Spotlight: asset management - Utility Week Spotlight: asset management - Utility Week

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Utility Week kicks off a new series of ‘spotlight’ features, beginning with a focus on asset management.  With the new regulatory periods for RIIO2 and AMP7 looming Nadine Buddoo looks at whether utilities have wholeheartedly embraced totex and how will they master the approach in the years ahead?

 

CHAPTER 1

Asset management: Mastering totex for AMP7 and RII02

Utilities face mounting pressure to maintain asset resilience and deliver improvements that will render networks fit for future demand. With these challenges in mind, the total expenditure or ‘totex’-based approach championed by Ofgem and Ofwat, represents an alternative means to deliver these major capital projects, while mitigating risk. But with the new regulatory periods for RIIO2 and AMP7 looming, have utilities wholeheartedly embraced totex and how will they master the approach in the years ahead?

Over the course of AMP6 and RIIO1, pressing issues such as climate change, an increasing population and urbanisation have seen utilities incentivised to adopt new approaches and drive innovation. The industry is under no illusion that for AMP7 and RIIO2, delivering the greatest value for customers will require further innovation to optimise asset investment and aid financial performance.

But the transition towards a totex framework and away from setting out separate capital expenditure (capex) and operational expenditure (opex) requires more than just a shift in a business’ accounting procedures. The real challenge is responding to this new approach by driving fundamental change across day-to-day business practices and decision making.

Transition to totex

Under the RIIO framework, the focus has been on outputs, incentives and innovation, as well as total expenditure (totex). For Ofgem, the totex approach to setting price controls aims to incentivise companies to deliver outputs at the lowest total cost, without preferring either opex or capex solutions. According to the regulator, totex consists of ‘fast’ and ‘slow’ money – fast money is funded in the year incurred and is equivalent to opex, while slow money is equivalent to capex and added to the regulatory asset value (RAV). It is also funded over time through allowances for depreciation and return on capital.

Capex solutions have traditionally been a preferred option for utilities because the cost was capitalised and increased the RAV. However, within the totex model, when companies invest in a solution, the same percentage is capitalised regardless of whether that solution involves opex or capex. As a result, utilities are encouraged to take a more holistic view of investment and are more likely to choose the most overall cost-effective solutions.

When applied to the asset management cycle, a totex hierarchy in investment decision making can allow utilities to ensure the lowest cost and carbon solutions are considered. Ultimately, it is about driving energy firms to take a more joined-up approach to assessing assets, potentially resulting in a company choosing maintenance over replacing an asset, or perhaps using demand-side management instead of installing new capacity.

For the water sector, the shift is similarly underpinned by the removal of a focus on specific capex solutions. The sector has been challenged to move focus towards performance and how this can be improved at the lowest cost.

The water regulator introduced a totex and outcomes framework for PR14, giving companies the flexibility to decide how best to deliver their services while using the most cost-efficient and innovative solutions. Under previous regulatory approaches, Ofwat had identified concerns that companies were overly focused on capex-based solutions while avoiding opex-based solutions which were potentially more efficient and innovative.

For PR19, Ofwat expects ‘water companies, as well as the supply chain, will have better embedded totex and outcomes frameworks in their business planning process.’ As part of this drive to encourage companies to improve efficiencies and embrace innovation, the regulator has introduced direct procurement for customers (DPC). In essence, DPC allows water companies to competitively tender for a third party – a competitively appointed provider (CAP) – to design, build, finance, operate and maintain infrastructure that would otherwise be delivered by the incumbent water company.

‘‘We want companies to use DPC where this is likely to deliver the greatest value for customers,” Ofwat stated in its final methodology for PR19. The regulator has billed DPC as suitable for discrete, large-scale enhancement projects expected to cost over £100 million, based on whole-life totex.

The introduction of DPC into the PR19 process has encouraged companies to consider some existential questions in areas such as the operation and maintenance of assets and financing of business plans. According to Andy Clark, head of procurement and contract management at Yorkshire Water, direct procurement has “ensured that companies consider themselves to have an internal market from the provision of services to customers that must prove their competitiveness against the external supply chain”.

Slow uptake

As the incentives to focus on capex are diminishing, the DPC route offers an opportunity for companies to take a more longer-term view of cost of capital and revenue requirements. It is too soon to tell whether the regulator’s direct procurement strategies will gain significant traction during AMP7, but the initial uptake has been considerably slow. “It is early days for DPC with initial schemes being significant raw water resource projects which often cross company boundaries,” says Clark. “There is a joint appetite from Ofwat and companies to continue to iterate the DPC approach to see a wider application.”

The most significant application, to date, is London’s Thames Tideway project. Dubbed the “super sewer”, the Tideway Tunnel is the biggest infrastructure scheme the UK water sector has ever seen. The project has been a key driver for the DPC concept which benefitted from the award of a licence from Ofwat.

