Our value cycle approach has been applied to strategic asset management in a number of utility companies including Scottish Power, Thames Water and Transco. A critical issue facing all UK utilities is the trade-off between short term profitability, long term asset serviceability and risk.

Client issues

Scottish Power is an international energy company. SP Energy Networks, supported by Valculus, has been using value cycle simulations over several years to develop, test and communicate asset investment strategies in the electricity network and distribution business.

Utility customers, regulators and capital markets are ever more critical of service levels and increasingly unforgiving of service failures. Regulators, in particular, are now looking at investment, profitability and long-run customer serviceability and risk.

Asset managers have to balance customer service, efficiency and shareholder value through two interdependent levers - efficient operational spending (Opex) and effective capital investment (Capex). Opex and Capex must work together to deliver maximum returns on investment, high customer service in the present, and improving and sustainable service in the medium and longer terms, at acceptable levels of risk. Today's capital projects and operational maintenance policies will impact regulated performance for many years to come, so the focus of asset management thinking shifts from tactical, data-intensive analysis to strategic, long-term customer service performance objectives.

Strategic asset management means developing and managing the knowledge of key people and also communicating effectively with key stakeholders about future options for asset investment and performance.

The value cycle approach

A simulation model of the client’s asset infrastructure was developed to portray asset ‘ageing chains’ – the process through which asset performance changes over long life-cycles. Each asset type (e.g. overhead lines, transformers, sub-stations) has specific ageing characteristics, but the process of maintaining performance is similar in each case – Opex (maintenance, refurbishment) and Capex (new build, replacement).

The simulation models are transparent in the eyes of senior asset managers. In order to recognise uncertainly and to test for strategic risk, models are rigorously tested at the extreme limits of control variables and ‘sanity-checked’ to develop confidence.

The impact on corporate value was assessed through a financial model which attaches costs and revenues to each and every stage of asset life cycles. The modelling approach was simply configured for client specific valuation methods. In this manner, value and performance trade-offs are tracked over time in respect of revenues and a wide range of KPI’s including ROS, ROI, growth, R&D productivity and gain.

Finally although specific to this particular client’s needs, the utility simulation models are fully generic (and indeed configurable) to the needs of any utility industry client.

Client outcome

The simulations revealed some significant gaps between long-term service objectives as set by the Regulator and the likely service outcomes of current Opex and Capex plans. Conventional wisdom had suggested that the company could bridge the gap mainly through maintenance and refurbishment - a major shift to new build and replacement was required in some cases.