Page 3: Core business
PowerGen first concentrated on becoming a low cost and flexible producer. The twin aims were to reduce fixed and variable costs.
- Fixed costs are those costs that do not increase as output increases. Fixed costs do not change over a range of output even though output within that range will vary.
- Variable costs are those that increase as output increases, because more of these factors need to be employed as input to increase output.
Fixed costs were cut dramatically and productivity increased by some 150%. The performance of PowerGen’s existing plant portfolio was also improved, in particular, through benchmarking its major coal-fired plant against a number of American coal stations considered to be the most commercially efficient in the world.
Bench-marking is a method which identifies ‘best practice’ in other organisations with a view to developing such methods within your own business. PowerGen’s main variable cost is its fuel costs. These were reduced through a reshaping of the company’s fuel and plant mix. Whereas the industry was dependent on one major coal supplier pre-privatisation, PowerGen can now turn to a wider mix of suppliers and fuels, which now include the use of gas.
PowerGen has also invested in state-of-the- art gas-fired plant which is much more efficient than conventional power stations. With more than £1.1 billion invested in over 3,000 MW of gas plant, gas accounts for over a third of the company’s generation output. Instead of following ‘best-practice’ bench-marks of other organisations, the operating and maintenance arrangements at PowerGen’s gas-fired stations have enabled the company to set its own bench-marks for the world’s best commercial practice.
Another major advantage of using gas for power stations is that it is much more environmentally friendly than coal-fired generation. A gas-fired station emits virtually no sulphur dioxide, half the carbon dioxide and a quarter of the nitrogen oxides of an equivalent coal-fired station. This has been particularly important because of the tighter environmental limits set for power generating activities at the time of privatisation.