Smart Grid Demands a Collaborative Strategic Sourcing Approach

Transcription

1 Smart Grid Demands a Collaborative Strategic Sourcing Approach Andy Flores and Quentin Watkins Copyright 2010 by ScottMadden, Inc. All rights reserved.

2 The potential for utilities to create value through Smart Grid investment is great, but unique challenges and risks will reshape traditional strategic sourcing approaches for this emerging technology. Successful, full-scale Smart Grid deployments will require collaborative sourcing approaches to minimize utility system risks and to effectively capture sustainable benefits for the utility and its stakeholders customers, communities and local economies, regulators and legislators, and the utility s investors. Strategic sourcing methodologies today are well defined and fairly standardized (see graphic below). This approach has proven to be effective, but in some cases, it can become an exercise for the sake of following a methodology rather than getting the best long-term deal that maximizes lifecycle value for the company. Spend and Market Analysis Sourcing Strategy Competitive Evaluation Negotiations and Contracting Performance Management For large-scale Smart Grid deployments, companies must go beyond the standard sourcing approach. It is not enough to perform supplier and market research, select a pool of vendors, send out an RFP, and hope for the best possible response. Similarly, associated sourcing negotiations and contracting should go beyond standard terms and conditions. Companies making Smart Grid investments must consider the uncertainty of future upgrade requirements as well as intellectual property management issues that arise when making these investments. For example, the bleeding edge/proof of concept nature of many of today s Smart Grid investments creates the potential for utilities to lose competitive advantage if adequate protections are not addressed in vendor contracts. As a result, a much more collaborative sourcing partnership between buyers and vendors is required to ensure: Vendors fully understand buyers requirements Buyers are thoroughly aware of vendor capabilities and associated risks Unnecessary risks are not priced into bids/contracts and unduly borne by utilities Unit purchasing costs resulting from strategic sourcing s Total Cost of Ownership (TCO) approach are expanded to reflect a Total Lifecycle Model perspective, which incorporates vendor, technology, and operating risks in addition to the values/benefits provided by Smart Grid Smart Grid vs. Traditional Utility Infrastructure Investment The broader risk categories impacting the procurement decision are a key differentiating aspect of sourcing for Smart Grid compared to traditional tried and true utility infrastructure investments. Today, there is much discussion by Smart Grid equipment vendors and system integrators about managing technology risks associated with these investments and the Copyright 2010 by ScottMadden, Inc. All rights reserved. 1

3 additional system capabilities they enable (e.g., demand response, energy management, small-scale customer renewable applications, etc.). Although IT/equipment risk is a key and familiar category for any technology investment, there are also two additional larger areas of uncertainty (risk) that must be considered: Undefined or evolving operational business risks associated with Smart Grid Vendor risks specific to the Smart Grid technology/equipment space First, unlike equipment sourcing for traditional utility operations that have remained relatively unchanged for years, true clarity does not yet exist regarding the operational use, value, and risks of Smart Grid. On one hand, energy companies are trying to understand how to use this new, emerging infrastructure to create sustainable, long-term value for stakeholders. On the other hand, they must deal with constantly changing operational business requirements as Smart Grid capabilities continue to evolve through rapid ongoing technology advancements. This increases utility strategic investment risks by creating a highly complex, continuous yearto-year procurement cycle. Second, vendor selection risk specific to Smart Grid investments can make these long-term sourcing decisions quite troublesome, particularly given the many I ve got the better mousetrap vendor choices in the marketplace. Many of the vendor start-ups that currently hold a unique piece of the total Smart Grid technology solution may not prove to be viable business partners in the long-term, which adds further to the need for thoughtful consideration of vendor risks. Lastly, equipment interoperability/scalability issues can also present a tremendous challenge in the integration of this new hardware and software with legacy systems. The graphic on the following page illustrates many of these new risks as well as some emerging market, operational, technology, financial, regulatory, and stakeholder planning variables that must be considered when developing Smart Grid sourcing strategies. The new uncertainties associated with these variables are unique to each utility s market context and operations, and they can significantly impact a utility s ability to create lasting value for stakeholders through the Smart Grid (i.e., reliability, efficiency/cost savings, compliance, and customer service). Copyright 2010 by ScottMadden, Inc. All rights reserved. 2

