Combined Cycle Power Plant: Environment, SWOT, and Financial Analysis - Case Study Example

Running Head COMBINED CYCLE POWER Combined Cycle Power Plant Environment, SWOT, and Financial analysis Abstract Navasota Energy Partners LP, or "Navasota Energy" is an energy and energy-services providing company in Texas. The focus of the company is on the generation of natural gas, with the development of opportunities in advanced technologies, renewable energies and asset management (Navasota 2008). With a management team built of industry executives and experts, Navasota defines its mission as investment in areas including natural gas, clean coal technology alternatives, and the contracting and efficient management of advanced technology facilities. We examine Navasota's current position in the Texas energy market place to describe the environment in which the company is developing, the strengths and weaknesses and financial characteristics of such a company. We then propose different possibilities for a strategy for Navasota in the future and extend our analysis to see what leadership and rewards might need to be available for Navasota employees, executive or other, to make this happen. Navasota and the Energy Generation Market When considering the total amount of energy used in the United States, 22% of it corresponds to natural gas. Natural gas is used to produce heat, steam and electrical power generation, with use ranging from commercial and residential sectors, to industrial processes. At the moment, 15% of utility and non-utility power is produced from natural gas. Projections show that in the US as a whole 33% of the electricity generated in 2020 will be from natural gas-fired power plants (Spath & Mann, 2000). However although this is figure that may be true on average for the whole country, individual states, as we will see later, may have different objectives. Navasota runs two natural gas combined cycle facilities in Texas, one in Wharton and the other in Odessa. The term "combined cycle" refers to the method used to improve the efficiency of electricity generation. In a combined cycle power generator, the gas is used to generate electricity via a turbine, and waste heat that would otherwise have escaped is used to produce more electricity via another steam turbine. Combined cycle power plants are prevalent among new gas power stations in Europe and North America (OPA, 2008) An independent study on gas-fired generators found that CO2 accounts for 99 wt% of all air emissions. Methane is emitted in the next highest quantity, 74% of which are fugitive emissions from natural gas production and distribution (Spath & Mann, 2000). In Texas in particular however, the historical activity of oil and gas production is decreasing. The state is gradually turning its attention to sustainable, "green" energy sources. It cites the drivers for this shift in emphasis as being peak oil and gas prices, climate change, technological change and economic development issues (Texas State, 2008). Currently gas with its 4253 trillion BTUs is second only to oil in terms of the quantity of energy generated in the primary energy category for Texas. Conscious of the environmental consequences, mindful of the falling intra-state production of gas and looking for ways to contain and reduce energy expenditure, the state has identified biomass and bio-fuels, wind, solar and geothermal energy sources as candidates to replace oil and gas generation of energy, together with a further source of (electrolytic) hydrogen (State of Texas, 2008). It is this thinking that leads the state of Texas to define green buildings, wind power generators, hydrogen, advanced solar, hydrogen re-powering, transportation unification and tele-transportation as the new vectors of energy generation and energy economy to be followed. The proposed Texas State energy strategy is then defined as the re-establishment of energy independence for Texas, the development of new, renewable energy, strengthening of the rural and domestic sectors as energy generators (notably from solar energy) and the funding and enforcement of existing laws in this sense (State of Texas, 2008). Upon implementation of this strategy, Navasota's current offering will fall outside of the desired configuration as defined by Texas state. Navasota customers currently include electric utilities, retail marketers, electric cooperatives, and large industrial facilities (Navasota, 2008), but no mention is made of links or relationship building with domestic or rural sectors that the state of Texas wishes to involve. If the Navasota web site is anything of a mirror to current company areas of focus, then Navasota is currently concentrating on gas production and only mentions alternative energy of sources as "lip service" (Navasota, 2008). SWOT Analysis We use a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) to position Navasota in the current situation of its home state of Texas. We follow this with a CASE model (Confront, Avoid, Search, Exploit) to understand how Navasota may then define a strategy for the short term and the long term (CATA, 2008). The strengths of Navasota Energy lie in current gas-fired combined cycle power plants that it is operating. Notwithstanding the plans of Texas State to step away from non-renewable sources of energy such as gas, this will not happen overnight. Navasota's gas-fired generators remain a source of income generation for the time being. Navasota also states that "the company's ability to enter the market more quickly than its competitors will create competitive advantage" (Navasota, 2008). While this may be true in a general sense, there is no information precise enough to allow such a statement to be evaluated. On the other hand, Navasota's management board contains a number of executives with direct and successful industry management and consulting experience. This resource can be considered as a strength. Navasota also has asset management capability, which it deploys already on its own behalf for the Wharton and Odessa facilities and which it is capable of deploying on a "for hire" basis for others. The weaknesses of Navasota Energy in the current context include its lack of solid product or service offering for sustainable or renewable energy, despite a mission statement that mentions an orientation towards clean coal-fuel alternatives (Navasota, 2008). The opportunities available to Navasota are to become a supplier or even reseller of new, renewable energy to consumers, both as members of the public and representatives of the business sector in Texas. The threats to Navasota include possible financial repercussion if the state of Texas decides for example to finance moves towards renewable energy sources by increasing taxes, duties and charges on firms clinging to fossil fuel generating techniques, or at least on firms such as Navasota with large investments in installed machinery to recover (RRC, 2008). Having conducted our SWOT analysis, we follow up with CASE (CATA, 2008). The first element that we consider is "confront" (the "C" in CASE). Confront describes the situation where the internal strengths of Navasota confront the threats coming from the outside. Navasota might need