The utility industry is undergoing dramatic change as new technologies, such as solar and batteries, threaten to disrupt the traditional utility generation model and may have a dramatic impact on revenues. At the same time, costs are increasing as interest rates rise, distribution systems are reworked to adopt two-way flow of power, and customer expectations drive the need to support new channels for information and transactions. Combined, these trends are placing significant pressure on earnings.
To address these pressures, utilities frequently look to traditional cost cutting methods to meet financial performance objectives: flat percentage or across-the-board cuts in base budgets, staff reduction or deferred project spending. While these traditional methods may achieve some results, a more analytical approach to optimize spending will help ensure the right funding is applied to the right efforts at the right time.
Risk Informed Budgeting is an analytical approach to budgeting where the timing, amount and consequence of every budget line item is challenged. In our experience, an effectively implemented Risk Informed Budgeting program can produce 10% to 15% savings in routine budgets, even after implementing other cost reduction initiatives.Read the Risk Informed Budgeting white paper.
Between 2013 and 2019, nearly a dozen nuclear plants have closed or will close for economic reasons; additional retirements over the next decade are possible. As part of the three-year Delivering the Nuclear Promise initiative, chief nuclear officers are seeking ways in which to reduce costs. Because staffing/labor is the single largest cost of a plant’s operating budget, CNOs will pay particular attention to this component as a way to reduce costs. MCR’s white paper looks at the challenges of staffing and provides insights to a winning approach to optimize staffing.Download the nuclear staffing optimization white paper
When asked, most nuclear utility executives say their organizations develop effective Life Cycle Management (LCM) plans. However, when analyzing industry data, a somewhat different story emerges as industry and regulatory groups continually flag deficiencies in LCM planning. A recent analysis of INPO Equipment Reliability AFIs found almost 25% were LCM-related. LCM is not new to the nuclear industry, but successful implementation appears to be a struggle for many licensees. How did the industry get to this point, and what can be done to fix it?Download the Life Cycle Management white paper
Nuclear power plants reliably provide nearly 20% of electricity generation in the United States with 80% of these plants at least 30 years old. As nuclear plants continue to age, sustaining equipment reliability and addressing equipment obsolescence will continue to place upward cost pressures on operating and maintenance expenses as well as capital investment. The cumulative impacts of ever more demanding regulations also add to the cost of nuclear plant ownership. While nuclear costs have continued to rise, the advent of cheap shale gas and subsidized renewable generation have resulted in seemingly permanent low wholesale market prices. Combine increased costs with decreased revenue and the once forgone conclusion, a well-run nuclear plant will be highly profitable, is now in question.
In addressing cost pressures, licensees frequently look to traditional cost cutting methods to meet financial performance objectives: flat percentage, or across the board cuts in base budgets, staff reduction or deferred project spending. While these traditional methods may achieve some results, a more analytical approach to optimize spending will help ensure the right funding is applied to the right efforts at the right time. Zero Base Budgeting is an analytical approach to budgeting where the timing and amount of every budget line item is challenged. In our experience, an effectively implemented Zero Base Budgeting program has produced 10% to 15% savings in routine budgets even after implementation of other cost reduction initiatives.Download the Zero Base Budgeting white paper
MCR presented “Reconcile Safety and Reliability with Cost: A Proven Approach to Optimize Project Spending” at Tulane University’s 2015 Engineering Forum, where we discussed how making improvements to the project evaluation process helps ensure power plants meet their reliability goals in the most cost-effective manner. Moreover, improvements in project evaluation processes have historically provided a 20%-30% reduction in annual project spending.Download the MCR project spending presentation
Reducing O&M costs is one of the highest priorities for nuclear generation executives today. Often overlooked, however, is the treatment of project expenditures. A nuclear generation plant is composed of numerous functionally interdependent items of equipment and components, and it can be difficult to identify which items constitute discrete units of property, major components or something else. As a result, many nuclear facilities can’t be sure they are capitalizing all costs they are entitled to and thus, are potentially expensing more costs than required.Download the unit of property brochure
During annual budget creation, many nuclear executives face the daunting challenge of making cost cuts in order to meet corporate financial targets. MCR frequently sees cost reduction treated as “just another budget exercise – with some cuts.” Unfortunately, this common approach is rarely successful. Learn why this approach fails and the key elements to a successful cost reduction.Download the budget cuts hot topic
Most nuclear plants require some form of business case before a significant project is approved. These business cases, however, often “just go through the motions,” resulting in higher than necessary budgets and crowding out other important projects in the portfolio. A successful business case and project review process requires an active Executive Review Team and robust business cases to quantify alternatives and structure evaluation of cost-risk tradeoffs. This process helps ensure power plants meet their reliability goals in the most cost-effective manner. Moreover, when led by senior plant management, this approach can produce cost savings of 20%-60%, thereby reducing the strain on power plant capital and operating budgets.Download the project spending white paper
Upon completing its merger with another utility, a large, multi-jurisdictional IOU needed to integrate its capitalization policies and unit of property (UoP) catalogues for its expanded generation fleet, transmission, distribution and general utility property. The existing UoPs were overly cumbersome and a perennial source of disputes in project capital/expense classification decisions. As one senior accounting manager at the company described, the UoP catalogues had grown “out of control.”
The merger presented an opportunity to align the capitalization practices of both companies, incorporate industry best practices, address key upcoming projects and resolve previous organizational disputes. Senior management also wanted to ensure any new levels of capitalization would be defensible to the public service commissions overseeing the company’s numerous jurisdictions. MCR had previously worked with the company on a UoP catalogue integration for its merger with a former utility and was asked to assist again.Download the capitalization policy and units of property integration case study
Utility industry trends are now compelling Chief Nuclear Officers (CNO) to focus on cost optimization in order to create incremental value from nuclear plants. In order to be successful, CNOs need to develop a long-term cost strategy centered on a “North Star” to guide their management team and staff through cost and risk decisions. This North Star target provides the strategic context and “guiding light” for a nuclear plant’s cost optimization initiatives.Download the optimizing nuclear plant costs white paper
MCR’s client maintained a strong operating record, but at a cost unacceptable to Senior Management. Previous benchmarking studies confirmed their high costs, yet provided no actionable insights or optimization plan. Furthermore, the generating station desired a long-term “North Star” cost target to guide their spending decisions on a day-to- day basis. Senior management knew something needed to change; and change quickly. With cost optimization as the driver, the generating station approached MCR for help.Download the cost optimization case study
MCR’s client, a nuclear generating station, has consistently been a top quartile performer in terms of cost per MWh. Facing large increases in operations, maintenance and administration expenses, the generating station approached MCR for help.Download the Zero Base Budgeting case study