Cost Reduction Strategies for Utilities

Utilities are trusted with a responsibility to provide a standard service at a regulator approved rate, without a right to refuse anyone, with expectations for the highest levels of public safety and reliability of service. That makes us conservative by nature, I get it. But that’s no excuse to be complacent, hiding behind the shadow of greater responsibility and walls of regulation, thinking that we have too many constraints to innovate. Hoping that our business model will continue to deliver value for our customers, the shareholders and the stakeholders. I don’t believe that our current business environment will continue in a world where users are no longer willing to pay for affording utilities the luxury of owning and inefficiently operating single purpose infrastructure. In a world where you can turn your personal commute car into a dual-purpose Uber taxi and the unused rooms in your house into Airbnb hotel rooms our current model looks awfully inefficient and it is going to be challenged. However, before that happens, and we’re forced to make quick changes, there is a window of opportunity to evaluate if our customers are getting true value from our assets and for their rates, are we operating our utilities efficiently, are we making an effective use of our resources and deploying best practices, latest technology and approach to making the best and informed decisions for not just our shareholders, utility boards but also for the ratepayers. Utilities are at a crossroad today and they need to decide whether they are going to evolve to become more innovative on their own initiative or are they going to be forced by customer pressure through political will and regulators or be taken-over by the non-utility competition. This paper will explore some approaches utilities can take to deliver better value to their ratepayers.

1. Multipurpose Use Assets

There was a point in time when the telephone companies used to transmit through their copper wires only telephone voice communication and the cable companies only TV video signal, however, today the same copper wires are being used to transmit voice, internet traffic and video signals, taking their one revenue stream to multiple while dramatically lowering the individual cost of each service. What makes us think we can continue to deliver a single product of only electricity down our wires without being challenged and our current business model called-out as archaic?

Utilities need to reevaluate the assets that they own and think what additional value could be derived from them? This will not only make them more efficient and lead to lower rates for our consumers, but it will also increase their market capitalization by increasing value of the existing assets and revenue per km of line or per transformer or megawatts of generation per acre. Utilities have some very valuable assets in terms of their generation plants, lines and substations, land and right-of-way, maintenance and spare equipment, construction vehicles and consumer data. Can more value be derived from them, some ideas to consider are presented here:

• Adding solar and wind resources on the existing traditional generating plant lands will add capacity to the same facility making greater use of the existing land, increasing energy density of megawatts generated per acre, while utilizing the existing grid connection.
• Adding powerline carrier communications (PLC) on the powerlines that allows telecommunication such as internet and voice traffic to be carried over the powerlines. This will add another revenue stream and make multipurpose use of the powerlines subsidizing the electricity delivery cost.
• Many utilities will setup their own area wide fiber network for protection requirements. These requirements use only a small bandwidth of the fiber leaving much of the bandwidth to remain unused. Most utilities do not utilize the spare fiber capacity or get a benefit from commercializing it for additional revenue.
• Along the same lines of thought, could fiber be buried in the powerlines right-of-way or alongside pipelines or railway tracks making multipurpose use of the same right of way land reducing the environmental impact but equally importantly reducing the costs of construction by laying down multiple assets at the same time. Getting a bit more creative could the powerlines be buried below or alongside the train tracks? The same crew could inspect and maintain both assets, reducing operational costs.
• Utilities especially the distribution utilities own some prime land for substations in urban centers. Perhaps, some of these spaces can be commercialized, for example, could a drive-thru fast food restaurant or a coffee shop be opened at the substation property or even a public library, mall or a condo building built atop a substation? Certainly, additional public safety precautions will need to be considered to make such ventures viable. However, if the additional cost to build appropriate structures to restrict public access while allowing operational access, and to make it architecturally appealing, is outweighed by the additional revenue and utilization potential then perhaps there is a sound business case that needs to be investigated to gain the extra value.
• Encouraging smaller utilities to merge to create operational efficiencies while reducing the management overhead. Where that is not possible could the utility spare equipment and maintenance vehicles such as bucket trucks be pooled between the neighboring utilities to make efficient use of those assets for the participating utilities.
• There would be operational and corporate overhead efficiencies if utilities deliver multiple services, for example, if an electric utility also runs water and natural gas utility or vice versa allowing same accounting, supply chain and field crews to be able to support multiple assets. Instead of having multiple revenue meters and area networks to get the meter data perhaps one super-meter could work for electricity, gas and water transmitting the data over one area network instead of three.
• Now for some truly out-of-the-box thinking consider the transmission lines that crisscross our lands thousands of kilometers between cities and communities scattered throughout most countries of the world. Could goods such as from Amazon, Walmart or postal service deliveries be transported along the transmission lines especially to remote communities and between major urban centers? For example, Hydro Quebec has developed a transmission line inspection robot called Expliner that crawls the conductor checking for anomalies. Similar robots or tethered drones could have dollies to carry delivery packages autonomously. This will not only create another revenue stream for the T&D utilities, but it would reduce much goods transportation traffic from our roads reducing the carbon emission, roads wear and tear, and the cost of deliveries while lowering the electric utility rates.

