Power Generation Company Develops Large Investment Strategy for Environmental Compliance

Situation Analysis

A large power generation company had multiple owners, and each of them had a different vision for how to strategically approach future uncertainties (e.g., regulatory scenarios and market prices) that would guide the organization’s future investment strategy. Several of the company’s plants were aging, and as a result, there were increasing concerns around environmental compliance, specifically related to air pollution.

Discovery & Solutions

Strategic Decisions Group was called in to help devise an investment strategy for environmental compliance that would provide clarity around several considerable uncertainties. In its initial discovery stages, SDG led the discussions to establish the common understanding of three critical categories of uncertainty:

Regulatory: There were multiple scenarios for new regulations at the state and federal levels, and the company required a nimble investment strategy that would provide it the clarity to anticipate and navigate new legislation.

Technological: The technologies that the company would have to utilize in order to comply with new regulations required an investment of hundreds of millions of dollars, along with significant lead time required for these investments. With the various regulatory uncertainties still up in the air, it was difficult to quantify the final scope of necessary technology investment. Additionally, the cost of the technology depended upon when the company chose to invest. If the company invested too early, it would be betting on the uncertain scope of future regulations, whereas if it invested too late, many companies would have already started implementing the technology, and the company would have to accept higher prices from vendors and EPC companies.

Market-related: Similar to the technological uncertainties, fluctuations in commodity prices had a direct impact on the company’s profitability, and were a critical factor in determining the investment timing and scope. Additionally, if regulators were to implement market-based solutions (e.g., emission credit cap & trade), it would be critical for the company to have a clear understanding of the ranges of credit price and its interplay with energy price.

Using these insights, SDG facilitated an investment decision using the Decision Dialogue Process (DDP) to clarify the company’s decision-making frame. Through discussions with the client team and owner companies, SDG provided quantitative and qualitative insights into the likelihood and implications of various regulatory scenarios, choice of optimum compliance technology and its cost, and future commodity & emission credit prices, as well as the impact these factors had on the plant’s long-term value.

Results & Impact

Ultimately, these insights provided clarity around the scope and timing of the company’s investment in regulatory compliance moving forward. SDG found that the most advantageous strategy would be for the company to delay its initial technology investment in order to avoid a premature outlay. Once the scope of new regulation was better understood, the company could invest in technology to beat out late competitors and avoid premium pricing.

The DDP was critical to developing this strategy and earning buy-in from the company’s multiple owners, as it first generated consensus through facilitating discussion of assumptions. This provided the opportunity to fully analyze all possibilities and then organically arrive at actionable conclusions and recommendations. As it turned out, the decision to delay entry into the market allowed the company to defer its investment of hundreds of millions of dollars for several years. Aside from the financial gain, the company also used SDG’s approach to create a functioning taskforce comprised of key members from each of the company’s key stakeholders, providing an effective forum in which future decisions could be made.