Tool Box Talks: Scenario Planning

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Management tools are a dime a dozen. And yet, contrary to popular belief, most of them are good and helpful if used correctly and in an adequately defined context.

In “Tool Box Talks” we introduce you to common and less well-known tools and show you how you can exploit their potential for your enterprise, with today’s focus on scenrio planning.

What is scenario planning and when should it be used?

Scenario planning is a strategic planning tool. It analyses the potential development of factors impacting the development of an organization and develops different pictures of its future. Thus, it allows for the development and the test of robust and adaptive stratgeties.

Whenever a company’s enviroment is characterized by ambiguity and frequent changes, scenario planning is a valuable extension in the strategic planning process. The tool’s strengths come into play whenever environmental factors impacting a company’s success are known but not the way they will evolve over time. In these circumstances, scenario planning helps to develop a realistic view on the future and derive strategies to achieve an organisation’s goals and objectives.

How is scenario planning used?

Scenario planning is a five-step process. First one needs to define the boundaries for the scenarios, i.e. the focus (e.g. a specific market, a region or country, a certain technology, etc.) and the time (e.g. the upcoming 12 months, the next 5 years, until 2050, etc.).

Next, the user needs to define the relevant impact parameter. If they are not already known, a PESTEL analysis is the tool of choice to ensure a holistic collection of impact factors. For each of the identified factors the user has to evaluate the potential future development. This should include the spread of potential outcomes as well as the accuracy of the prediction made. Finally, the impact of each factots on the defined targets and dependencies between different factors needs to be worked out.

The third step in the scenario planning process is the selection of scenario-defining parameters. These are characterized by (i) a high impact on the targets, (ii) a low predictability, and (iii) the absence of interdependencies. The number of scenarios is directly linked to the number of defining parameters: one parameter will lead to two scenarios, two parameters will result in four scenarios, three parameters can be used building eight scenarios and so on.

Once the defining parameters are selected, the user can formulate the final situation for each scenario by picking a set of extreme results from the defining parameters. These are used to depict a potential future at the end of the selected timeline. This should be as realistic and conclusive as possible and reflect all parameters identified in step two of the scenario planning process.

Finally, a narrative bridging the time between today and the future end points needs to be developed. As before, these stories need to be realistic, conclusive and meaningful for the organisation.

Beware of pitfall!

Scenario planning is not a prediction of the future. It rather highlights dependencies and helps making ambiguities tangible and handable. Thus, it is not the goal to develop the one correct scenario but rather a set of different, equally realistic ones.

As with planning in general, there is apotential danger that some initial impacting factors are unexplored or that the analysed data is biased. To overcome these obstacles, a wide range of people including externals should be involved in the scenario planning process.

Last, the development of a narrative may be tricky, too. The team needs to pay special attention to include all relevant impact parameters and use conclusive developments. Otherwise, the scenarios become blurry and are of little use for the organization.

What are the benefits of using scenario planning?

The primary result of the scenario planning process are the derived scenarios. These are the starting point for the development of robust strategies, i.e. strategies which allow the organization to achieve its goals and objectives independently of the future development. Besides, scenarios can be used to develop an early warning system. This enables the company to react to unfavourable developments early on rather than waiting for significant deviations in the results or to develop option-based strategies.

Another benefit from scenario planning is its systematic interaction with a company’s environmental factors. By frequently changing perspective from today’s boundary conditions to a potential furture development, the involved personnel develop a deeper understanding of how external factors impact the organization. This considerably improves the decision making process as external factors are more likely to be included.

Follow us on LinkedIn to learn on a regular basis how you can make the most of management tools, so that you will stay one step ahead of your competitors.

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3 Cost Elements of Green Hydrogen

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Green Hydrogen is considered key to a sustainable and climate neutral energy supply. Neither its production nor its consumption emits carbon dioxide, it can be stored and transported without significant losses and allows for sector coupling. However, these benefits com at a cost. For 2019, statista estimates the costs of the production for green hydrogen at 16.50 €/kg.

