ge smart energy case competition - 2013 mit sloan submission

ECLP Case Competition 11-01-2013

Leveraging Big Data to Optimize

Power Generation

Experienced Commercial Leadership Program

NE Regional Case Competition

Friday, November 1st 2013

Alexander Boutelle, Ariel Chua, Avner Penchas, Sam Massy


Agenda

Introduction

Our Larger Strategy A change moment in GE’s storied history

Our Pitch to Potenza Responding to the client’s questions, and the reasons behind them

Deal Structure and Business Model Creative solutions to win this deal and establish a beachhead

Questions


Our A Pivot Point for GE

“This Industrial Internet… is about combining the world’s best technologies to solve our biggest challenges. It’s about

economically and environmentally

sustainable energy… and preparing our infrastructure and cities for the next 100

years.”

-Jeff Immelt, GigaOm (11-28-2012)

Larger Strategy >> Potenza Pitch >> Business Model >> Conclusion >> Questions


Opportunities in Utility Analytics

Projected Analytics Market for Utilities2

1 Utilities Analytics Institute 2 GreenTech Media

• 39% increase in utility analytics software by 20161

• $1.5 billion in the US alone by 20202


The Challenge of Energy

Share of Total GE revenue 2010-20121

Market in need of solutions • Growing and unpredictable global market

Massive opportunity in the power industry • Net sales of energy 3.75 billion MWh, representing $371 billion revenue

• 1% fuel saving for power generators = $66B savings over 15 years

Growth Market for GE specifically

Year Power and

Water Energy

Management

2012 19.2% 5.0%

2011 17.4% 4.4%

2010 16.6% 3.5%

1 GE Annual Report 2012 2 “Game changers: Five opportunities for US growth

and renewal” - McKinsey Global Institute, 2013

Incremental Annual GDP by 20202


Creating dominance in Energy Market

2016 2017 2019 2018 2020 2014 2013 2015

Our strategic approach: Zero-Capital, Gain-share Model

GE revenue:

Predictivity

Power Equipment

$22.5B

$46B

$2.3B

$0.3B

Pitching Potenza


“We cannot suffer any more imbalance charges. We’re leaving money on the table.” -CEO

CEO Responsibilities • Accountable for firm’s sustainable

performance; Optimizing people & assets

• “Seeing around corners” to ensure future stability, profitability and growth;

• Balancing risk: safety, environmental compliance, insurance and regulations

Sales Strategy • First and foremost, demonstrate GE

software’s impact on profitability

• Demonstrate awareness of the diverse risks managed by the CEO, and our product’s role in proactively managing these concerns.


ROI: Value Proposition for Potenza

Improving Efficiency Output, GE 7F-5* 216MW

Increased output (Predictivity) 8%

Increased fuel economy 0.2%

Wholesale electricity $50/MWh

Per MWh savings $887.38/MWh

(GE 7F-5)

Annual Savings (GE 7F-5) = $3.1M

Annual Savings (500MW Plant)=$6.6M

Meeting Demand • Remove charges directly impacting

Potenza’s bottom line

• Ripple effects: improved dependability translates into increased demand from Dispatch

GE 7F 5-Series Gas Turbine * GE website


ROI: Additional Value Adds

Enhanced performance • Supply demand at full capacity

Maximize Renewable Energy Use • Improved forecasting and weather

data enables real-time integration of wind power; stop “leaving money on the table”

Safety and Predictability • Transforming unpredictable, costly

maintenance emergencies into low-impact, low-cost, low-skill tasks

Increase revenue &

reduce operating

costs

“You’re not software experts. Besides, we already have relationships with IT firms.”

– Asset Manager .

Asset Manager Responsibilities • Managing and optimizing all the

costs associated with an asset over its useful life

• Communicates about the health and maintenance schedule of an asset with the Plant Manager.

Sales Strategy • Highlight the Predictivity™ maintenance

savings and operational improvements

• Recognize that software costs may be incurred on her P/L, but fuel savings will accrue to different cost center.


GE vs. Traditional Software Companies

General Electric IT Companies

Experience More than a century in power generation

1 – 20 years in tech

Focus State-of-the-art, holistic

power solutions IT-specific

Timeframe Can commit to decades

of maintenance Survived the last bubble

Capabilities Investment

$1B investment in Industrial Internet

Energy consultant hired

Relationship with Potenza

Helped install half the factory floor

Recently signed a contract

Proactivity Can identify what

must be fixed Can fix what you identify for them

Offices 160 countries Silicon Valley

“What if we can’t fire GE because you have a stranglehold on our data?” - Plant Manager

Plant Manager Responsibilities • Ensures power is generated

safely and reliably, in accordance environmental regulations.

