For utility asset managers, the primary goal is invariably to take decisions which increase value for the energy, gas or water company.
One of the key values for any organisation is risk and in many asset-intensive businesses such as utilities, a big part of overall strategy is managing risk.
Existing assets inherently have risk built-in, in the sense that they can fail. Managing risk is therefore a central component of strategy, explains Boudewijn Neijens, Chief Marketing Officer at Copperleaf Technologies.
He explains: “We have to understand what our risk position is, we also have to understand what our risk tolerance is.”
Asset management - decision framework
Determining these functions will influence to a large extent how decisions are made within a utility.
A definition of risk is effectively the probability of an event happening multiplied by the consequence of that event happening.
“If we're going to create a project to reduce risk, the benefit or the value of doing that particular project is the risk reduction that we’re cashing in on,” says Neijens.
Typically there are different types of risk within a utility, for example safety, environmental or financial risks such as the lost ability to serve the customer. Many companies, whether in the utility space or otherwise, try to quantify how these risks compare.
Neijens observes: “We should be able to build a function which allows an organisation to compute in one number a unique metric of the overall value of any project that it would want to undertake.”
Equating risk to a financial value for an organisation essentially normalises the definitions of the consequences of every single risk type in such a way that they can be effectively compared.
“We could generalise this concept and actually apply it to any value element,” says Neijens, adding: “There are different ways of identifying what are the values that you're trying to maximise and minimise in your organisation.”
Translating asset values into metrics
Value can be interpreted slightly differently depending on where you are within a utility.
At the highest level, it translates as a mechanism to express what value means to the various stakeholders in order to meet their expectations.
Neijens explains: “You have to become more granular in the way that you describe what value means.
“This is important because at any point in time you have different internal stakeholders represented around the table.
“Generally speaking every one of those stakeholders will have their own perspective of what they're trying to maximise or minimise.”
Making utility asset decisions - how to determine the best value?
Each of these elements has merit that must be quantified to produce an aggregate score or measure of value that the whole company can agree and act upon.
The key decision-makers are being presented with any number of new projects or ideas, every one of which is of course, urgent, important and critical, but possibly developed using different values or different metrics.
If a senior utilty executive is presented with multiple competing projects which are difficult to compare, how can they select the optimal projects or investments in such a way that actually maximises value for the organization?
Copperleaf’s Neijens offers a solution: “If I could actually translate my overall values into metrics, cost is an obvious one, I can compute the cost of a particular project quite easily,” he says.
“I might be able to measure the risk that I'm mitigating by undertaking a particular project, I can also possibly measure the improvement in reliability, the increase in profit etc.”
“The first thing you have to start doing is, of course, look at metrics that translate your values into something that actually can be measured over time and in a relatively rigorous way.”
This leads to the concept of developing a value function - a mathematical expression of the blend of all the various value measures - a mechanism to translate the high-level strategic goals of the organisation into metrics or value measures.
These value measures have to adhere to a number of principles. For instance, in computing the value of a particular project, all the competing projects should use the same assumptions with regards to inflation, the cost of capital and so on - financial parameters which also have to be injected into the value function.
“For every project I undertake I can actually express numerically what the benefits or the contribution of this particular project is to the overall value score. That's the overall concept of translating strategic objectives into something which is measurable,” says Neijens.
Every energy company will have its own value framework and particular metrics that will be specific to the business.
By coming up with a conversion rate for every single one of the different elements in the value framework - in such a way that they're comparable - it is also possible to apply weighting to particular elements through the business cycle so they will more easily come to the top of the rankings.
It is in this way that the most valuable projects are executed first, minimising risk and maximising value for the organisation.