Could PODs or tethered drones similar to line inspection dollies be used to deliver goods. Photo credit - EPTCON

• Could the right of way the utilities own be used for other purposes such as for farming? Could underground storage, data warehouses or automated factories that require minimum manpower such as bottling be constructed there? Could the base of transmission towers be converted into storage space for utilities or municipalities?
• Utilities sit on a treasure-trove of consumer data that can be anonymized and utilized to offer new services to our customers or shared as open-source with technology companies to develop new smart home technologies and services - layering services on top of our utility network.

There are already some successful examples of such multipurpose use where street lights for examples are attached to the distribution poles and 3rd party fiber is hung on the powerlines as well. The next generation small cellular 5G network will require a high concentration of antennas to have sufficient signal strength and utility poles will provide a great mounting post. Similarly, as the move towards the interconnected and smarter cities of the future takes place could the sensors and cameras monitoring traffic flows, weather, crime be installed on the power poles. These instruments could double duty and also detect and report on pole and conductor condition and outages?

2. Technology Adoption

In the early 1900’s when electricity was being distributed to the houses. Utilities were considered technology companies because they were laying the foundation of the modern life and there was a strong demand for electricity service to be able to bring light and connect time saving tools and appliances at home with perhaps the same longing eyes as there is today with the latest smart devices. Somewhere along the way utilities lost their cool and instead of being innovators utilities became known as bureaucratic and boring. It doesn’t, however, need to be this way into our future. With technologies such as artificial intelligence, data analytics, remote sensors, automation and drones there is a real opportunity for the utilities to embrace technology and automate repeat tasks, routine designs, inspection and maintenance activities and predict when and where the next outage is likely to occur. Some examples scenarios are provided below:

Powerline inspections using drones is a growing field. Photo credit - Fortune Magazine

• Using drones for aerial line and substation inspections to do thermal and infrared scans, vegetation management and physical condition inspections such as a broken insulator, missing bolt or a rusted member on a tower.
• Using data analytics and machine learning there is potential for drones to also be used to record construction progress, inventory control to track goods as they’re received and checked-out, and even to make the final as-built drawings from a scan of what was actually constructed.
• 3-D scans of existing facilities make it possible to produce a 3D model and a site layout drawings, making verification of site conditions easier without the need for multiple site visits, saving time and money.
• Using virtual reality to train new technicians, or to remotely provide assistance to junior technicians or during construction to help workers see what the fully completed system will look like. It can help speed up equipment assembly reducing chances of error.
• Disturbances on the powerlines say due to a vegetation or bird contact or a fault can be detected in the voltage waveform using data analytics tools. This detection can help utility engineers detect for creeping issues before they become a problem and result in an outage or equipment failure saving money.
• Similarly, a utility has the ability to read the smart meter data to be able to detect issues with a home’s appliances. Each appliance has a certain “load-signature” that allows the utility to harvest the smart meter data to detect issues with a home’s appliances, whether it is energy efficient or not or whether there’s an issue developing with the appliance. Utilities can use this data and, perhaps for a service fee, they can provide a residential customer useful information to help them save money on their bills as well early warnings on developing issues, perhaps if your home furnace blower is starting to draw extra amperage because bearings are worn out or fridge compressor is overheating because piston is no being lubricated properly.

