Gencos embrace benchmarking as strategic tool

The utilities that have chosen to remain in the generation game are making a renewed commitment to becoming fitter competitors. From their executive suites on down, in response to the imperatives of Wall Street and the investor community, one genco after another is embracing continuous improvement and generation excellence. The tactics being used to support those strategies are reducing costs, maximizing unit availability, and managing resources on a life-cycle basis.

For gencos, the increasingly common goal—handed down from the board and the CEO—is to be among the “best in the business,” usually defined as ranking within the top 10% to 25% of comparable companies in key performance measures. Any good executive will tell you that you can only manage what you can measure, so industry benchmarking data are absolutely vital to assessing performance.

Lean, mean machine

Benchmarking requires comparing yourself to your peers and looking at how high the cost and performance bars have been set by the best in your class. Modern benchmarking practices and information sources now make both possible. As Paul Kramer, director of operations support at Allegheny Energy, explains, “We are committed to benchmarking our power station costs and performance as a means of fostering an environment that focuses on continuous improvement. Benchmarking has become an integral part of ensuring that Allegheny Energy Supply repositions itself as an industry leader in power generation.”

Gone are the days when benchmarking cost a fortune and took a year or more to complete. New genco benchmarking services—such as the Generation Knowledge Service (GKS) database—are extremely cost-effective and dynamic. They make it easy to set performance goals and to update those goals every budget cycle, as progress is made, or when market conditions change.

One generator’s story

One large Midwestern utility (which wishes to remain anonymous) has been benchmarking the performance of its generating assets for the past three years. Pleased with the results, the company recently incorporated benchmarking into its budgeting process. Using the GKS database and software to carefully identify industry peers and key targets of excellence, planners at the utility routinely develop—and sometimes reject—project recommendations based on targets developed from these peer groups.

The utility has identified three key performance indicators for its generating units: equivalent forced outage rate (EFOR), equivalent availability factor (EAF), and total non-fuel O&M dollars spent per kilowatt of installed capacity ($/kW). It also has divided the units into four peer groups: large coal, medium coal, small coal, and hydro. For each peer group, analysts search the GKS benchmark database and highlight the top performers of that group by each performance measure. This process, performed annually in preparation for the utility’s budgeting cycle, defines the key targets and quantifies the shortfall for each unit of the power plant fleet.

The benchmarking process has become a key driver of the utility’s business plan development and project prioritization. Benchmarking’s goal is to increase overall fleet performance—and, by inference, competitiveness—such that each generating unit is in the top 25% of its peer group, as measured by EFOR, EAF, and non-fuel O&M $/kW. Plant staffs are intimately involved in this process; the business plans they develop, including strategies for achieving the performance levels, and the project priorities they set help implement the strategies.

As an example of how this process works, following are some key initiatives that were identified and approved during the utility’s most recent budgeting cycles:

  • At one key baseload plant, unit availability was determined to be below the peer median, mainly due to boiler outages. Plant management estimated that improving the existing boiler maintenance program’s attention to tube leaks and fouling would improve availability to the point that more than $20 million of additional revenue would be generated—more than justifying the added maintenance cost.
  • Several units across the fleet were not meeting availability targets derived from peer unit comparisons, although they were meeting their cost targets. Based on economic data produced by the benchmarking process, utility management decided to allocate additional maintenance dollars to the units to improve their availability.
  • At another key baseload plant, the operating costs of one unit were running high due to constraints in the plant’s overall coal-handling capacity. Here, the GKS program advised that increasing that capacity would not be a sound investment. As a result, the plant shelved a proposed project to boost coal-handling capacity and modified the cost targets for that unit to better reflect reality.
  • For several units in the “small” category, the benchmarking process indicated that lengthening the interval between planned outages would make more O&M resources available elsewhere in the fleet, where they would produce more value. Management acted on that advice, but only after determining that the small units were performing close enough to benchmark goals to extend the interval between overhauls.

A growing trend

Two more-recent adopters of the GKS system that have agreed to share their experiences are Allegheny Energy (Greensburg, Pa.) and American Electric Power (Columbus, Ohio). Both utilities have used benchmarking in the past, and their current motivations are similar—to identify the class of the generation field and then prioritize their spending to join it.

At both companies, the order to resume benchmarking has come from the board and the executive suite. Key indicators of excellence are taking shape; they include cost, performance, and safety, and—in Allegheny’s case—staffing levels as well. Now both companies want to take benchmarking even further, by using the power of the GKS system to explore in detail and learn from the best practices of their peer group’s leaders.

The reemergence of benchmarking in power generation is driven largely by strategic and financial imperatives. The reinvigoration of such a time-honored asset management practice must be attributed to a key change in the benchmarking process itself. Compared with traditional benchmarking studies, benchmarking by database is more dynamic, more affordable (especially to smaller gencos), less labor-intensive, and better supports performance of “what if” analyses for defining (and redefining) peer groups and performance criteria.

Wave of the future

The current “buzz” about benchmarking among gencos and the growing number of companies developing internal benchmarking staffs more than suggest that the technique has strategic value. They make clear that generation benchmarking is no management fad but rather an increasingly important genco business process.

The potential of benchmarking by database appears to be enormous. Used as the front end of an asset management process, to help generators identify appropriate goals and improvement strategies, the technique has already proved indispensable to a handful of utilities, as described above. Many more are taking the first steps needed to use benchmarking results to drive their generation fleets toward excellence. Investors, customers, and other stakeholders in the generator business look to reap benchmarking’s benefits—more-reliable, more-profitable, lower-cost electricity production—as the future unfolds.

—Brad Whitlock is associate director at Navigant Consulting and can be reached at 818- 368-6847 or bwhitlock@navigantconsulting.com. Lew Rubin can be reached at 831-459-8084 or portal@cruzio.com. For more information on GKS, see www.beyondbenchmarking.com or call 612-868-5955.