• Responsible for responding to trading and dispatch solicitations at the lowest possible cost.

Sales Strategy • He has the most direct experience with

GE equipment: highlight our history of engineering excellence, safety, and maintenance.

• May be concerned that software will lead to reduced headcount on his team.


Data Issues

• Data is yours. • Security is our top priority

• Access performance reports 24/7 with secure, backed-up online data storage

• GE Information Security Center: 100 staff hired over last year, and will double our staff within 2 years

• Why do you need other companies machinery info? • Predictivity will work with both GE and non-GE

equipment; it will help the two perform better

“What kind of guarantees are you willing to make?” - CEO

CEO Responsibilities • En

Sales Strategy • He h

Deal Structure and Business Model



The Zero-Capital, Gain-Share Model

• GE: Provides Predictivity (both sensors and

software), analytics and system maintenance

• Potenza: Shares (40%) of gains from fuel savings

and increased energy output

Potenza Savings

Potenza Savings GE Revenue

Both sides to agree upon baselines. GE to manage Measurement and Verification process.


Gain-sharing = Win-Win

Value to Potenza •No initial capital requirements

•No-risk Guarantee: Pays GE when efficiency value is realized

•Potenza keeps other value-adds (increased revenue, reduced

maintenance)

Value to GE • Establish strategic

beachhead in this market

• Obtain real-world data, enhance future products

(both software and hardware)

• Turn customer into intra-industry advocate;

let their experience drive business to GE


Gain sharing: Contractual service agreements (CSAs):

Future of Predictivity

Outcome-based approach to demonstrate efficacy and create revenue streams

Create a holistic energy solution for our customers

2013 2014 2015 2016 2017 2018 2019 2020

What this means for GE



Organizational Change

• Transitioning from selling hardware to providing holistic solutions

• Same GE brand, wider scope

• Culture Transition • Greater collaboration and joint P/L

responsibilities across IT & Hardware Sales team

• Leverage ITLP, San Ramon Software Center of Excellence, EEDP Software track

Questions?

Appendix


Revenue Projection for GE

(1) 1% fuel saving = $66bn over 15 years, GE Annual Report

(2) GE website (3) International Atomic Energy Agency, assuming 8% growth in investment per year * Assuming 1% improvement as initial estimate

Global Revenue from Software/Analytics 2013 2014 2015 2016 2017 2018 2019 2020

GE Market Share 25% 25% 25% 25% 25% 25% 25% 25%

Fuel saving for 5% improvement in fuel efficiency ($bn) (1) 4.4* 22 22 22 22 22 22 22

5% increase in energy output ($bn) (2) 1 1 1 1 1 1 1 1

Assume GE sharing 40% of savings/gains ($bn) 0.54 2.3 2.3 2.3 2.3 2.3 2.3 2.3

Assume growth of adoption 15% 20% 25% 40% 60% 80% 100%

0.345 0.46 0.575 0.92 1.38 1.84 2.3

CAGR 37%

Global Revenue from Power Equipment 2013 2014 2015 2016 2017 2018 2019 2020

GE Market Share 25.0% 25.7% 26.4% 27.1% 27.9% 28.6% 29.3% 30.0%

Global Investment in Power Generation ($bn) 90 97 105 113 122 132 143 154

GE Revenue from Global Power Generation Investment ($bn) (3) 22.5 25.0 27.7 30.8 34.1 37.8 41.8 46.3

CAGR 10%


Savings Analysis: GE 7F-5 w/ GE Predictivity AGP & OPFlex

Units:

INPUTS:

Output, GE 7F-5 (Simple cycle) 216 MW

Increased output (AGP & OPFlex) 8%

Increased fuel economy (AGP & OPFlex) 0.20%

Average wholesale electricity price (U.S., 2013) $50.00 per MWh

Average Capacity Factor (CCP) 40%

ANALYSIS:

Increased output (AGP & OPFlex) 233.28 MW

Associated cost savings $864.00 per MWh

Fuel efficiency savings (per MWh) $23.33 per MWh

Total Cost Savings (per MWh) $887.33 per MWh

Annual Savings, GE 7F-5 w/ AGP & OPFlex = $3,109,197.31

Extrapolated savings, 500MW plant $6,664,088.89

Savings Analysis

ge smart energy case competition - 2013 mit sloan submission

Data & Analytics

mwh ge

annual savings ge

model ge revenue

dispatch ge

ge annual report

energy market

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ge softwares impact