)

Cost EfficiencyAvailability

OptimizationCore Operations support

Organizational simplification

Fuel

Management Operating system

Performance and cost 'wiring'

• Assetoptimization

• Capitalprioritizationand scoping

• O&Mcontractstructureand management

• Outagetenderingand performance management

• Corporateefficiency

• Supplychainefficiency

• Materials&services [re]tendering

• Contractmanagement

• Contractormanagement

• Organizationalalignment

• Incentivesystems

• Industrialrelationssetting

• Fuelquality

• Fuelpricing

• Availabilitystrategy/flexibilization

• Outagescheduling

• Outageacceleration

• Offloadingminimization

A B C D

E

F

ThisExecutiveInsightillustratesthepoweroftheGFPprogrambyfocusinginonaselectionofkeyelements.Howeveraholistic

approachisneededtodeliversubstantiveandsustainabletransformation.

l e k . c o mPage 3 l.e.k. consulting / executive Insights Vol. XVI, Issue 26 insights @ WORK®

ExEcUTivE inSiGHTS

example cost lever: Asset optimization

Generationbusinessesare,attheircore,aseriesofdiscrete

butconnectedassets.Achievingthefullpotentialfora

generationbusinesscanonlyberealizedbydrivingeach

asset to its full potential, from both a performance and cost

perspective,recognizingthatchangesinoneassetcanaffect

a‘downstream’asset.

Therearemanytechniquesforimprovingtheperformance

ofanasset,suchasprocessre-engineering,SixSigma,Leanetc.

Foranytechniqueused,thekeyisprovidingtransparencyon

theunderlyingdriversofperformanceandengagingwiththe

assetoperatorsinawaythatallowsthemtooptimizethese

drivers.WhatmakesL.E.K.Consulting’sapproachdistinctisa

focusonvaluebasedperformancemeasuresthroughtheuse

ofourbespokeValueDriverTree(VDT)tool.

Awell-constructedVDTcapturesthefullsuiteofoperational

driversandorderstheminamannersotheylinktothepredicted

performance and operational cost of the asset, at multiple

levelsofthatasset.Thisdirectandcascadinglinkagebetween

operationaldriversandcostandperformanceoutcomesallows

afact-basedinvestigationofnotonlywhichoperationaldrivers

offer the greatest cost reduction potential, but also the cost-

performancetrade-offsthatmayneedtobemade.Moreover,the

nature of such an approach supports asset operators deploy their

subjectmatterexpertisetothetopic.

Figure2below,Value Driver Tree,illustratesa‘costcascade’

that clearly demonstrates the cost and performance related to

combustion.ThisVDTidentifiedthatmaximumimprovement

potentialexistedthroughstreamliningthemaintenanceregimeof

the coal-handling infrastructure. The analysis demonstrated that

equivalentperformancecouldberealizedthroughanincreasein

plannedmaintenanceresultinginloweroperatingcostsduetoa

reductioninovertimeandunplanneddowntime.

Cost / MW

FY13 FY14

FY AcT

Variance %

total Costs

FY13 FY14

FY AcT

Variance %

Combustion

FY13 FY14

FY AcT

Variance %

Coal handling

FY13 FY14

FY AcT 1,313,131 1,515,143

Variance % 15

Running costs

FY13 FY14

FY AcT 131,313 135,252

Variance % 3

Planned

FY13 FY14

FY AcT 732,727 571,527

Variance % (22)

Costs

FY13 FY14

FY AcT 183,182 190,509

Variance % 4

Production

FY13 FY14

FY AcT

Variance %

Fuel, gas and draft

FY13 FY14

FY AcT

Variance %

steam cycle

FY13 FY14

FY AcT

Variance %

turbo generator

FY13 FY14

FY AcT

Variance %

Electrical

FY13 FY14

FY AcT

Variance %

Maintenance costs

FY13 FY14

FY AcT 1,181,818 1,379,890

Variance % 17

Unplanned

FY13 FY14

FY AcT 449,091 808,363

Variance % 80

Frequency

FY13 FY14

FY AcT 4 3

Variance % (25)

