Managing Generation Assets
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Managing Generation Assets

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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 ...

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.

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Managing Generation Assets Managing Generation Assets Presentation Transcript

  • Copyright © 2012 by ScottMadden. All rights reserved. Managing Generation Assets A Generation and Transmission Cooperative Strategic Priority April 2012 Contact: Brad Kitchens (sbkitchens@scottmadden.com) Marc Miller (mdmiller@scottmadden.com)
  • 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. 2 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 DescriptionComponent 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. 3 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. 4 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 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 MWs Wind Water Oil Nuclear Gas Coal Biomass 5,000+ 0 5,000 10,000 15,000 20,000 25,000 MWs Wind Water Solar Other Nonrenewable Oil Nuclear Geothermal Gas Coal Biomass 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. 5 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 Asset Management Process DecisionPaths 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 NetCapacityFactor(%) 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. 6 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 mdmiller@scottmadden.com Brad Kitchens President and CEO ScottMadden, Inc. 3495 Piedmont Rd, Bldg 10 Suite 805 Atlanta, GA 30305 Phone: 404-814-0020 sbkitchens@scottmadden.com 7