Key Drivers of Hydrogen Production Costs

The main obstacle to the commercial success of green hydrogen is its cost compared to other sources of energy. Therefore, one of the most important questions is: How can we reduce

Production costs? To better understand this question and its implications, let’s take a deep dive into what contributes to hydrogen’s production costs.

The main elements defining its production costs are:

  • investment,
  • fixed operational costs,
  • variable operational costs and
  • utilisation.

By investment is meant all expenditure related to hardware incl. engineering and erecting – from electrolysis to piping and fencing. It is primarily impacted by the size and type of electrolysis. As large scale industrial production of electrolysis systems is still in its infancy, Fraunhofer’s IMS assumes that investment costs of electrolysis projects will be roughly cut to 50% of today’s cost level by 2030.

Fixed operational cost (OPEX) is primarily defined by labour and maintenance. Thus, the most probable scenario here are cost increases induced by general inflation effects. Besides, no significant cost changes can be anticipated.

Variable OPEX is dominated by cost of electricity. Cost for water and other consumables which are required in minor quantities can be neglected for an initial estimation of production costs. Renewable electrical power can be generated for 0.03 to 0.17 €/kWh, depending on the utilized energy source and the size of the production facility.

The fourth factor influencing the hydrogen costing system is the utilization of the electrolysis. While variable OPEX is directly proportional to hydrogen production, investment costs and fixed OPEX are constant annual costs. Its impact on cost of production is depending on the overall hydrogen production and thus on capacity utilization. As producers generally try to increase utilization as much as possible, it directly depends on the availability of renewable electricity.

Dependencies in Cost of Production

Cost of production for green hydrogen can, slightly simplified, be calculated from these four factors and the time of depreciation, which is in many cases 10 years. The respective formula is:

 

CoP = V + (F + I / t) / (U * N)

 

CoP = cost of production [€/kg]

V = variable OPEX [€/kg]

F = fixed OPEX [€/a]

I = invest [€]

t = time of depreciation [a]

U = utilization [%]

N = nominal Production [kg/a]

 

As highlighted before, producers can primarily influence two factors: the cost of electricity, i.e. variable OPEX, and capacity utilization. Hydrogen production costs are reduced for lower electricity costs and increasing capacity utilization. Unfortunately, these two factors are not independent of each other for green hydrogen production.

In the example calculations shown in the table below, I assumed a 10 MW electrolysis with 65% efficiency, which would results in an annual hydrogen production of 1,500 t at 100% utilization. The overall investment cost is set at 10 M€ with a 10 years linear depreciation and 150 k€ annual fixed costs. For variable OPEX, only cost of electricity is included while all other costs are neglected for simplicity’s sake.

Bearing in mind that potential sites for large-scale hydropower plants are already used in Germany and thus the optimum scenario with a 10 MW hydropower station is unrealistic, the data showcase the reverse trend in variable and fixed elements in production costs.

Optimizing Cost of Production

Looking at the calculated cost of production, the key question is how to produce green hydrogen both ecologically and economically. One important factor will surely be e reduction in hardware cost. Even if a certain fraction of this effect will be balanced by inflation effects, the relative cost of electrolysis units will go down compared to other energy conversion technologies.

While investment costs for electrolysis technology can be expected to decline over time, a similar effect cannot be expected for wind and solar power. Thus, cost reduction for variable OPEX is rather unlikely, especially as sites with optimum wind and solar conditions will soon be utilized and new wind and solar parks will rather be built on B or C sites with lower average power production.

Finally, electrolysis utilization may be increased by use of power storage and a combination of several renewable electricity sources. Batteries or similar electricity storages can significantly increase utilization but are quite expensive as of today. Thus, an optimization of utilization comes at the cost of increased investments and the effect on hydrogen’s production costs are rather negative.

The approach to improve utilization by using several power sources, e.g. wind and solar power, seems to be more promising in reducing lower production costs. This scenario, however, requires an increased power supply which needs to be provided for. This may impact the average cost of electricity and thus has to be evaluated separately.

This example calculation and the discussion of its results highlight the complexity in green hydrogen economics. Contact us or follow us on LinkedIn to learn more about the topic.