 

But Tideway aside, the impact of direct procurement methodologies on the water sector is difficult to quantify as companies have, so far, approached DPC with caution. United Utilities remains the only company to promote a qualifying project through this channel for PR19.

With United Utilities, Severn Trent Water and South West Water securing fast track status for AMP7, it remains to be seen whether the resubmitted business plans of the remaining companies have reconsidered their approach to investing in projects of at least £100 million in totex value.

For Richard Whale, market director for water, Atkins, member of the SNC-Lavalin Group, the longer-term benefits for DPC are clear. “While arguments are made for lower financing arrangements for large discrete projects, a key benefit [of DPC] is the flexibility to fund large infrastructure projects over several AMP cycles,” he explains. “This allows more strategic investment decisions without having to balance cost within a single AMP, potentially at the expense of other critical asset improvements, service performance or customer bills.”

The move to a total expenditure, or totex, regime was first suggested by Ofgem in March 2008 when the energy regulator launched its RPI-X@20 review. From this review of the previous regulatory regime emerged the RIIO (revenue= incentives+innovation+outputs) model.

Totex was first used in the electricity distribution network price control DPCR5 (2010-15) but it was central to RIIO, which was introduced for electricity transmission in April 2013, and then gas transmission the following year.

Water regulator Ofwat’s shift to totex was confirmed in July 2013 with its final PR14 methodology and came into effect in April 2015.

Totex and energy

The energy regulator has taken note of Ofwat’s direct procurement strategies and has stated it expects to see “competition more widely where this can deliver benefits” in RIIO-2. The sector could see an iteration of direct procurement, with competitive tenders encouraged to allow third parties to deliver the design, build, financing or operation of projects.

With Ofgem’s final view on price control allowances set to be published by the end of 2020, companies are preparing to submit a first draft of their RIIO-2 business plans this summer. It will be interesting to see whether a capex bias remains, or if companies will forge ahead with totex-based solutions.

“While utilities are clearly embracing totex, there is sometimes a tendency to turn to the tried and tested capex cost reduction strategies, or more exciting digital solutions,” says Tim Cooper, client development director at Arcadis. “The problem with this approach is the risk of missing out on the opportunity to learn from the production efficiency techniques applied by other sectors, such as oil and gas.”

But for energy firms that have fully embraced totex, the benefits can be truly liberating. Western Power Distribution (WPD) exemplifies this, having adopted a totex-centric approach across the business. According to WPD’s finance director, Ian Williams, this new approach enables the company to think about the best solution for the customer in any situation. As a result, the business is “not constrained by considering which budget the expenditure needs to come from,” explains Williams.

As a DNO, WPD is still only half-way through RIIO-1 so Williams cautions that it is too soon to say what lessons the sector will take from this regulatory period. However, he does believe one significant issue is the importance of focusing on outputs rather than inputs. “By that I mean focusing on what benefits expenditure will bring to the customer, rather than solely considering the expenditure itself,” he says.

Totex barriers

Atkins’ Whale similarly believes that the totex approach has been a welcome regulatory development for the water sector, adding that it has incentivised companies to make more sustainable asset investment decisions. “However, the regulation was only introduced in AMP6, and there is naturally a period of adjustment,” he admits.

In order to respond positively during this unsettling period of transition, Whale believes the industry must develop improved knowledge sharing practices and processes that will enable information to quickly and freely transfer between companies’ internal structures and supply chain partners. “This will allow better comprehension of service risks, more accurate analysis of root causes and consequently earlier, more innovative, affordable and reliable solution investment decisions,” he says.

But utilities cannot wholly embrace totex if decision-making systems do not consider risk and resolutions with a balanced approach across capex and opex interventions. To tackle this challenge, Yorkshire Water has invested significant resources, working with specialist partners to overhaul its risk and decision-making systems. Clark believes that these intelligent systems are essential if companies are to appropriately weigh risks and interventions against each other to find the best totex solutions.

He adds: “Making the best totex decisions is further challenged by companies typically having a separation of decision-making processes between typically asset management and operations driven processes.” Facilitating a mature totex approach requires the ability to utilise a true-life cost when in reality this has constraints, such as affordability, within any discreet investment period.

In the energy sector, there are concerns that the totex model has yet to see investment drive asset resilience across the network. In the 2018 RIIO-ED1 Annual Report, Ofgem highlighted that expenditure in most key areas of investment that drive totex performance had remained largely unchanged from its previous review. “In particular, the fact that ’resilience’ remains at only 4 per cent of total expenditure suggests that this may not yet be central to long-term asset and totex performance,” notes Cooper at Arcadis.

Armed with the knowledge of where the approach lacks maturity, utilities can make more efficient totex-based investment decisions for RIIO2 and AMP7. Maximising this opportunity will be critical in delivering the smart, connected assets that are vital to meet future network demands.

