Let''s Take A Closer Look at Generation Operational Excellence by Chris Trayhorn, Publisher of mThink Blue Book, May 15, 2006 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, lets 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 units 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 lets 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 companys 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, Gomms 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 Gomms 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 companys 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 Treacy, Michael and Fred Wiersema. The Discipline of Market Leaders. Perseus Books, 1995. ibid, pg. 49. ibid. ibid., pp 51-58 IBM Business Consulting Services analyses 19982005. IBM Business Consulting Services analyses and author audience surveys during speaking engagements 19982005. Hypothetical calculation performed by author for this article, 2005. http://www.maintenancebenchmarking.com/best_practice_maintenance. htm. IBM Business Consulting Services RCM analyses 19952005. Hypothetical calculation performed by author for this article, 2005. From Integrating Information Technologies into the Enterprise, presentation by Robin Gomm of RWE Innogy Plc at the Electric Power 2004 conference held March 30April 1, 2004 in Baltimore, MD, proceedings disc. ibid. ibid. Filed under: White Papers Tagged under: Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.