Costs

FY13 FY14

FY AcT 149,697 161,673

Variance % 8

Frequency

FY13 FY14

FY AcT 3 5

Variance % 67

Figure 2

Value Driver Tree (subset shown)

+

+ + +

+

X

X

ExEcUTivE inSiGHTS

l e k . c o minsights @ WORK®

Inadditiontooutagestrategyandperformance,availabilitycan

bemaximizedthroughminimizingunplannedoffloads.Attention

istypicallygiventohighlossunplannedoffloadevents,however

sucheventsarechallengingtopreventgiventheirunpredictability

anddonotdrivesustainedimprovementastheyareinfrequent.

Rather,sustainedandmaterialresultsarebestachievedthrough

aninvestigationthatdrillsdownintotherootcausesofsystemic

andhighcostunplannedoffloadevents.SeeFigure3.

MoresophisticatedVDTtreescanextendthisanalysisinto

dynamic‘whatif’scenarios.Ultimately,theVDTtoolhasmany

usesbeyondbeingaone-offinvestigativetool–itshouldbe

theprimarybasisformeasuring,managingandoptimizingthe

operational and commercial performance of an asset.

example cost lever: contractor management

Generatorsoftenhaveasubstantialnumberofcontractorswho

typicallyperformabroadrangeofspecialistactivities.However,

thissecondaryworkforceisoftenundermanagedrelativeto

permanentemployeesand,ifover-sizedrelativetotheneed,

can lead to substantially higher costs.

OneL.E.K.clientdidnotaccuratelyknowhowmanycontractors

theyhadon-siteortheaveragedurationoftheircontractors.

L.E.K.conductedaforensicexaminationinvolvingmatching

security cards, safety training logs and accounts payable to

unearthahugebodyofallegedly‘spot’contractorsthatwere

verylightlymanaged.Itwasfoundthatsomehadevenbeenon

siteformorethanninemonthsformultipledaysperweekeven

thoughthespecialisttaskwasforecasttobeapproximately

three months.

Availability Optimization

Subjecttotypicalwholesalemarketpricing,maximizing

availabilityisakeyvaluedriverofbaseloadcoal-firedgenerators.

Inmostcasesoutagestrategiesareinfrequentlyreviewed.

However,ananalyticalreviewofthetruerisksofextendingthe

periodbetweenoutagesandlinkingoutageschedulestoplant

performancecandriveamorecommerciallycentricperspective

tooutagestrategies.Furthermore,acceleratingindividual

outagesthroughimprovedprojectmanagementandcontractor

incentivestructurescanminimizelostoutputfromthoseoutages

that are undertaken.

Page 4 l.e.k. consulting / executive Insights Volume XVI, Issue 26

Figure 3

Identifying Systemic and High Cost Unplanned Offloads

Systemic issues

Scope to address the underlying issues that are occurringrepeatedlywithmaterialconsequenceson

each occasion

Often ‘one off’ events but high impact

Challengingtoprevent givenunpredictability

andinfrequency

Frequent but relatively minimal

impact

Infrequent and low impact

Average number of Unplanned

Offloading Events

Average MW Offloaded Per event

Unplanned Off-loading

High

HighLow

Low

ExEcUTivE inSiGHTS

l e k . c o mPage 5 l.e.k. consulting / executive Insights Vol. XVI, Issue 26 insights @ WORK®

Sustaining the Results

Whileone-offeffortstoreinincostsarevaluable,thisisnota

viablelong-termsolution.Itiscriticalthatcostandavailability

improvementsareembeddedintoanewwayofworking.

Consequently,L.E.K.focusesonhelpingmanagementachieve

sustainableresultsthroughtwomeans:

1.ManagementOperatingSystem(MOS): framed around the

end-to-endcycleofmajorworkflows(whichtypicallycutacross

organizationalboundaries),theMOSgivesclaritytohowwork

ismanagedandcontrolled(asopposedtohowaparticulartask

isdone).Forexample,aMOSidentifieskeyevents/milestonesin

aworkflowandtheinputs,meetings,governancearrangements

andtoolsrequired.Thiscodificationanddisciplinegives

managementthemeanstoensurethattheoverallworkflow

is controlled appropriately.