3. Asset Life-cycle Considerations

Capital project designs need to consider assets full life-cycle costs to better understand the truer cost of environmental permitting and land acquisition, build, operations, maintenance and disposal to end up with assets that bring long-term value. For instance, there has been much research done in-terms of loading various assets to go beyond their design capacities into their safe-operating limits where you start to trade the remaining asset life for short-term or momentary loading such as during emergency situations or momentary peak demands. You can also extend life of existing assets by replacing only the components that have reached their limits. Some examples include:

• The power industry and our governments need to advocate more for the larger societal benefits of electricity infrastructure as an economic driver and enabler of our quality of life. Industry’s remiss in this area has led to wide-spread general opposition to many power projects resulting in enormously costly permitting delays that have added significantly to the cost of building power infrastructure projects.
• Current technologies of digital relays and fast telecommunication networks allow engineers to load lines above their design limits, closer to their thermal and electrical ampacity ratings, essentially getting more capacity from the same conductor than was previously not possible. Same is true with transformers where online transformer monitoring allows real-time monitoring of their loading allowing operators to momentarily load them higher without causing a damage.
• In some instances, the need for new transmission lines to bring additional capacity into an area can be avoided by using high thermal conductors that can operate at higher temperatures to provide twice the transfer capacity using the existing poles/towers and foundations at a much lower cost than what a new build would require and with a quicker regulatory permitting process.

Another area of optimization is the design standards. Some alternative designs may be more cost effective over life of the asset because of reduced footprint and maintenance and less equipment requiring disposal at end of life.

Gas Insulated Substations have a small footprint than air insulated substations

• The footprint of a Gas Insulated Substation (GIS) is a third of an Air Insulated Substation (AIS), it requires less maintenance and it has a lower failure rate.
• Air insulated buss in a substation takes up most of the footprint, is it possible to have the buss go vertical instead of horizontal so the substation footprint can be reduced. The cost savings are not just in smaller parcel of land that will need purchasing, but also in less ground grid, gravel and fencing costs.
• In certain situations, it may be more cost effective to use localized distributed generation or battery storage to handle transmission capacity constraints or momentary peak load situations instead of building new transmission in the area.

Some of these non-traditional solutions will cost more time and money in the short-term to develop them but once developed they will have their applications where they can save over a medium to long-term delivering a better value for our ratepayers. Perhaps, the leading utilities could even patent and sell their designs and services to implement these innovative solutions to other utilities for additional revenue stream.

4. Strategic Asset Management and Asset Health Tracking

The approach to asset management and asset health continues to evolve. The ability to gather, store and use data analytics to makes sense of large amounts of real-time data is giving rise to strategic asset management solutions that are more intelligent than the ones available even five years ago.

Today, utility asset managers can have access to higher quality "realtime" data. For instance, with mobile devices with barcode scanners technicians can record and tag the results of equipment maintenance and test result so their values can be tracked against acceptable norms to flag any abnormalities that may warrant further inspection. If this information can be monitored and tracked for all major or critical equipment, then at any time there’s a good indication of enterprise wide assets health. With data at fingertips it is easy to start looking for patterns such as assets nearing end of optimal useful life before reliability metrics start being impacted or risk of costly catastrophic failure start becoming unacceptable resulting in long-term operational savings.