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The 7 Colors of Hydrogen

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Hydrogen (H), a colourless, odourless, tasteless, flammable gaseous substance that is the simplest member of the family of chemical elements.

Hydrogen is colourless – that is a well known fact and not only a definition from Encyclopædia Britannica, and yet, hydrogen is frequently referred to a having a specific colour. However, the colour coding does not define the actual optical appearance of the gas. Rather, it is used to indicate its ecological footprint and its carbon intensity in particular.

Occurrence and Production of Hydrogen

With more than 90% of all atoms and roughly 75% of matter, hydrogen is the most common chemical element in the universe. However, hydrogen only contributes to less than 1% of earth’s overall mass and hardly any terrestrial hydrogen is available as H2 but in more complex molecules like water or methane (i.e. natural gas), making it impossible to exploit natural hydrogen reservoirs on earth.

To make hydrogen available in large quantities one needs to split up molecules which are available in vast quantity. This is primarily done using three processes: steam reforming, methane pyrolysis, and electrolysis.

Today’s hydrogen production primarily relies on steam reforming. In steam reforming, a hydrocarbon – primarily methane – reacts with steam to hydrogen and carbon monoxide. In a subsequent process step, additional water is used to produce carbon dioxide and additional hydrogen from the carbon monoxide.

Another technology, methane pyrolysis, uses methane as starting point. The gas is thermally cracked into hydrogen and carbon. As carbon is a solid, it can easily be separated and stored or used in other processes, thus avoiding any carbon dioxide emissions to the atmosphere.

Perhaps the best-known process for hydrogen production probably is water electrolysis. As most terrestrial hydrogen can be found in water, this technology levers the largest hydrogen reservoir on earth. Electricity is used to split water into hydrogen and oxygen. As no carbonaceous molecules are involved in the process, it does not emit any carbon dioxide at all.

That is How Hydrogen Becomes Colourful

Hydrogen and its derivatives, i.e. energy carriers produced from hydrogen, are an important building block for a sustainable and climate neutral energy supply as no carbon dioxide is emitted when using hydrogen. For a sound evaluation of hydrogen’s climate impact, however, it is necessary to understand the way it is produced – and that is why its colour nomenclature makes sense.

The color of hydrogen determines both the primary hydrogen and energy carrier and the production process. This set of information allows for a rough estimation of the climate footprint of a specific batch of hydrogen and thus whether is can be considered climate friendly or not.

Unfortunately, different users are using different color codes which, in some details, differ from each other. We are following the definitions used by Germany’s National Hydrogen Council and the German Government.

Hydrogen produced from methane and other hydrocarbons using steam reforming is labeled as grey hydrogen. Assuming perfect process conditions, four hydrogen molecules and one carbon dioxide molecule are produced from one methane and two water molecules. The energetic efficiency of the process is at roughly 70%.

The carbon dioxide emissions from this process can be captured and permanently stored underground, either in gas caverns or suited geological formations. While the required process steps prevent emitting carbon dioxide in the atmosphere, they also reduce efficiency as additional energy is required for carbon sequestration and compression. Hydrogen produced by steam reforming from fossil hydrocarbons utilizing carbon capture is labeled as blue hydrogen.

Turquoise hydrogen is hydrogen produced by methane pyrolysis. As with grey and blue hydrogen, the production process utilizes fossil hydrocarbons. But since the byproduct is not carbon dioxide but solid carbon, carbon dioxide emissions are avoided if the energy required for the pyrolysis process is produced in a carbon neutral way. The technology is currently being developed but not yet commercially available at larger scale.

Red, yellow, and green hydrogen all stem from electricity using water electrolysis. There are no direct carbon dioxide emissions, and the energetic efficiency of commercial systems today is in the 60-65% ballpark. The different colors signify differnt sources of electricity.

Yellow hydrogen is hydrogen made from grid power. The energy mix, i.e. the percentage of fossil, nuclear, and renewable energy, is given by the power generation at the very moment the hydrogen is produced. The measure of carbon dioxide emissions of yellow hydrogen are varying because the energy mix is constantly changing – due to availability in solar and wind power and changes on the demand side. In case of a high percentage of coal and gas in the energy mix, the effective emissions of yellow hydrogen may temporarily even be worse than those of grey hydrogen.

