managing generation assets
DESCRIPTION
The management of generation assets, never easy, is even more challenging in today’s environment of uncertain commodity prices, aging infrastructure, environmental mandates, and uncertainty in regulatory and capital markets. Cooperatives must respond by effectively planning their portfolios and getting the most out of the assets they have. This ScottMadden insight is the first in a series on “Five Strategic Priorities for Generation and Transmission Cooperatives.” The report summary can be found here: http://www.scottmadden.com/insight/516/five-strategic-priorities-for-generation-and-transmission-cooperatives.html. To learn more, please visit www.scottmadden.com.TRANSCRIPT
Copyright © 2012 by ScottMadden. All rights reserved.
Managing Generation Assets
A Generation and Transmission Cooperative Strategic Priority
April 2012
Contact: Brad Kitchens ([email protected])
Marc Miller ([email protected])
Copyright © 2012 by ScottMadden. All rights reserved.
Introduction
This ScottMadden insight is the first in a series on “Five Strategic Priorities for Generation and Transmission Cooperatives.”
Contents
Overview
Resource Portfolio Planning
— Implications of Tightening Environmental Rules
— Installed and Planned Generation Capacity
Comprehensive Asset Management
— Developing Plans and Making Decisions
— Improving Performance
Contact Us
1
Managing Generation
Assets
Ensuring Grid Security and
Reliability
Gaining Access to
Capital Markets
Improving the Effectiveness
of Stakeholder Management
Fostering Economic
Development
Copyright © 2012 by ScottMadden. All rights reserved.
Overview
The management of generation assets, never easy, is even more challenging in today’s environment of uncertain commodity prices, aging infrastructure, environmental mandates, and uncertainty in regulatory and capital markets. Cooperatives must respond by effectively planning their portfolios and getting the most out of the assets they have.
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Almost half of the total MW capacity of top cooperatives* is coal. Establishing a formal approach to portfolio lifecycle optimization is
becoming critical.
Physical Assets
Life Cycle Costs
Management
Risk
Asset Value
Ensuring assets operate at design parameters with minimal off-normal operations and
maximum efficiency
Optimizing initial and ongoing investment to maximize an asset’s value over its life cycle
Maximizing the contribution from those who manage the asset through review of performance
against key operational and personnel measures
Managing engineering, operational, financial, and market risk
Developing additional value from physical assets and management/operational competencies
Description Component
Gas
Impact of the “rush to gas” on future demand (and prices)
Environmental pressures on shale gas extraction
Coal
Regulatory uncertainty
Environmental pressures
Practicality of retiring older units
Nuclear
Long development time and higher project schedule risk
Uneasiness about future capital costs and current economics (low gas price)
Environmental scrutiny (e.g., post-Fukushima regulation)
Wind
Extent and timing of renewable energy standards
Low capacity factor and intermittency
Geographic constraints and transmission availability
Each resource type has key issues that complicate resource portfolio planning:
The lifecycle value of an existing portfolio can be optimized through an effective and comprehensive asset management strategy.
*Defined here as those with assets more than $1 billion or annual revenue more than $500 million; Source(s): SNL
Copyright © 2012 by ScottMadden. All rights reserved.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
2015 Projected Reserve Margin Before New EPA Regulations
2015 Projected Reserve Margin After New EPA Regulations
NERC Reference Reserve Margin
Recent EPA rule making standards have made the prospects of new coal builds extremely unlikely
Resource Portfolio Planning:
Implications of Tightening Environmental Rules
Stringent new environmental regulations are increasing the cost to generate and creating heightened concerns regarding reserve margins and overall capacity.
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Effective resource portfolio planning will incorporate these considerations and address them in a manner that is consistent with the strategy of the power supply cooperative.
