Asset Optimization Explained

To the editor: In the Oct. 1, 2002 issue ("The Fourth Wave," Frontlines, p. 4), executive editor Richard Stavros discusses how the term "asset optimization" has been used ambiguously to describe a tactical means of extracting more value from generating assets. Today, the need to define clearly the activity of "asset optimization" will be crucial as Wall Street is now skeptical of ambitious growth plans, and power companies are looking for safe options that will keep analysts happy and yet generate sufficient profit for shareholders. Many companies are getting back to basics-divesting non-core business activities and focusing on their physical assets as drivers of income. This could be viewed as a shrewd move, as there is a vast amount of value to be extracted from power plants. Of course, some equate asset optimization with cost reduction. But profit is not always achieved by reducing costs. Rather, "true asset optimization" encompasses not only costs, but also expenditures and several other considerations. Optimizing Expenditures. Consider, for example, a plant running at baseload. A baseload tactic is correct if that is what the market demands. However, even if this is the optimal maneuver, there are usually at least a few hours within a 24-hour period where the price per kilowatt hour is less than the total cost of the fuel-to-power conversion process. During that time, it does not make commercial sense to generate, since the plant would be running at a loss. Many operators running at baseload aim to be the lowest cost producer. However, if the revenue gained from generating during a particular hour is less than the cost of production, then the lowest cost producer is operating at a loss. Consider the basic equation that profit = revenue - costs. Power producer A has the lowest overall costs. Total costs for power producer B are greater, but so is the difference between revenues and expenditures. Even though A is the lowest cost producer, B is the more profitable of the two. Admittedly, flexing a plant can increase wear and tear on different components, increasing the potential for unplanned outages, and putting strain on the level of future returns. This is why a thorough cost analysis must be carried out in terms of the projected cycling pattern of the plant within its market. This type of analysis may not reduce overall plant expenditure, but it will result in an optimal cost and investment strategy. Generators will get a "better return on their money," in terms of plant performance and ultimately revenues gained. Optimizing Efficiency. Others equate asset optimization with increased efficiency and, to a certain extent, this is true. If an asset can generate the same number of megawatts using less fuel, or expend less pollutants, then that plant will be more efficient. However, over-investment in one area of the plant starves other areas of much-needed investment to make the plant operate at the commercially optimal level. Additionally, over-efficiency often leads to a high residual value that is locked into the plant at the end of its operating life, and cannot