In fact, using data analytics with intelligent algorithms analyzing various operating conditions, equipment failure scenarios and likely impacts it is possible to flag the zones of system weakness. Then applying dynamic modelling of severe weather scenarios it could be possible to start predicting with some level of confidence potential upcoming problems that may crop-up for example on a hot summer day, heavy rain or during a high wind, ice storm or during outage conditions. Ultimately, helping utilities to better focus their resources and response strategies on the weak spots. In addition, having good asset health data equips utility executives with a dashboard to help them play various asset management scenarios, for instance to refurbish or replace, and better focus their opex investments to get the most life and utilization from their existing assets while reducing costly system failures and customer disruptions.

5. Enterprise Resource Planning system

In plain words an Enterprise Resource Planning (ERP) system is a central database system that houses financial, human resources, material, schedule, regulatory and work orders information about the capital and operational expenditures (capex and opex) of a company. It has various modules that display that information in a fashion that is suitable for various departments, functions and levels of an organization. An ERP system today is a crucial tool for utilities to bring greater visibility to the workflows, resource availability, productivity levels, stakeholder commitments and asset management. Access to good data leads to better decisions. Utilities have all kinds of useful and important data about their people, projects, asset health, contractors, facilities, inspection and maintenance, connection requests, regulatory commitments and documents.

If this data is placed in the hands of operators and decision makers from planning, project teams, asset management specialists, operations and construction folks then they will have greater visibility to analyze the field conditions, areas of weakness, resource constraints, associated risk, and can predict cost and schedule outcomes giving them insights to better allocate their capital. You can’t control what you can’t see, and data gives visibility into what would otherwise be a blackhole. Why not gather pertinent data, create appropriate dashboards and setup appropriate user access and make it available to everyone who could benefit from it. This makes the resources more productive, reduces chances of mistakes and keeps the team aligned, resulting in operational effectiveness. Some ideas that can lead to cost savings in the short-term are.

• Prioritizing both capital and operational expenditures based on priority and business impact. Project teams are always trading dollars to gain schedule or reduce risks. This approach can help determine where to focus the capital and resources and not pay premium for expediting services that have a lower priority and business impact.
• Benchmarking internal and external resources for capacity, capability and productivity to determine each team’s capability to successfully execute work while delivering value. This will allow management to select resources that are best suited to undertake a certain scope of work, allowing various parties (both internal and external) to compete on capability and success of the past execution history. This process rewards good performance with repeat work and places accountability as a forefront to win projects versus straight allocation based on availability of resources and lowest rates. This technique in turn improves performance and productivity delivering better results and greater value for money.
• Utilities use a plethora of computer tools to run studies and do design calculations and analysis. Each program requires data to be entered to run the calculations and models. Data for an asset could be entered multiple times for instance once to run conceptual models, then for detailed electrical rating studies, once to do structural analysis and once to do foundation design and once for asset management. Why are there so many different tools to analyze various functions of the same asset and data needing to be manually entered over and over again. Wouldn’t be nice if all parameters about an asset came from the manufacture and got entered once into a system once, and then various calculations involving that asset could poll that data automatically reducing much labor, data entry errors and improving overall calculation accuracy using one version of truth.

6. Contracting strategies

It is not uncommon for a mid-size utility to annually spend hundreds of millions of dollars on projects in capital and operational expenditures. Some larger utilities may even spend a billion or more dollars each year. Most utilities will outsource a significant portion of that work to procure consulting services, material, construction or on turnkey engineer-procure-construct (EPC) basis. To get value for their money utilities need to evaluate the various contracting strategies available to them.                          

Utilities have many contracting strategies depending on project risk

Depending on the project scope, constraints, risk profile and pressures on cost and schedule, certain contract structures may be better suited to increase the likelihood of a successful project outcome. The right contract strategy will drive-up bidder competition, clearly layout scope, schedule, contract terms and conditions, correctly allocates risk, create trust and reward good behavior while discouraging the bad. One such contract for complex and large projects like in the power sector is an open-book EPC.

