The management of generation assets, never easy, is even more challenging in today’s environment of uncertain commodity prices, aging infrastructure, environmental mandates, and uncertainty in regulatory and capital markets. Cooperatives must respond by effectively planning their portfolios and getting the most out of the assets they have. This ScottMadden insight is the first in a series on “Five Strategic Priorities for Generation and Transmission Cooperatives.” The report summary can be found here: http://www.scottmadden.com/insight/516/five-strategic-priorities-for-generation-and-transmission-cooperatives.html. To learn more, please visit www.scottmadden.com.

1. Copyright © 2012 by ScottMadden. All rights reserved.
Managing Generation Assets
A Generation and Transmission Cooperative Strategic Priority
April 2012
Contact: Brad Kitchens (sbkitchens@scottmadden.com)
Marc Miller (mdmiller@scottmadden.com)

2. Copyright © 2012 by ScottMadden. All rights reserved.
Introduction
This ScottMadden insight is the first in a series on “Five Strategic Priorities for Generation and Transmission
Cooperatives.”
Contents
 Overview
 Resource Portfolio Planning
— Implications of Tightening Environmental Rules
— Installed and Planned Generation Capacity
 Comprehensive Asset Management
— Developing Plans and Making Decisions
— Improving Performance
 Contact Us
1
Managing
Generation
Assets
Ensuring Grid
Security and
Reliability
Gaining
Access to
Capital
Markets
Improving the
Effectiveness
of
Stakeholder
Management
Fostering
Economic
Development

3. Copyright © 2012 by ScottMadden. All rights reserved.
Overview
The management of generation assets, never easy, is even more challenging in today’s environment of uncertain
commodity prices, aging infrastructure, environmental mandates, and uncertainty in regulatory and capital markets.
Cooperatives must respond by effectively planning their portfolios and getting the most out of the assets they have.
2
Almost half of the total MW capacity of top cooperatives* is coal.
Establishing a formal approach to portfolio lifecycle optimization is
becoming critical.
Physical Assets
Life Cycle Costs
Management
Risk
Asset Value
Ensuring assets operate at design parameters with minimal off-normal operations and
maximum efficiency
Optimizing initial and ongoing investment to maximize an asset’s value over its life cycle
Maximizing the contribution from those who manage the asset through review of performance
against key operational and personnel measures
Managing engineering, operational, financial, and market risk
Developing additional value from physical assets and management/operational competencies
DescriptionComponent
Gas
 Impact of the “rush to gas”
on future demand (and
prices)
 Environmental pressures on
shale gas extraction
Coal
 Regulatory uncertainty
 Environmental pressures
 Practicality of retiring older
units
Nuclear
 Long development time and
higher project schedule risk
 Uneasiness about future
capital costs and current
economics (low gas price)
 Environmental scrutiny (e.g.,
post-Fukushima regulation)
Wind
 Extent and timing of
renewable energy standards
 Low capacity factor and
intermittency
 Geographic constraints and
transmission availability
Each resource type has key issues that complicate resource
portfolio planning:
The lifecycle value of an existing portfolio can be optimized through an effective and comprehensive asset management strategy.
*Defined here as those with assets more than $1 billion or annual revenue more than $500 million; Source(s): SNL

