Managing Director & Senior Partner
A Holistic Approach to Operations
Around the world there is a growing focus on energy networks and operators’ responsibility for the planning, construction, and maintenance of grids and pipelines. Achieving operational excellence has become an imperative as a result of increasing investment as well as regulatory and customer pressures—all occurring in an economically constrained environment. Utilities are challenged to go beyond achieving savings on narrow functions to develop a holistic approach that achieves true excellence—both cost efficiency and quality improvement.
Investment dynamics are exerting new pressures on operators. In developed countries, key drivers include the replacement of aging infrastructure (much of which is more than 50 years old and increasingly subject to failure), the interconnection of regions and states, and the reinforcement necessary for the integration of renewable-power generation. In developing countries, the key driver is grid expansion to cope with the expected increase in per capita electricity consumption as a result of accelerating urbanization and industrialization.
In addition, the rise of smart-grid development has important ramifications for energy networks worldwide. NRG Expert estimates that global capital expenditures in power transmission and distribution will grow 5 percent anually in the coming years, reaching more than $220 billion by 2015.
Regulators continue to put pressure on network operators to reduce costs. Thus, it has become standard practice to incorporate efficiency factors in the regulation of energy networks. For example, over the past 15 years, most European countries have moved from cost-plus to performance-based regulation, which allows network operators to keep the profits made through reductions in operating costs—as long as they achieve or exceed the efficiency target. Achieving savings is becoming particularly hard in some countries where such regimes are well established and the low-hanging fruit has already been picked.
Since the financial crisis, which created significant uncertainty and reduced credit availability, utility companies have been finding it harder to access financial markets. This difficulty is forcing network operators to be more efficient in their allocation of resources.
At the same time, improving reliability is gaining importance in the digital economy. For instance, according to the U.S. Department of Energy, power outages and blackouts cost the U.S. economy $150 billion annually. As a consequence, most countries have introduced quality considerations into their regulation of energy networks.
In this challenging environment, achieving operational excellence is a necessary best practice for energy network companies around the world. However, while some have focused on specific areas such as reducing interruptions or achieving savings on field services, relatively few have developed a holistic approach that achieves cost efficiency and quality improvement, the holy grail of network operators.
Achieving true excellence requires companies to rethink how they look at their operations and to focus on the end-to-end process rather than on narrow functions. On the basis of its experience working with network operators around the world, The Boston Consulting Group has identified best practices and solutions that break the cost-versus-quality compromise. By going beyond the standard levers to cover all the critical processes along the value chain, these best practices deliver a bigger quality bang for the buck. BCG experience shows that a network operator can achieve cost reductions of around 15 percent if it pulls the right combination of levers and implements the appropriate program.