Let”s Take A Closer Look at Generation Operational Excellence

Accelerating world demand for energy, coupled with recent natural disasters,
is driving and will continue to drive, gas, oil, coal and nuclear fuel prices
to unprecedented levels. Increasing global warming concerns are driving additional
emphasis on tightening emission limits, requiring utilities and merchant generation
companies to spend hundreds of millions of dollars per fossil-fueled plant to
either comply or shut down existing plants. Both ends of the generating process
are putting plant, division and corporate generation managers in an ever-tightening
squeeze to decrease costs in the operations and maintenance budgets.

This phenomenon is not new. For the last 10 to 15 years, energy and utility
companies have had to do more with less. The problem now is that the low-hanging
fruit has been harvested. Voluntary separation programs and other destaffing
exercises have been conducted, which have yielded the requisite operational
and maintenance budget decreases. However, this has been done without rethinking
the way work gets done or considering how to apply technology to assist in better
operational and maintenance decision making.

In other words, for the past decade or more, most of us in the energy and utilities
industry have talked about operational excellence, a.k.a. cutting costs, without
understanding what the term really means. In light of ever-increasing pressures
and the reality that we may have cut our organizations to the point that we
might have jeopardized the long-term integrity of the generation assets for
which we are stewards, perhaps it is time to really understand and implement
operational excellence techniques.

What Is Operational Excellence?

A Yahoo search on operational excellence yields more than 5 million hits, mostly
for products or services that can yield operational excellence for a company.
In searching for a definitive definition of operational excellence, the best
that I have found over the years comes from The Discipline of Market Leaders
by Michael Treacy and Fred Wiersema.[1] In Chapter 4, “The Discipline of Operational
Excellence,” the reader can start to draw some interesting insights into what
behaviors and traits a company that competes under this model should possess.[2]

The fundamental characteristic the authors cite is lowest cost, but that has
some additional caveats. What lowest cost means is that nobody else in the market
can sell the product or service for less than you can when all of the costs
to the consumer of owning or using your product or service are taken into account.[3]
Other characteristics include:

  • Highly regimented, proceduralized and rules-driven;
  • Aggressively pursue automation to minimize labor and lower variable costs;
  • Standardized assets and efficient operating procedures;
  • Rejection of variety;
  • Work to reshape customers’ expectations since you cannot be all things to
    all people;
  • Focus on activity-based costs and transaction profitability;
  • Everyone knows the plan, the rules of the game and exactly what they have
    to do and when;
  • Low overhead with efficient, re-engineered business processes; and
  • Passionate about measuring and monitoring to help ensure rigorous cost and
    quality control.[4]

Many of you reading this may be saying that this is fine for other companies,
but what does this have to do with companies that have large fleets of generation
assets? The answer is that everything these authors said about operationally
excellent companies in 1995 applies today, and it especially applies to generation-intensive
companies.

Applying Operational Excellence Principles

Before we start to apply operational excellence principles, let’s explore the
following background questions:

  • Do you make operational and maintenance decisions based on market-based
    margin conditions?
  • Do your information systems provide the control-room operators with a view
    of the profitability of each unit’s current and cumulative performance so
    you can measure against the business plan?
  • Have unit and portfolio optimization scenarios been developed that take
    into account market conditions and timing thereof, fuel blend, emissions,
    unit consequences, heat rate, EFOR (emergency forced outage rates), derates,
    superheat temperature, optimum operational frequencies – deslag, soot blow,
    air preheater washes – and crossorganizational process optimization between
    trading and operations?
  • Are you doing the right maintenance work for the right reasons, i.e., to
    what extent have you implemented reliability-centered maintenance and condition-based
    maintenance to one-time reduce the amount of maintenance workload?
  • Are you performing the remaining maintenance work as effectively and efficiently
    as you can, i.e., are you optimizing the performance of your personnel in
    getting work done?
  • Are you providing the correct metrics to manage the processes and achieve
    the operational excellence vision?

Reading through this list of questions, some of you may have answered “yes” or
“kind of/sort of,” and some of you may have felt that the questions did not apply
to you since you are a base-load or peaking unit. The fact is there are very few
companies that can answer yes to all of these questions. However, answering yes
to these questions is at the heart of becoming an operationally excellent generation
company.

What Is the Value of Applying Operational Excellence Principles?

The value of applying operational excellence principles is great. Some of the
benefits of doing so include the following:

  • Market-based margin decision making: The value of focusing on this
    area will vary from company to company and market situation to market situation.
    However, the key areas for improvement and range of savings include:

    • Outage in a box – Shorter-duration, more frequent outages based on market
      conditions could potentially reduce purchased power costs, reduce risk
      and reduce available production to match market conditions.
    • Derates to perform maintenance – Performing derate maintenance when
      market conditions allow will reduce purchased power costs and increase
      revenue.
  • Doing the right maintenance for the right reasons: Effectively implementing
    reliability and condition-based maintenance can onetime reduce the annual
    maintenance workload by 25 to 30 percent without increasing EFOR or unit availability/performance
    (heat rate).[5]
  • Performing maintenance as efficiently and effectively as possible:
    Typically this dimension looks at the direct activity of the maintenance workers.
    Informal benchmarking studies have shown that typical hands-on work direct-activity
    rates for non-nuclear generation facilities run 45 percent of every 8-hour
    day.[6] Stated differently, only 3.6 hours of every 8-hour day for every maintenance
    trades and labor person is spent on hands-on maintenance work. By focusing
    on delay codes and proactively working with unions, it is feasible to easily
    increase this to 50 percent with a stretch to 55 percent if you focus on the
    causes of delay in accomplishing maintenance work. Think about the potential
    impact: If you have a 1,000- person maintenance workforce, every 1 percent
    improvement in direct activity equals 17,800 hours or $1 million at $60 per
    hour fully burdened.[7]
  • Focus on the proper metrics: One of the metrics that an operationally
    excellent generation company should focus on is the percentage of maintenance
    that is planned versus the percentage that is emerging or corrective. Informal
    benchmarks have shown that the percentages for this typically run 60 to 65
    percent for planned maintenance and 35 to 40 percent for emerging or corrective
    maintenance. The target for sophisticated asset management companies is 85
    percent planned and <15 percent corrective or emerging.[8] Furthermore, numerous industry studies have shown that corrective maintenance is four to six times more expensive than planned maintenance.[9] Take a hypothetical generation company spending $750 million on maintenance annually and performing 65 percent planned and 35 percent corrective maintenance. Using a 2X multiplier, improving the planned to corrective maintenance percentages by 5, 10 and 20 percent could yield a $28 million, $55 million and $128 million reduction in maintenance expenses. Using a 4X multiplier, it could yield a $55 million, $119 million and $220 million reduction in maintenance expenses.[10]

The potential savings speak for themselves. Now let’s look at how to make this
happen.

How Does a Company Become Operationally Excellent?

There is no magic solution that you can find, buy and implement to become operationally
excellent. First, it takes a company commitment to designate someone to focus
on operational excellence. Second, the company needs to form a team whose sole
focus is to establish the operational excellence philosophies and key performance
metrics with which the business will be run in accordance. Third, the data and
information necessary to implement the operational excellence vision must be
established. Fourth, the systems that house this information and data must be
identified. Finally, the company’s information technology organization must
be challenged to integrate and provide all of the information the company needs
to be successful.

There is one global generation company that appears to have mastered operational
excellence. The former non-nuclear British Energy generation assets were privatized
during the British deregulation and privatization of the late 1990s. The company
that owns these assets is now RWE Innogy, and most of its success has been attributed
to: 1) a focus on market-based margin decision making, and 2) integrating plant,
transactional and market information to enable effective decision making.

According
to a presentation entitled “Integrating Information Technologies into the Enterprise”
by Robin Gomm of RWE Innogy Plc given at the Electric Power 2004 conference,
numerous benefits can be derived from exploiting IT. Some of these benefits
include cost management (fixed to variable), extension of plant life and improvement
in its performance and efficiency, optimized resource management, and reduction
of operational and commercial risk.[11]

To derive these benefits, previous islands of information must be effectively
integrated and made available to every aspect of the business in order to optimize
end-to-end performance as opposed to parts or portions of processes. For example,
Gomm’s presented paper mentioned the distribution of commercial, performance
and forecasting data. With this accomplished, information could be shared by
the trading department, with the production department regarding such aspects
as the definition of future commitments, enhanced trading activities to optimize
outage planning, and supporting an internal market. Information could be shared
by the production department, with the trading department regarding the definition
of operational and plant technical data in commercial terms, plant risk and
reliability issues, and opportunities for enhanced trading and outage optimization.[12]

In addition, according to Gomm’s paper, distributing commercial, performance
and forecasting data can help promote greater understanding by the trading department
of operational problems and activities, and greater understanding by the operations
department of the trading and asset management processes. Furthermore, data
shared by a company’s internal market can aid in the comprehensive evaluation
of risk in plant operation and in Business Risk Assessment.[13]

Figure
1 shows how integrating plant, market and transactional information might be
accomplished. As shown, the steps involve gathering the data, knowledge discovery
and decision trade-off.

To move toward generation operational excellence, companies also need to move
from a strictly cost focus to a business focus (see Figure 2). For example,
instead of just focusing on cutting costs, companies should focus on increasing
revenue and profits. Instead of just focusing on collecting business data, companies
should focus on creating enterprisewide knowledge. Instead of just focusing
on processing customer transactions, companies should focus on developing innovative
services for customers. This change of focus from cost to business will assist
generation companies in better operational and maintenance decision making and
can help companies become the lowest customerperceived cost provider in the
market.

Conclusion

Becoming an operationally excellent generation company is a transformational
journey. By implementing the steps properly, you can effectively change from
a past focus on cost to a future focus on the business, thereby moving along
the road toward generation operational excellence.

This article represents the views of the author, not the views of TVA.

Endnotes

  1. Treacy, Michael and Fred Wiersema. “The Discipline of Market Leaders.” Perseus
    Books, 1995.
  2. ibid, pg. 49.
  3. ibid.
  4. ibid., pp 51-58
  5. IBM Business Consulting Services analyses 1998–2005.
  6. IBM Business Consulting Services analyses and author audience surveys during
    speaking engagements 1998–2005.
  7. Hypothetical calculation performed by author for this article, 2005.
  8. http://www.maintenancebenchmarking.com/best_practice_maintenance. htm.
  9. IBM Business Consulting Services RCM analyses 1995–2005.
  10. Hypothetical calculation performed by author for this article, 2005.
  11. From “Integrating Information Technologies into the Enterprise,” presentation
    by Robin Gomm of RWE Innogy Plc at the Electric Power 2004 conference held
    March 30–April 1, 2004 in Baltimore, MD, proceedings disc.
  12. ibid.
  13. ibid.