An open-book contract is similar to a cost-plus arrangement where the contractor’s fee for service and reimbursable expenses are negotiated between the contractor and the owner along-with a fixed margin the contractor can charge on the pass-through costs such as on material procurement or on construction contract values. The contractor provides an open book to the owner for project expenditures, procurement and awarding of any external contracts. In exchange, the risk associated with final project costs rests with the owner. Cost plus or open book arrangements are most often used where the full scope of the work is unclear due to possible concealed conditions such as on brownfield projects, difficult site or subsurface conditions and other types of unknown or undefined scopes of work. This contract structure takes out some of the risk from the contractor associated with unrefined scope and site conditions thus improving contractor pricing.

Another approach to drive better pricing, especially on smaller opex types projects, is to bundle smaller projects to make bigger work packages. This will drive-up competition and use economies of scale to reduce consultant and internal overhead resulting in better price. This will also reduce the internal resources a utility needs to project manage those projects.

Utilities also need to adopt risk assessment techniques that place risk with the parties who are best able to handle it, even if that means going externally to a consultant to get the most qualified resources best suited to execute the work. I would like to note here that when evaluating the productivity and cost of internal versus external resources utilities don’t always compare apples to apples. A correct comparison would involve understanding the true cost of each internal employee inclusive of salary, benefits, administrative overhead such as IT, office space, supervision and their productivity. Only then a proper comparison with value of external resources can be adequately done to determine the best value.

The more progressive utilities develop closer connections and have open communication with their external consultants and see them as partners rather than a threat. Strong relationships lead to open communication and trust and issues get resolved as they come-up versus boiling over to surface when it is often too late or much more costly to fix.

7. Construction Techniques

Construction is a high stakes game with major implications for safety, cost and schedule on any project. Even minor issues during construction such as a safety instance, late material delivery or equipment failure especially on a long lead can make or break a project as costs associated with delays or rework escalate sharply and equipment and crews wait. Any tasks and activities that can be automated or removed from the exposed extremities of outside and brought to a controlled environment at a factory, fabrication shop or an assembly yard reduces those risks. Some ideas to accomplish this are presented here.

Modularized construction is more efficient and safer

• Modularized construction techniques attempt to assemble as much of the components of a facility as possible before transporting it to site. Modularizing substation structures and buss for instance is one aspect as is the use of pre-cast foundations and pads. As costs of 3D design software and 3D scans of a construction site have come down. It is possible to do much of the design using 3D model of the terrain such that pre-fabrication and assembly of modules can be done for a precise fit minimizing the need for adjustments at site. The only limitations are road restrictions to how big and heavy the modules can get.
• 3D printing technology is developing quickly and it has much promise to make construction more efficient by custom building components at site while automating some of the construction activities because major components can be printed on location where they are to be installed. Certainly, some pilot testing would be needed to determine applications of 3D printing in the power sector, but it needs to take place to evaluate its value and there is great potential for it to bring many efficiencies and cost savings in construction.

Modularized construction is more efficient and safer

• Capability of drones continues to evolve leaps and bounds, there’s much progress been made in replacing helicopter use with using drones that can remotely carry heavy loads improving safety, in time costs will come down to become the method of choice
• In countries with colder climates, speeding-up construction during non-winter months can be more cost effective than construction through the winter months. By adding a 2nd shift at night for instance to increase the volume of construction activity in warmer weather while reducing it in the dead of winter months when productivity is low and costs escalate from increased fuel use and shorter days.

