'Portfolio management key for investment agenda of energy companies'

08 August 2023 Consultancy.uk 6 min. read
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To meet energy transition demands, utilities companies need to coordinate their resources in ways the sector is historically unprepared for. According to Ed de Vroedt from UMS Group, having robust portfolio management approach in place is key to success.

By all accounts, the transition to sustainable business is going to take a mammoth effort from the utilities sector. As firms in the sector continue to contend with huge reputational damage relating to inflation-driving bills and notable failures to meet social and environmental responsibilities, it is very apparent that utilities providers are not used to having to adapt their offerings to the will of public opinion.

According to Ed de Vroedt, this may stem from these companies being used to dealing with ‘certainty’ – a material perhaps in even shorter supply than the oil and gas in Europe currently. Elaborating, he explains that utilities companies have been run as “stable predictable businesses and with long lead times,” meaning “there has traditionally not been seen a need to be agile.” In the old days, utilities could bank on the fact they were supplying resources customers essentially could not live without, while facing minimal demands for change from the government. But recent times have upended those assumptions.

“Now to be reliable and safe in the execution of projects, amid a market of constant change and challenges, we need other business models,” De Vroedt tells presenter Sana Orchi, on UMS Group’s company podcast. “Utilities firms want to have a good knowledge of what is coming up – not only for the next year, but the next five years. Portfolio management is crucial for this because it can help define what our workload is, but then account for what kind of restraints might occur.”

De Vroedt is the vice president and a managing director of the UMS Group. He heads up the Benelux team at UMS Europe, focusing on the utilities sector, supporting utilities in asset management, and related areas including risk management, portfolio management.

Looking for examples in why accounting for unforeseen disruptions matters, De Vroedt particularly draws on the shaky geo-political picture that has come to characterise the present decade. The war in Ukraine, he says, has “accelerated the need for the energy transition” by suddenly shutting off a key gas pipeline from East to West. Meanwhile, supply chain issues in China have also emerged amid an escalating trade war with the US, illustrating the need “to be able to plan more flexibly than before” – and leading firms which do not account for the turbulence of the market to delay or cancel projects.

“At the same time, there are other challenges which the utilities sector is facing, which didn’t previously impact it,” he notes. “A big challenge is not so much funding now, it is more the capacity [for projects in the energy transition]. The hands to do the work. When it comes to skilled labour, there is a shortage, and a war for talent. Studies show over 40% of people are looking for other jobs – and with an ageing workforce, that is becoming very difficult for utilities. You have to weigh up which issues you need to tackle most urgently to deliver projects.”

Portfolio management

What can companies do to keep themselves agile, while meeting the requirements of the green transition? According to De Vroedt, “there are all kinds of solutions which are being applied, including getting more headcount and efficiency gains” but key to it all is the concept of portfolio management.

Asked to define portfolio management, De Vroedt explains, “A portfolio is just the combination of activities that the company needs to do to achieve its corporate goals, like reliability, like supporting the energy transition, like safety, etc. Portfolio management means you should think of the projects which really deliver value to the company, and help achieve its targets. Focusing on the right mix of projects is the biggest challenge of utilities nowadays – especially amid the energy transition. That’s where portfolio management is helpful.”

Knowing is half the battle. Once companies know the areas where most of their time and resources need to be dedicated, they can focus on optimising their processes. But defining which projects are part of that “right mix” is tricky in its own right.

“What you want to do is have the projects listed up, in a standardised way, where you can compare apples to apples,” De Vroedt goes on. “Risk management is now applied by a lot of utilities firms across the world, and that model really helps utilities to rank a project in terms of the highest priority. Even then, this only provides a ranking of importance though.”

Utilities firms need to integrate the concept of portfolio management into the asset chain, to get a fuller picture, from the asset management stage to early stages of execution. Establishing solid lines of communication to this end with assets providers and staff on a local basis is important, as “they know exactly how it is in the field; what local constraints they have; where they don’t have the hands, or the resources.” Knowing these details can prevent prioritising a project which will end up being delayed or cancelled, over delivering several that could be completed in a straightforward manner.

While the store is open

Having been working for so long in a stable market, having to adapt on the fly like that is not common knowledge in the sector,” concedes De Vroedt. “But the dangers of not doing it are, if there is poor linkage in the asset chains, you will have postponements in the project delivery because projects aren’t aligned with the material realities the company is facing. Portfolio optimisation can help in making sure not only the best projects are selected, but to plan projects against the issues experienced in the whole asset chain. We see that if we don’t optimise, fewer projects are delivered, and less value is created. In contrast, there is a 15% to 20% gain – with the same money – choosing the right mix within the given constraints.”

This is particularly important because, in De Vroedt’s words, “we are rebuilding the store while the store is open”. Portfolio management can help a firm organise the required supervisors, staff, materials and partners in a market where every project also has to be coordinated with an “outage window”. All the processes are still active in the energy grid, meaning delays and cancellations in the sector can see projects end up on hold indefinitely.

Getting started might seem daunting in a sector which is not used to acting reactively. But De Vroedt states it needn’t be something organisations undertake alone. When creating an overview to which projects are feasible, and where bottlenecks might be, picking the right, relevant data will not come naturally to utilities operators at present, for instance, but he suggests “that’s one area experts at UMS can support with.” At the same time, consultants can help gradually build up the knowhow needed to utilise portfolio management within a company’s long term plans.

Addressing firms nervous of the undertaken, he concludes, “It’s not something you have to set up all at once. You can gradually optimise the process by creating more transparency across the chain – from the strategic suppliers and their capacity – to integrate it in your own asset chain. With this incremental approach, it is a doable and exciting thing for utilities, helping them to be agile going forward.”