to lobby particular parts of the organisation representing the state of Texas to gain at least temporary respite, if legal action is taken that penalises classical energy generation. When comparing the weaknesses of Navasota against the threats of the market, we talk in terms of "avoid". Until such time as Navasota establishes a real and credible offering in green and / or renewable energy generation, it will need to avoid conflict with Texas State organisations concerning preferences for green energy rather than fossil fuel. To manoeuvre within the constraints of current internal weaknesses compared to external opportunities, Navasota should "search" ("S") for ways to improve its situation. If Navasota did not in fact intend to correct its own lack of renewable energy generation, then its best move might be to resell the renewable energy that the state will encourage the rural and domestic sectors to produce (State of Texas, 2008). Finally and by playing to its strengths, Navasota should exploit both its sector experience and its executive team to enter the renewable energy market faster than competitors and establish a stable trading position, whether or not it corrects the internal weakness of a lack of its own offering in this domain. Navasota and Energy Sector Financial Criteria Navasota is a privately owned company and not all of its financial information is publicly available. However we can examine certain criteria to evaluate the financial strength of the company, an important aspect for being able to take action either in the CASE context already described or to implement the recommendations on strategy that we mention afterwards. For optimal financial strength, we require: a high return on investment; balanced leverage (debt/equity); solid liquidity; low capital required compared to what is available; high cash flow; easy market exit; little business risk; and high economies of scale and experience (CATA, 2008). Whereas Navasota presents a number of unknowns (we have no information on its rate of return on investment or rate of cash flow for example), certain other criteria attract a low rating for Navasota. For instance, "easy market exit" would not be easy for Navasota given the large gas generating installations that it would have to dispose of. In all, and in the absence of any further data, these financial aspects should also be weighed up before starting any of the events referred to elsewhere in this paper. Navasota - Strategic Recommendations To remain a player in the long term for customers in the state of Texas, Navasota will need to develop its skills, support and offering in terms of sustainable / renewable energy generation. This longer-term strategic goal can be broken down in the first instance to some short-term strategic objectives: replace (after attrition) or add to the current personnel by choosing new people with skills in sustainable energy; and define and market an offering of asset management in order to build business activity and relationship with those entities that already produce alternative energy (State of Texas, 2008). Navasota - Leadership The business context of Navasota will need to change. It is the role of the leaders within a company to set the pace and the direction of the change, and also to maintain focus on the overall objective and to attract the following of company employees in doing so (Heathfield, 2008). Besides this, company leaders will also need to ensure that there is a clear internal communications channel, so that they can in turn communicate the strategic direction to the employees. However, they will stop short of doing the line manager's job, as this latter role has value-add built in, in that the managers themselves should then interpret the leaders' messages and accomplish what is necessary in their own specific domains. Navasota - rewards The reward structure in Navasota will need to match the objectives that have been defined. In particular, the move to a fully functional alternative energy offering will need to be singled out and recompensed in a way that signals the appreciation that the employee is contributing useful efforts. Other business activities such as the gas combined cycle power generation, will still need to be rewarded, because they will still need to generate revenue. Executives and perhaps employees will possibly identify reward with higher valued stock options although as a generalised benefit, this does not pinpoint the precise actions to be done in the context of a particular objective. However, other forms of reward that do not have any material form (either money, stock options or the like) can also be very powerful and very targeted. Examples are (public) praise for an employee whose work gives a result in line with the specific and critical objectives that the company has set itself (Heathfield, 2008). Navasota - ethical issues Navasota is affected by two linked ethical issues: a positive one, engendered by moves towards sustainable energy; and a negative one, which comes from the continued use of gas-fired generating stations. It has the capability both in company skill-set and management to be able to move to the positive one of non-polluting, sustainable energy. At the same time, it also has sizable investments in an inherently polluting technology that it could not abandon rapidly, because of the consequent loss of revenue and collapse of an important investment. By concentrating on the positive one, Navasota can relieve pressure that may be building up on the negative one, and in collaboration with Texas state energy initiatives, make a timely transition to energy generation that poses no ethical problems. Conclusion: Navasota Energy is likely to find itself "wrong-footed" if the new Texas State energy policies are implemented, and will therefore need to plan for a transition to alternative energy generation with a corresponding change in corporate and employee mindset. This transition can be accomplished satisfactorily if Navasota works with the State of Texas and leverages its strong management to get the "buy-in" of all employees in the Navasota company. (2089 words) References Heathfield, S.M. (2008). Leadership rewards and recognition. (Retrieved April 15th 2008). http://humanresources.about.com/od/leadership/a/leader_reward.htm Koplyay, T., & Goldsmith, D. (1998). Strategic management. (Retrieved April 15th 2008). http://www.cata.ca/files/PDF/Resource_Centres/hightech/elearning/Part5-Strategy.pdf Navasota (2008). Navasota Energy. (Retrieved April 15th 2008). http://www.navasotaenergy.com/ OPA (Ontario Power Authority) (2008) Generation development. (Retrieved April 15th 2008). (http://www.powerauthority.on.ca/Page.aspPageID=924&SiteNodeID=236 State of Texas (2008). A Texas energy strategy. (Retrieved April 15th 2008). http://www.rrc.state.tx.us/tepc/616presentations/GovernorsEnergyPresentation.pdf Spath & Mann (2000). Life cycle assessment of a natural gas combined-cycle power generation system. (Retrieved April 15th 2008). http://www.nrel.gov/docs/fy00osti/27715.pdf Texas General Land Office (2008). Sustainable energy strategy for a new century. (Retrieved April 15th 2008). http://www.glo.state.tx.us/sustain/sustainable.html Read More