NERC1 projects that new EPA regulations will force seven of 17 regions below the “reference” reserve margin. These regions include: — MISO — MRO — PJM — SPP — SERC – East, West, and Southeast subregions
Cost of Selected Alternatives2
Retrofitting large coal unit ~$800/kW
Retrofitting marginal coal unit $1,700-2,400/kW
Reference price for new NGCC ~$800-1,000/kW
Reference price for used NGCC ~$400/kW
Many U.S. coal plants have no air quality control system installed—Selective Catalytic Reduction (SCR), Flue-Gas Desulfurization (FGD), etc.3
Replacement or retrofitting is costly, which increases the need for cooperatives to optimize generation assets through the monitoring of key operational figures in a systematic manner
Years Built Units w/o SCR & FGD/
% of Total Units Nameplate
Rating (GW) Average Capacity
Factor
Since 1970 131/14.2% 42.8 72%
1960–1970 441/47.8% 21.4 52%
1950–1960 305/33.1% 14.2 50%
Before 1950 44/4.7% 2.8 27%
Source(s): 1NERC 2011 Summer LTRA and 2010 Special Assessment; 2ScottMadden analysis of EIA data; 3Power Magazine, April 2011
Projected reserve margins
could fall below NERC
required levels in some
regions
NERC Projected Impact of EPA Regulations on Reserve Margins
Copyright © 2012 by ScottMadden. All rights reserved.
Resource Portfolio Planning:
Installed and Planned Generation Capacity
Cooperatives need to understand how their resource portfolios have developed over time as compared to peers and other market players, how their existing portfolios are poised for the future, and what are the resulting implications.
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Observations
Planned generation capacity for IOUs is more diversified than for cooperatives—renewables continue to play a growing role
With new emissions controls, very few (if any) new coal builds will occur, and coal retirements will become more prevalent
Increased uncertainty for traditional baseload resources (i.e., coal and nuclear) means increased importance of diversification, including renewables
Demand side strategies—Energy Efficiency (EE) and Demand Response (DR)—are emerging as alternatives to capacity additions
Some Implications for Cooperatives
With smaller scale (and smaller balance sheets), cooperatives will have increased difficulty with retrofits and fuel diversification
Less costly alternatives to supply additions (EE and DR) should be considered
— More “care and feeding” required (e.g., MMV)
— Proper energy regulatory framework required for success
— Customer penetration a critical success factor
Resource portfolios change slowly, especially for an individual cooperative. This makes it increasingly
important for cooperatives to get the most out of the assets they have.
Installed and Planned Generation Capacity by Vintage and Fuel Type
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
19
35
19
40
19
45
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
20
20
MW
s
Wind
Water
Oil
Nuclear
Gas
Coal
Biomass
5,000+
0
5,000
10,000
15,000
20,000
25,000
MW
s
WindWaterSolarOther NonrenewableOilNuclearGeothermalGasCoalBiomass
25,000+
Planned IOUs
Top Co-ops*
More
diversified
additions
incorporate
various
renewables
Planned coal
capacity is
less certain in
out years
Much of the U.S.
coal fleet is at
least 30 years old
Plentiful gas reserves
make gas the cheap,
clean option for new
additions
*Assets more than $1 billion or annual revenue more than $500 million; Source(s): SNL
Copyright © 2012 by ScottMadden. All rights reserved.
Comprehensive Asset Management:
Developing Plans and Making Decisions
Cooperatives can get the most out of the assets they have through a well-designed and well-executed comprehensive asset management program. Comprehensive asset management is a strategy that seeks to optimize the life-cycle value of a portfolio by managing each asset according to its established management plan.
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An effective asset management process lays out a clear decision path based on value analysis and is executed in a consistent and logical manner.