4. Copyright © 2012 by ScottMadden. All rights reserved.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
2015 Projected Reserve Margin Before New EPA Regulations
2015 Projected Reserve Margin After New EPA Regulations
NERC Reference Reserve Margin
 Recent EPA rule making standards have made the
prospects of new coal builds extremely unlikely
Resource Portfolio Planning:
Implications of Tightening Environmental Rules
Stringent new environmental regulations are increasing the cost to generate and creating heightened concerns regarding
reserve margins and overall capacity.
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Effective resource portfolio planning will incorporate these considerations and address them in a manner that is consistent with the strategy of
the power supply cooperative.
 NERC1 projects that new EPA regulations will force
seven of 17 regions below the “reference” reserve
margin. These regions include:
— MISO
— MRO
— PJM
— SPP
— SERC – East, West, and Southeast subregions
Cost of Selected Alternatives2
Retrofitting large coal unit ~$800/kW
Retrofitting marginal coal unit $1,700-2,400/kW
Reference price for new NGCC ~$800-1,000/kW
Reference price for used NGCC ~$400/kW
 Many U.S. coal plants have no air quality control system
installed—Selective Catalytic Reduction (SCR), Flue-
Gas Desulfurization (FGD), etc.3
 Replacement or retrofitting is costly, which increases the
need for cooperatives to optimize generation assets
through the monitoring of key operational figures in a
systematic manner
Years Built
Units w/o SCR & FGD/
% of Total Units
Nameplate
Rating (GW)
Average Capacity
Factor
Since 1970 131/14.2% 42.8 72%
1960–1970 441/47.8% 21.4 52%
1950–1960 305/33.1% 14.2 50%
Before 1950 44/4.7% 2.8 27%
Source(s): 1NERC 2011 Summer LTRA and 2010 Special Assessment; 2ScottMadden analysis of EIA data; 3Power Magazine, April 2011
Projected reserve margins
could fall below NERC
required levels in some
regions
NERC Projected Impact of EPA Regulations on Reserve Margins

5. Copyright © 2012 by ScottMadden. All rights reserved.
Resource Portfolio Planning:
Installed and Planned Generation Capacity
Cooperatives need to understand how their resource portfolios have developed over time as compared to peers and other
market players, how their existing portfolios are poised for the future, and what are the resulting implications.
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Observations
 Planned generation capacity for IOUs is more
diversified than for cooperatives—renewables
continue to play a growing role
 With new emissions controls, very few (if any) new
coal builds will occur, and coal retirements will
become more prevalent
 Increased uncertainty for traditional baseload
resources (i.e., coal and nuclear) means increased
importance of diversification, including renewables
 Demand side strategies—Energy Efficiency (EE)
and Demand Response (DR)—are emerging as
alternatives to capacity additions
Some Implications for Cooperatives
 With smaller scale (and smaller balance sheets),
cooperatives will have increased difficulty with
retrofits and fuel diversification
 Less costly alternatives to supply additions (EE
and DR) should be considered
— More “care and feeding” required (e.g., MMV)
— Proper energy regulatory framework required
for success
— Customer penetration a critical success factor
Resource portfolios change slowly, especially for an
individual cooperative. This makes it increasingly
important for cooperatives to get the most out of the
assets they have.
Installed and Planned Generation Capacity by Vintage and Fuel Type
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
MWs
Wind
Water
Oil
Nuclear
Gas
Coal
Biomass
5,000+
0
5,000
10,000
15,000
20,000
25,000
MWs
Wind
Water
Solar
Other Nonrenewable
Oil
Nuclear
Geothermal
Gas
Coal
Biomass
25,000+
Planned
IOUs
Top Co-ops*
More
diversified
additions
incorporate
various
renewables
Planned coal
capacity is
less certain in
out years
Much of the U.S.
coal fleet is at
least 30 years old
Plentiful gas reserves
make gas the cheap,
clean option for new
additions
*Assets more than $1 billion or annual revenue more than $500 million; Source(s): SNL