4 Members & Energy Markets Power Supply & Delivery Operations Stakeholder & Rule Maker Engagement Financing & Capital Key market, regulatory, utility, and economic drivers/trends True value of new data (e.g., use, quality/validation, access) Higher customer awareness Increased knowledge of customer New customer satisfaction expectations/metrics Fit/timing of new demandside options and resources Complexity of value propositions Economic development impacts and utility growth Cross-segment tech applications M&V compliance/monetization Distribution s role not just wires Breadth/depth of grid control Beyond the meter requirements Supply/grid benefits reliability, cost, capex, compliance, etc. Integration with IRP, PPAs, etc. Future state functionality Real needs and timing Technology maturity Lifecycle; early replacement Recovery versus value/timing Systems/component integration Cyber-security Interoperability standards Workforce Skill requirements and mix Education and training Outsourcing (including tech support) Significant regulatory requirements Aligned, cohesive, enterprise message of Smart Grid value Consistent message from all levels (management/staff) Information/education of Smart Grid what it is/benefits Customers Community leaders Others including influencers Engagement with rule makers Same message Differentiate infrastructure (value, risk, and recovery) Require achievable rules/mandates and rate policies Local and regional benefits Contingency planning for unfavorable rulemaking Increasing lender due diligence Value of increased information (data) to lowering risks System operations Smart Grid investment Smart Energy investment Favorable regulatory/legislative climate Customer support for rate increases Greater capital access and lower cost of capital New non-traditional capital options (including stimulus) New financial metrics New/adjusted operating metrics Utilities that incorporate these variables into planning/sourcing decisions and manage the broader risk profile will be much more likely to translate large-scale Smart Grid deployments into sustainable value for stakeholders. The graphic on the following page provides a few representative examples of new areas of value that can be achieved with incremental Smart Grid investments that align well with a utility s energy markets, businesses, and operations. Copyright 2010 by ScottMadden, Inc. All rights reserved. 3

5 Potential Areas of Utility Core Value Impacted by Smart Grid Supply/IRP Load shifting increases baseload utilization Intermediate/peaking generation (CTs and CCs) DR reduces dispatch of expensive gas generation Operate closer to optimal utilization Lower O&M Longer equipment lifecycle Energy efficiency lowers load shape Defers risky baseload Bridge gap to nuclear Expanded fuel options Renewables no fuel cost energy (realtime FAC) Renewables with DR/storage firm no fuel cost resource DR combined with financial fuel hedging Grid Management Voltage management reducing system energy costs DR helps loading and circuit management Transmission/distribution automation (T/DAI) Condition-based maintenance savings (e.g., recloser duty cycles, transformer oil, etc.) Optimize circuit loading; defers capex Outages and power quality Workforce AMI isolates customer-side meter issues (e.g., not utility-side issue, reduced truck rolls, etc.) Faster outage recovery (e.g., electronically walk lines, verify restoration, etc.) Localize outage with auto switches Cost of new talent/skills Mobile/digital workforce efficiencies/costs Vendor outsourcing mix, services, etc. Early infrastructure replacement Tech maturity and required/unforeseen upgrades Cyber-security/interoperability costs Copyright 2010 by ScottMadden. All rights reserved. Utility Strategic Sourcing Strategies for Smart Grid Sourcing strategies for Smart Grid must have at their core a foundational understanding of the new areas of value enabled by Smart Grid. These strategies must also clearly incorporate the required system capabilities, deployment sequence, and implementation timing to be able to effectively communicate business, operating, and technology requirements to potential Smart Grid vendors. This clarity increases the likelihood that vendor Smart Grid offerings are evaluated based on a comprehensive risk profile, and the utility is able to manage its Smart Grid sourcing efforts cohesively year-to-year through multiple procurement decisions that are thoughtfully coordinated. These objectives can only be accomplished through a collaborative sourcing approach that actively engages the utility s internal supply chain, operations management, and vendor partners throughout the entire process. Copyright 2010 by ScottMadden, Inc. All rights reserved. 4

