June 17, 2010
by Barry Dyson and Jane Allen
Globally, energy companies will need to make capital investments of US$26.3 trillion just in infrastructure between now and 2030.
Long before the global financial crisis wreaked havoc across virtually every market sector, the power and utilities industry was already facing serious business challenges: the need to upgrade an aging infrastructure and address escalating energy demands in an environmentally responsible way.
The old ways of doing business will no longer do. Energy companies must greatly improve operational efficiencies, especially with such urgent capital requirements that will demand significant corporate investment in the very near term.
How significant are these looming capital requirements? According to the International Energy Agency, between 2007 and 2030 the global industry will need to invest US$26.3 trillion (in year-2007 dollars) in infrastructure alone. To address growing energy demands, power and utilities organizations will need to double their base load generation from both traditional and renewable sources. They also need to invest in new carbon-reducing technologies for carbon capture and storage, smart metering and demand side management. And they must do so despite resource constraints caused by competition for capital.
To succeed, it will be critical to minimize production costs by improving commercial performance. The steps taken by this sector to improve operational efficiency also serves as a model for other industry segments striving to rein in costs while maximizing revenues.
The first step is to pinpoint the functional areas that are underperforming. They’ll differ depending on the type of entity involved, be it investor-owned and regulated utilities or generators, distributors, system operators and wholesalers.
For instance, some organizations may face particular challenges managing their aging assets, streamlining project management or identifying their highest margin services. Others must determine how to transfer knowledge from an aging workforce to a new generation of workers. Still others struggle to connect their employees’ daily activities with the actions they must take to achieve organizational goals. Even fully regulated utilities feel ministerial pressure to tighten their budgets. Regulation also can inspire or impede management’s moves to improve efficiency through revenue requirement and rate-setting practices.
One way to identify operational inefficiencies is to determine how well (and how quickly) executives can lay their hands on critical data that provides an accurate, up-to-date and reliable understanding of the business’s health. At any given time, they should be able to answer the following questions with a reasonable degree of accuracy:
• How much money did the business make yesterday?
• How much money could it have made? (Can you quantify both lost money and lost opportunity?)
• How does current performance compare to projected performance?
• What is the trend? Are you getting better or worse?
• Who owns the problems and how are they responding?
Organizations that cannot effectively answer some or all of those questions will likely face difficulties making informed, timely decisions and may miss out on significant opportunities by failing to act with appropriate speed. Business processes and technologies capable of providing real-time visibility into key performance indicators (KPIs) will help to avoid such negative outcomes.
Like many industries, the power and utilities sector has no shortage of data but many organizations rely on brainpower rather than technology to convert that data into market insight. As a result, a vast repository of corporate knowledge ends up in employees’ heads.
Unlocking this critical business intelligence hinges on linking their knowledge to tangible results, which may require training them to be as good at maximizing commercial performance as they are at keeping the lights on.
Success will come from clearly articulating measures of success, replacing technical KPIs with commercial indicators linked to operational performance, and cascading them down to the knowledge workers and managers responsible for making day-to-day decisions.
Consider how this works in practice. Market-leading organizations have already developed technology infrastructures that provide a real-time overview of controllable costs. Algorithms monitor actual costs and alert key decision-makers when they begin to deviate beyond a specific threshold. This triggers a commercial event log that outlines the day’s performance and the impact that unanticipated costs may have on long-term performance. This type of market-based maintenance allows executives to prioritize responses that will limit revenue loss, or take advantage of emerging opportunities that may otherwise have gone unnoticed.
Refining plant performance to maximize market capabilities improves revenue from the sale of energy, calculates capacity payments more accurately and attracts new streams of revenue from ancillary services such as reactive power or voltage control. This leads to more efficient management of the value chain. For example, in Russia 45% of produced energy is wasted. By aligning production with real-time demand, Russia could realize savings of 300 million tonnes of oil each year—the equivalent of all energy produced in the UK.
Improving plant efficiencies through technology investment, business process redesign or even with initiatives such as lean manufacturing delivers notable benefits, ranging from improved asset use and greater visibility into costs, to lower prices and enhanced operational flexibility. As an ancillary benefit, it provides an ideal way to make more informed capital investment decisions, a capability that will unquestionably be a competitive differentiator in capital-intensive industries.
The transition towards this type of market-based maintenance will take time; however, businesses that want to remain relevant must take these steps to improve performance or risk being left behind.
Barry Dyson is a partner and leader of our power plan efficiency practice in Russia. E-mail email@example.com. Jane Allen is a partner and the national leader of Deloitte Canada’s power and utilities practice. E-mail firstname.lastname@example.org.