6. Copyright © 2012 by ScottMadden. All rights reserved.
Comprehensive Asset Management:
Developing Plans and Making Decisions
Cooperatives can get the most out of the assets they have through a well-designed and well-executed comprehensive
asset management program. Comprehensive asset management is a strategy that seeks to optimize the life-cycle value of
a portfolio by managing each asset according to its established management plan.
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An effective asset management process lays out a clear decision path based on value analysis and is executed in a consistent and
logical manner.
Identify input
variables and
asset impacts
Develop a long-
term view of the
value of each
asset
Use results as the
basis for long-term
investment
decisions
Establish basis for
development of
Capital/O&M
spending on units
Identify and
quantify risks to
long-term value
Develop initiatives
to improve value
There are several interdependent and iterative steps used to
build a management plan for each generating asset. Analysis for each generating asset should occur on a regular
basis. Updates based on key issues/events that impact value
can be a good idea, but the key is to analyze at regular
intervals. Otherwise events can distort analysis
 It is critical to perform this work at regular intervals, not just in
response to an event or a senior management question
 Using the same process and the same tools over multiple
instances produces patterns that are important to decision
making
 It is difficult to make a decision of this criticality based on one
negative NPV outcome, but if the numbers go negative and
stay negative, it becomes much clearer
Asset
Management
Process
DecisionPaths
Reconfigure the Asset
 Reconfigure
 Repower
 Change operating parameters
Retain and Optimize the Asset
 Process, procedure, and protocol review
 Strengthen outage and routine maintenance
 Implement mechanical integrity plan
 Align CapEx and O&M budgets to asset optimization plan
Shut Down the Asset (e.g., retire/mothball)
 Program management office setup
 Fleet asset adjustments
 Decommissioning/transition plan
 Financial, regulatory, HR, and communication transition plan
A decision to reconfigure, optimize, or shutdown an asset will
be determined by your viewpoint on key trends and your
evaluation of future value creation for the asset:
Revenue > Cost Revenue < Cost
Dispatched
(Actual MW)
Adding Value Destroying Value
Not Dispatched
Missing
Opportunity
Not Competitive

7. Copyright © 2012 by ScottMadden. All rights reserved.
0
2
4
6
8
10
2006 2007 2008 2009 2010
1st Quartile 2nd Quartile 3rd Quartile
0
10
20
30
40
50
60
6,000 7,000 8,000 9,000 10,000 11,000
NetCapacityFactor(%)
Heat Rate (MMBtu / Kwh)
Comprehensive Asset Management:
Improving Performance
A well-executed comprehensive asset management program will improve the performance of existing assets in order to
extract more value from these resources. A critical tool for improving the performance of generating assets is operational
benchmarking.
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Source(s): 1NERC GADS – Cumulative figures for all U.S. coal steam turbines, 350-500 MW capacity, in all regions
with vintages between 1975-1985.
2Ventyx – Five-year cumulative figures for 21 CC plants from nine of the top cooperatives, those with assets
more than $1 billion or annual revenue more than $500 million.
Example #1: EFOR for Comparable1 Coal Plants In leading cooperatives, benchmarking facilitates two key
components of sound management:
— Fact-based decisions and consistent comparisons
— Measurable, objective, and externally referenced definitions
of success
 Benchmarking is a foundational part of the business planning
process and is used to set goals, identify gaps, and develop
initiatives to close those gaps
 How you benchmark must be tied to how you measure and
manage (focus areas and indicators)
— Benchmarking should not be a one-time event and must be
an integral part of the planning and improvement process
— Target-setting benchmarking should be replicable and
based on data that is industry accepted and defensible
 Benchmarking helps set reasonable targets that are aggressive
but achievable by establishing relative performance for goal
setting
— Example #1(see chart, above right): My 400 MW coal plant
has an Effective Forced Outage Rate (EFOR) of 6%, which
is third quartile performance relative to peers. Our target will
be second quartile performance within three years
— Example #2 (see chart at right): My 400 MW combined cycle
(CC) gas plant is operating at a heat rate nearly 30% above
peer plants with similar net capacity factors. Our target will
be to reduce heat rate by 25% within three years
Current performance
Target
Performance Gap%
Current performance
Example #2: Heat Rate vs. Net Cap Factor for Comparable2 Gas Plants
Target
Performance Gap

8. Copyright © 2012 by ScottMadden. All rights reserved.
Contact Us
ScottMadden has undertaken numerous consulting projects for cooperatives across the country. If you are interested in
learning more about managing generation assets, please contact us.
Marc Miller
Director
ScottMadden, Inc.
3495 Piedmont Rd, Bldg 10
Suite 805
Atlanta, GA 30305
Phone: 404-814-0020
mdmiller@scottmadden.com
Brad Kitchens
President and CEO
ScottMadden, Inc.
3495 Piedmont Rd, Bldg 10
Suite 805
Atlanta, GA 30305
Phone: 404-814-0020
sbkitchens@scottmadden.com
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