The future’s here

Understanding asset performance in real time is already possible, but this will become more prevalent in AMP7 and RIIO2. While this knowledge allows companies to be more proactive in responding to an increase in demand or asset failure, Whale insists that the real benefit will arise from being able to virtually test asset resilience and determine the consequence of failure under any number of scenarios. “The prioritisation of investment planning, base maintenance and even response management will become pre-determined, allowing companies to really crank up customer service and asset resilience for an optimised investment,” he says.

Totex presents a tantalising opportunity to drive innovation and tackle legacy capex structures, while also forcing utilities to embrace a real step change in their mission to improve long-term asset value. This transition will require a sharp focus on the digitalisation of networks, as well as the use of asset data to drive momentum towards more long-term, holistic solutions.

For WPD, and asset owner-operators across the country, the future is all about gathering greater data and undertaking greater analysis to deliver better value for customers. Williams adds: “As more distributed generation is connected to our network and more customers acquire electric vehicles (EVs) for example, we are going to need to know far more detail about what’s happening on the network in real time.

“We are already moving towards the future as we embrace flexibility and I think the more that we learn, the more opportunities we will have to help customers.”

The totex transition

The move to a total expenditure, or totex, regime was first suggested by Ofgem in March 2008 when the energy regulator launched its RPI-X@20 review. From this review of the previous regulatory regime emerged the RIIO (revenue= incentives+innovation+outputs) model.

Totex was first used in the electricity distribution network price control DPCR5 (2010-15) but it was central to RIIO, which was introduced for electricity transmission in April 2013, and then gas transmission the following year.

Water regulator Ofwat’s shift to totex was confirmed in July 2013 with its final PR14 methodology and came into effect in April 2015.

CHAPTER 2

Expert View: Clear Horizon

Asset management for the DSO world: a new approach to data capture

A new fast field data loop at Scottish and Southern Electricity has transformed asset inspection and positioned the network for the transition to DSOs. Paul McKeon, CTO at Clear Horizon explains how.

 

 

 

 

The efficiency, quality and provenance of asset data capture as physical assets are inspected is essential from an Ofgem RIIO compliance and performance perspective, especially with the transition to direct system operators (DSOs). As networks draw up business plans for the next price review Information about the current condition of assets that cannot easily be monitored remotely is a critical.

 

As distribution network operators (DNOs) transition to DSOs this demands a more-current and more-connected understanding of asset information. Increased pressure from Ofgem is driving towards connected processes linking asset data between control systems, asset registry, and field asset data capture.  Accurate asset data is critical for DSO optimisation of localised power flows, minimisation of losses, and management of power fluctuations. All activities which touch the assets need to capture better quality and more targeted information, which can be rapidly made available across the organisation.

This process, known as a ‘field data loop’ from physical asset to core systems and back to field operations needs to be fast and accurate.

Some may feel they have achieved such a fast field data Loop but too often at least one aspect is missing or too expensive to implement. For example:

• Data quality is largely a manual process which is too slow and sits outside of the asset work process.

• Data collection questions are pre-programmed and inflexible, plus they are slow and expensive to change

• Connecting the fast field data loop relies on complex integration – but data languishes in silos and system update is slow

• Field workers don’t collect the quality of data needed; or systems are too expensive to extend to contractors, key contributors to asset data collection

Automation, system sensors, and monitoring go some way to address data quality improvement. This approach is limited but the good news is that, every day, teams are sent out to physically work on assets thereby providing the best opportunity for improved data collection.

At Clear Horizon we have developed software – CHIME – that provides a very efficient way of collecting relevant, accurate data at source by the field operative at all times (Inspection, Maintenance, Construction etc). Data collection remains relevant due to flexibility of change in the questions asked in CHIME by asset type and activity – and without any need for coding or IT intervention.

Furthermore, the quality of the data captured is assured by checks which are applied at point of entry in the field and at receipt in the back office.  Exceptions only are routed to human intervention at this stage which greatly improves the accuracy of data captured and improves efficiency.

One company that has been reaping the benefits of this fast field data loop is Scottish and Southern Electricity Networks.

Andrew Roper, DSO Director at Scottish and Southern Electricity Networks explains:

“The DSO needs much closer alignment between field workers who are operating, inspecting, maintaining, and constructing assets, with the asset registry and control systems.  A two-way asset data loop between the field and central systems is essential but this data needs rapid quality assurance before update of shared systems.

We’ve been able to achieve this with CHIME, uptake by our field operatives has been incredible. Job instructions are clearer, and recording is faster, yet we are gathering more data than ever before.

CHIME is fundamental to our system readiness for DSO and we plan to build further on the benefits already being delivered.”

CHIME’s capabilities greatly improve the efficiency, quality, and provenance of data collected and its relevance of that data to asset intervention decisions – vital information as networks ready themselves for RII02 and the DSO transition.

For further information: www.chime-it.com


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