8. Restructuring of regulations

Utilities operate in a regulated framework that aims to deliver stable pricing, steady and reliable supply, public safety and enable economic growth to a region. However, this regulation can also stifle innovation and if not balanced correctly can lead to rising costs for the ratepayers. The utility boards have typically evaluated utilities on a certain scorecard based on customer service, reliability, emergency response and cost prudency. However, to incent cost effectiveness the regulations need to allow room and flexibility for the utilities to be able to take-on calculated and measured risk to test and adapt new technologies, approaches and procedures, while holding them accountable to make measurable progress that results in tangible benefits with primary focus being on reducing electricity rates and increasing reliability. Some ideas to accomplish that are presented here:

• Utilities could be given performance metrics that they’re held to for reliability, service, safety, and cost of service but then the regulations could be successively relaxed for utilities that surpass that criteria to allow them room for creativity such that any cost-savings that result from innovative solutions are not only passed on to the ratepayers but some portion is shared with the utility to implement new solutions and some portion shared as bonuses for the utility executive team as reward for achieving them.
• Is there a regulatory model where multiple levels of service could exist if that means different cost are associated with those different levels of service? For instance, if a vacation home owner is willing to accept lower reliability or being on a lower priority for service restoration after an outage then they should be rewards with a lower rate. Similarly, if an industrial or commercial customer has their own back-up generation or their operation is not that critical to a production disruption due to an outage and they’re willing to be the first to shut down during a load-shedding scenario and restored later then why not give them a break in their rate because they’ve accepted a lower reliability of service in exchange for a less robust of a system their utility needs have in place to service them?
• The cost of delivered electricity has gotten so expensive in some jurisdictions that affordability for lower income families has come to be questioned. In such jurisdictions, similar to time-of-use pricing, could there be pricing based on the type of load such that essential load such as home heating, fridge and stove is a lower price while non-essential load such as hot tub heating, hair-dryer or espresso maker are charged at higher rates. This is not a solution for overall cost savings but it offers some relief for poor to not have to chose between home heating or paying for groceries. 
• Utilities make major long-term investments in their generation, transmission and distribution assets that last well beyond 30 years. These investments are better planned, assets better operated and market functions more smoothly when there is greater policy certainty over a longer term and policies are developed on sound technical judgement from seasoned operators taking into account various factors such as cost of service and long-term supply diversity, reserve margins and reliability criteria. In many jurisdictions this function resides with an Independent System Operator (ISO) whose role is to be an independent, at arm’s length, planner and market operator to determine the best way to deliver on the ruling government’s energy policy. If this independence is overruled, then the outcome may not be based on sound principals because any small misdirection will have long lasting consequences on many fronts including ratepayer bills and system reliability.
• In most regions, either the regional ISO or the vertically integrated utilities, will annually publish a short-term and every few years a long-term energy plan that spells out the most up-to-date information about the planned generation and transmission projects. This visibility into the future plans provide important information for the market participants such as power producers, T&D utilities and industry to make their business investment decisions to best meet their goals and reduce some uncertainty that does not need to be priced in their business model.
• Regulation costs money and these administrative costs are part of the ratepayer’s monthly bill. What is the right amount of regulatory oversight needed for good grid planning and a stable efficient functioning market without overburdening the ratepayers with too much administrative cost? Government policy makers should review if their region is being overburdened or is the current regulatory organizational setup bringing value.
• Policies developed with input from the stakeholders who are going to be impacted by them can help shape the policies in a direction that is better suits their needs. For instance, if there is a standing committee or a task group constituting of members from residential, commercial, industrial customers along with utilities from generation, transmission and distribution and municipalities that provides input into the regional energy plans and policy developments then the impacts of any policy changes especially on rate, service, quality and reliability would be better vetted before any major changes to plans and policies are finalized.

Conclusion

The electric grid is a complex system involving many moving parties. There is no single magic recipe that can deliver on optimization and cost reduction. There are many pieces that all need to be evaluated for the value they deliver and how they could be improved. Some of the areas the utilities can evaluate for efficiency gains range from questioning their current business model of continuing to build single-purpose assets to using the latest technology to automating tasks and using the best performing resources. However, progress will be slow unless there are the right policy triggers and regulatory flexibility in place to incent utility executives to innovate and share the operational savings with the ratepayers. 

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About the Author

Ahsan Upal is a regional manager with Burns & McDonnell, responsible for Canadian business development and leading engineering, project management and regulatory teams for major electrical distribution and transmission projects across Canada and the United States.