Comment: Asset life cycle optimisation: a salient lesson
- 01 November, 2010 16:20
The recent news that the Commonwealth Bank had written down its investment in Victoria's Hazelwood Power Station to only $1 million would certainly have shocked its owners, International Power, which paid $2.35 billion for the plant in 1996.
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Environmentalists would no doubt be pleased as the ageing power station, reputed to be one of the dirtiest and most polluting power stations in Australia, emits 13 per cent of Victoria's greenhouse gases and 3 per cent of the national total. CFOs and asset managers may sit uneasy with this determination. With some irony the bank commented that “the Hazelwood power station probably wasn't the best investment the bank made,” and that it “wouldn't plan to repeat an investment like the one we made in Hazelwood."
For sure the management of power station assets, particularly coal-fired ones of the Hazelwood type would not be the concern of the average CFO, but it raises some issues for finance officers concerned with asset life cycle optimisation, especially where the assets may be subject to a price on carbon or regulation in the future around climate change.
It is also relevant to assets that can generate a lot of money out during their lifetime and which represent exceptionally high CapEx.
In the case of the power station in question, on paper at least, it should have had a high value. After all it had been generating electricity at a cost of about $8 a megawatt hour and selling it for $45 a megawatt hour. In other words, it's been a very profitable operation.
Changing market conditions require many companies in the energy and mining industry to build energy-producing assets. Decisions about new asset acquisition, construction projects, and the management of a widely distributed and varied inventory would be based not just on a profit outcome but on an estimation of future asset values.
The asset-intensive nature of businesses such as energy companies as well a mining and mining service companies creates similar challenges.
Round-the-clock operations place enormous strain on machines, facilities, and people to produce at increasing levels - safely, economically. Carbon emitters such as energy, chemical, and treatment operations, will present as carbon legacy challenges for finance officers, with a heightened goals to generate high return on assets with declining value.
Fortunately, software packages today purveyed by specialist service providers and consultancies, offer solutions that promise increased use of and return on assets. These are optimisation programs that can be inputted with the kind of variables that the owners of the power station ought to have been aware of while offering a dashboard of key performance indicators in relation to a full spectrum of asset management.
How can an organisation avoid a Hazelwood-style debacle? It could deploy software tools or bring in the experts to:
- Optimise asset acquisitions, utilisation, and disposals
- Comprehensively manage supply chain and supplier relationships for maintenance and repair
- Manage complex new construction projects
- Increase workforce productivity.
This and an approach to carbon sustainability that brings to account a carbon-constrained future will protect companies from write-downs of the Hazelwood scale.