6 Increasing Smart Grid System Investment Smart Grid Demands a Collaborative Strategic Sourcing Approach Continuous Collaboration is Key to Success In order to procure and deploy Smart Grid technologies successfully, it is critical to start engaging with vendors early in the sourcing process. The focus of these discussions is to determine when and how to best partner with the vendor in the utility s Smart Grid business planning and sourcing processes. This collaboration allows buyers to evaluate how well a vendor fits with the utility s long-term Smart Grid strategy and business culture, and creates opportunities for vendors to help the utility to develop innovative solutions. Additionally, this approach reduces the likelihood of unnecessary risk premiums being built into vendor bids and allows buyers to solicit input for developing comprehensive total lifecycle models specific to the utility s Smart Grid development plans. The total lifecycle model below illustrates that Smart Grid is a series of overlapping, related investments with many intertwined, long-term risks and cost considerations. Total Lifecycle Model for Smart Grid Technology Risk lab bench technology, interoperability, legacy system integration, evolution/upgrades Vendor Risk many first-time startups, financial viability, proven field support, intellectual property Business Risk customer acceptance/use, rate recovery, changing market/system ops models Smart Grid Investment Phase XX Smart Grid Investment Phase 2 (e.g., demand response, distribution automation, etc.) Acquisition Costs Sustaining Costs R&D and Testing Initial Investment and Integration On-going Service and Maintenance Other System O&M/Capex Impacts Upgrades, Expansion, and Replacement Obsolescence/ Early Disposal and Write-off Smart Grid Investment Phase 1 (e.g., AMI) Acquisition Costs Sustaining Costs R&D and Testing Initial Investment and Integration On-going Service and Maintenance Other System O&M/Capex Impacts Upgrades, Expansion, and Replacement Obsolescence/ Early Disposal and Write-off Long-term Investment View with Increasing Risks and Lifecycle Cost Impacts Copyright 2010 by ScottMadden. All rights reserved. Copyright 2010 by ScottMadden, Inc. All rights reserved. 5

7 Lifecycle Modeling Evaluates the Entire Smart Grid Value Case Lifecycle models are the primary tools underlying a successful long-term Smart Grid sourcing strategy. Unlike TCO models that usually justify the procurement decision based on costs alone, lifecycle models quantify measurable costs and risks over time according to realistic risk assessments surrounding the investment decision (e.g., technology, business/operating, and vendor risks). For example, rather than one large-scale purchase covering a range of distribution automation applications, a well-coordinated Smart Grid sourcing approach might instead consist of a series of incremental, shorter lifecycle equipment solutions using a single, year-to-year procurement plan for grid-monitoring equipment. Taking this approach would enhance system reliability (and reduce risks) based on current proven technologies, while providing options for foreseeable technologies in the development pipeline, potential vendor upgrade paths, and evolving service/maintenance options. Smart Grid Requires a True Enterprise-Wide Strategic Sourcing Approach Ultimately, Smart Grid transforms the industry s operating model from a centralized, producer-controlled energy grid to a more distributed, customer-interactive energy network. The Smart Grid requires an unprecedented level of collaboration between utilities, regulators, customers/communities, and vendors in order to achieve its full potential. It takes an enterprise-wide perspective and a collaborative sourcing process to successfully plan, source, and implement Smart Grid technology solutions. By actively engaging Smart Grid vendors with the utility s operations and supply chain management throughout the sourcing process, an effective analytical framework can be developed that more accurately reflects the risk/benefit case underlying Smart Grid investments. In the end, the ultimate goal is for utilities to align Smart Grid operational plans and sourcing strategies more closely so they are able to realize effective, long-term solutions from their Smart Grid vendors. Andy Flores (aeflores@scottmadden.com) is a director in ScottMadden s Atlanta office where Quentin Watkins (quentinwatkins@scottmadden.com) is a managing associate. Copyright 2010 by ScottMadden, Inc. All rights reserved. 6