Innogy PLC, a UK
National Power successor company, set up US operations in mid 2000 to
redefine the energy-scape of the deregulating North American wholesale
power markets through the application of proven skills and intellectual
property developed in the UK throughout the 90's. World-Generation interviewed
Bill Miller, president and CEO of Innogy America from his Chicago headquarters
office to learn his plans for the US
World-Gen:
What is the derivation of the name Innogy and what branding campaigns
were undertaken in the UK?
The name "Innogy"
is derived from three very pertinent words in our industry - innovation,
technology and energy. We are continually developing progressive technologies
and methodologies through our ongoing commitment to innovation. These
approaches were tried and tested on Innogy's own plant portfolio, making
the plant truly flexible and capable of adapting to changing market conditions.
These technologies and skills are now being applied to clients' plants
within the global energy industry.
We executed several
branding initiatives, the most novel was projecting the Innogy logo onto
the Houses of Parliament in London at our launch in October 2000.
World-Gen:
Can you define "Optionality" and how do you achieve balance
and manage it?
Optionality is the
transformation of generating assets from a regulated utility perspective
to a market-optimizing stance. By positioning and repositioning power
plants within emerging markets to maximize value, while fully understanding
the consequences in detail of these moves, one attains an option - and
ceases to be a price taker. In competitive markets, it's possible to use
retuned intermediate plants to extract maximum value from market volatility.
Plants have to be truly flexible, so you are able to generate when the
market dictates, be up and running when in the money and shut down when
out of the money. Some of our UK plants do 300 starts/stops a year. Optionality
is the application of Real Options to the generating business.
World-Gen:
In 1990 Innogy inherited 40 percent of the UK generation plants from CEGB
and then over the next decade sold two thirds of this generation capacity
while doubling profits. How did Innogy do this?
In the early 90s,
as UK deregulation evolved, National Power was mandated by the government
to reduce our market power from about 25,000MW of generation by offering
assets to new market entrants. We sold a number of plants in the mid 90s
with some trepidation. As more entrants clamored for plants, the value
of our plants rose and our asset management and trading skills improved
markedly. We implemented a transformation that changed the very foundation
of our business. We changed our focus from keeping the lights on at all
costs, to recognizing energy as a commodity, to be generated for the least
cost and traded like any other product. This involved a completely new
way of thinking at all levels of the company, from plant operators to
senior executives. We recognized that it's our people who drive Innogy
forward, and so we invested heavily to foster the knowledge and skills
that will continue to add value to the company and allow us to grow.
In the late 90s we
decided that our shareholders would benefit if we sold our most valuable
asset, our 3600 MW flagship plant, Drax. We did this with full knowledge
of this plant's real value and our ability to reposition our intermediate
plants to compete with this asset.
The interest in Drax
was so great that we sold two more plants to bidders, which left us with
our current fleet of 8000 MW and which we determined was the right amount
of generation to back up our growing retail business.
With a combination
of cultural changes, process improvements and the development of IT technologies,
we were able to close the often troublesome knowledge gap between traders,
asset managers and operators. Real time information is the key to thriving
in competitive markets. When a visitor walks into an Innogy plant control
room, it feels like a commercial trading floor. Supported by the innovative
pieces of Innogy software, our operators have all the market information
and the plant economic and technical information they need to make the
decisions whether to respond to market opportunities on a real time basis.
They fully understand the commercial and technical implications of fast
starts and stops of their generating plant. Based on their knowledge,
our operators generate when it's commercially viable to do so, and don't
generate when technical risk outweighs the potential revenue.
World-Gen:
Does Innogy America offer new risk management strategies? Can this be
measured?
Every company approaches
risk management differently. However, Innogy has developed new strategies
that mitigate conversion risk and reduce performance risk. Our Business
Risk Assessment Processes (BRAP) enable us to identify and manage conversion
risk, based on an in depth analysis of the generation plant and its market.
The risk is measured in commercial terms, which commoditizes the entire
production process.
World-Gen:
You have been quoted as saying that "we take a personal stake --
if you don't make money, neither do we." Do you take equity positions
in projects?
Innogy America is
willing to guarantee the market facing plant conversion performance that
it predicts is attainable by our BRAP process. We are willing to perform
the recommended plant improvement work at our own expense in return for
a share of the increased plant profits. If the plant doesn't make more
money we get nothing. Innogy America is not offering equity investments
in power plants.
Miller has experience
in domestic and international deregulation and privatizations. Prior to
joining Innogy, he served as a consultant to Sargent & Lundy, Indeck Energy
and a number of other clients through his consulting firm, Ferson Creek
Consulting. In the 90's, after dozens of S&L management positions in 25
years, he was elected to the Sargent & Lundy ownership with overall responsibility
for Midwestern US fossil clients, all U.S. R&D clients and a worldwide
management consulting practice. He directed the start-up of the EPRI-S&L
joint venture SEPRIL and co-developed the award-winning SOAPP software
suite of products and has facilitated numerous strategic planning engagements
with clients such as Illinois Power, Montana Power-Colstrip and Kennecott
Minerals.
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