Identify input variables and asset impacts
Develop a long-term view of the value of each
asset
Use results as the basis for long-term
investment decisions
Establish basis for development of
Capital/O&M spending on units
Identify and quantify risks to long-term value
Develop initiatives to improve value
There are several interdependent and iterative steps used to build a management plan for each generating asset. Analysis for each generating asset should occur on a regular
basis. Updates based on key issues/events that impact value can be a good idea, but the key is to analyze at regular intervals. Otherwise events can distort analysis
It is critical to perform this work at regular intervals, not just in response to an event or a senior management question
Using the same process and the same tools over multiple instances produces patterns that are important to decision making
It is difficult to make a decision of this criticality based on one negative NPV outcome, but if the numbers go negative and stay negative, it becomes much clearer
As
se
t
Ma
na
ge
me
nt
Pro
ces
s
De
cis
ion
Pa
ths
Reconfigure the Asset Reconfigure Repower Change operating parameters
Retain and Optimize the Asset Process, procedure, and protocol review Strengthen outage and routine maintenance Implement mechanical integrity plan Align CapEx and O&M budgets to asset optimization plan
Shut Down the Asset (e.g., retire/mothball) Program management office setup Fleet asset adjustments Decommissioning/transition plan Financial, regulatory, HR, and communication transition plan
A decision to reconfigure, optimize, or shutdown an asset will be determined by your viewpoint on key trends and your
evaluation of future value creation for the asset:
Revenue > Cost Revenue < Cost
Dispatched (Actual MW)
Adding Value Destroying Value
Not Dispatched Missing
Opportunity Not Competitive
Copyright © 2012 by ScottMadden. All rights reserved.
0
2
4
6
8
10
2006 2007 2008 2009 2010
1st Quartile 2nd Quartile 3rd Quartile
0
10
20
30
40
50
60
6,000 7,000 8,000 9,000 10,000 11,000
Net
Cap
acit
y Fa
ctor
(%)
Heat Rate (MMBtu / Kwh)
Comprehensive Asset Management:
Improving Performance
A well-executed comprehensive asset management program will improve the performance of existing assets in order to extract more value from these resources. A critical tool for improving the performance of generating assets is operational benchmarking.
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Source(s): 1NERC GADS – Cumulative figures for all U.S. coal steam turbines, 350-500 MW capacity, in all regions
with vintages between 1975-1985. 2Ventyx – Five-year cumulative figures for 21 CC plants from nine of the top cooperatives, those with assets
more than $1 billion or annual revenue more than $500 million.
Example #1: EFOR for Comparable1 Coal Plants In leading cooperatives, benchmarking facilitates two key
components of sound management:
— Fact-based decisions and consistent comparisons
— Measurable, objective, and externally referenced definitions of success
Benchmarking is a foundational part of the business planning process and is used to set goals, identify gaps, and develop initiatives to close those gaps
How you benchmark must be tied to how you measure and manage (focus areas and indicators)
— Benchmarking should not be a one-time event and must be an integral part of the planning and improvement process
— Target-setting benchmarking should be replicable and based on data that is industry accepted and defensible
Benchmarking helps set reasonable targets that are aggressive but achievable by establishing relative performance for goal setting
— Example #1(see chart, above right): My 400 MW coal plant has an Effective Forced Outage Rate (EFOR) of 6%, which is third quartile performance relative to peers. Our target will be second quartile performance within three years
— Example #2 (see chart at right): My 400 MW combined cycle (CC) gas plant is operating at a heat rate nearly 30% above peer plants with similar net capacity factors. Our target will be to reduce heat rate by 25% within three years
Current performance
Target
Performance Gap %
Current performance
Example #2: Heat Rate vs. Net Cap Factor for Comparable2 Gas Plants
Target
Performance Gap
Copyright © 2012 by ScottMadden. All rights reserved.
Contact Us
ScottMadden has undertaken numerous consulting projects for cooperatives across the country. If you are interested in learning more about managing generation assets, please contact us.
Marc Miller
Director ScottMadden, Inc.
3495 Piedmont Rd, Bldg 10
Suite 805
Atlanta, GA 30305
Phone: 404-814-0020
Brad Kitchens
President and CEO ScottMadden, Inc.
3495 Piedmont Rd, Bldg 10
Suite 805
Atlanta, GA 30305
Phone: 404-814-0020
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