2.Performanceandcost‘wiring’:ensuringthelowercost

baseandnewwaysofworkingare‘wired’intothebusiness

throughappropriateKeyPerformanceIndicators(KPIs)thatare

actionedthroughpracticalandactionorientedreviewsessions

whichcascadethroughalllevelsoftheorganization.

AllorganizationswilluseKPIs,butitisrelativelycommon

forthesetobecomestaleandnotactivelyusedinamanner

thatgenuinelydrivesperformance–atoptobottomreviewof

existingKPIsandhowtheyareusedtypicallyunearthssubstantial

improvementpotential.

Suchsystemicissuescanbetargetedwithspecificremedial

actionsthatminimizethefrequencyand/ormagnitudeofthese

failures.Inourexperience,itiscommonfortheseremedial

actionstobebroadlyknowntooperationalstaffbutthecost

oftherepairwaspreviouslyconsideredprohibitive.However,

a more precise understanding of the nature of the unplanned

offloadingeventsandthevaluegainedfromminimizingthem

supports a commercial, rather than engineering centric, decision

toundertakethenecessaryexpenditureonremedialaction.

Perhapsthegreatestchallengetooptimizingavailabilityis

whentherehasbeenastructuralchangetomarketdynamics

andwholesalemarketpricesarebelowproductioncostsfor

sustainedtradingperiods.Suchanenvironmentrequires

challengingnormsofhow'fixed'costsmightmovetoa

variablebasis.Forexample,movingtoahighershareof

contractorworkforceoverpermanentemployees,and/or

re-evaluatingrigidshiftstructurestoprovidemoreflexibility.

ExEcUTivE inSiGHTS

l e k . c o minsights @ WORK®Page 6 l.e.k. consulting / executive Insights Volume XVI, Issue 26

Successfullyachievingsuchabroadbasedtransformationischallenging.However,doingsothroughthecomprehensiveand

coordinatedGFPprogrammaximizestheprospectofsuccess.Baseloadcoal-firedgeneratorsshouldaskthemselvesthreekey

questions:

Iftheanswertoanyofthesequestionsis‘no’it’stimetodosomethingdifferent.

Difficult but Possible

Substantialperformanceimprovementsarepossible.Figure4illustratesasuccessstorybasedontheGFPprogram.Through

analyzing,implementingandthenembeddingtheprinciplesofGFP,thisgeneratorachievedsustainedimprovementsof

$USD51 million.

Figure 4

Client Outcomes

1. Isourcurrenttrajectorysustainable?

2. Dowehavetotaltransparency on the underlyingdriversofcostandperformance, as outlined in the GFPprogram?

3. Areweconfidentthatwehavepushedthesedriverstotheirfull potential?

1 2 3

Note:*Generatorownsallfuelrequirements

0

20

40

60

A B C D E

sustainable cash flow uplift Millions of dollars (USD)

20

17

9

1*4

51

core operations support simplification Fuel Availability maximization

Total

ExEcUTivE inSiGHTS

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Thispublicationisintendedonlytoprovideasummaryofthesubjectmattercovered.Itdoesnotpurporttobecomprehensiveortorenderspecificadvice. Noreadershouldactonthebasisofanymattercontainedinthispublicationwithoutfirstobtainingspecificprofessionaladvice.

L.E.K. Consulting is a registered trademark of L.E.K. Consulting Australia. All other products and brand mentioned in this document are properties of their respectiveowners.

©2014L.E.K.ConsultingAustralia

L.E.K. Consulting is a global management consulting firm that uses deep industry ex-pertise and analytical rigor to help clients solve their most critical business problems. Founded more than 30 years ago, L.E.K. employs more than 1,000 professionals in 22 offices across Europe, the Americas and Asia-Pacific. L.E.K. advises and supports global companies that are leaders in their industries – including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. L.E.K. helps business leaders consistently make better decisions, deliver improved business performance and create greater shareholder returns.

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