In case only electricity from nuclear power plants is used for hydrogen production, this hydrogen is labeled as red. No carbon dioxide is emitted in its entire production process and thus it is climate neutral. However, nuclear power generation produces radioactive wastes which need to be securely stored for centuries. Thus, red hydrogen comes with additional risks.

Electrolysis utilizing only electricity from renewable sources, i.e. wind solar and hydro power, produces so-called green hydrogen. In the process, neither carbon dioxide nor any other harmful substances are produced. Unfortunately, the availability of renewable electricity is generally limited by weather conditions. Therefore, for a continuous production of green hydrogen, large scale batteries are required for storage of electricity.

Finally, orange hydrogen summarizes all production pathways utilizing waste or biomass as input. It is, however, impossible to have a general statement on overall efficiency and cabron bioxide emissions as this will vary depending on the input and the respectively used production technology.

You like to learn more about how to set up a sustainable and economical hydrogen supply? Contact us or follow us on LinkedIn for regular updates.

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Tool Box Talks: PESTEL Analysis

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Management tools are a dime a dozen. And yet, contrary to popular belief, most of them are good and helpful if used correctly and in an adequately defined context.
In “Tool Box Talks” we introduce you to common and less well-known tools and show you how you can exploit their potential for your enterprise, with today’s focus on a PESTEL analysis.

What is a PESTEL analysis and when should it be used?

PESTEL analysis is a strategic planning tool. However, it is also used in strategic marketing or quality management. It analyses the external environment of an organisation and provides a holistic overview of external factors the organization should be aware of.
PESTEL analysis is the first of several steps in strategic planning activitities. Whenever external, macroscopic driving forces need to be considered in the planning process, PESTEL analysis is the tool of choice.

How is a PESTEL analysis used?

PESTEL is an acronym for:
P – political factors
E – economic factors
S – social factors
T – technical factors
E – environmental factors
L – legal factors
Conducting a PESTEL analysis requires several steps to be taken. First, the facilitator needs to select a goup of people representing as many different parts and functions of the organization as possible. This group brainstorms driving forces for each of the six topics.
Next, people external tot he organization are interviewed. This ensures that results are unbiased and helps broadening the background from which ideas are taken, thus reducing the risk of missing important factors in the analysis.
IN the next step, the identified driving forces are evaluated. To do so, all available data on each of the factors are collected and reviewed in order to identify the potential impact on the organisation’s objectives.
Finally, the list of driving forces is refined based on the previous data evaluation. The result is a list of relevant external factors for each of the six categories. This list is the input for subsequent process steps, e.g. a SWOT analysis.

Beware of pitfall!

While searching external driving forces, a PESTEL analysis focuses on six different topics to help create a holistic picture of the environment. In doing so, the tool forces the user to adopt different points of view on the environment. Though this aids to minimize bias effects it does not guarantee that the team will identify all relevant factors. Thus, while preparing for a PESTEL analysis, the group discussion leader needs to pay attention on the selection of participants – both the internals for step one and the externals involved in step two. The broader the experience and background of those involved, the higher the likelihood that all relevant driving forces will be captured.
The same is true for the data analysis in step three. In order to obtain reliable results, the team needs to ensure that inputs are not only taken from a few limited sources. Instead, they should try using a baseline as broad as possible in order to avoid biased data. Again, the use of external experts in data gathering and data evaluation may be helpful in generating a neutral and balanced data set.

What are the benefits of using a PESTEL analysis?

A PESTEL analysis generates an overview of factors potentially impacting an organization. In this way the results assist in better understanding the external context in which an organization is operating. This understanding is one of the key requirements when setting up a quality management system according ISO 9001. Results from a PESTEL analysis may also be used as in input for strategic planning like, for example, a scenario analysis.

Follow us on LinkedIn to learn on a regular basis how you can make the most of management tools, so that you will stay one step ahead of your competitors.

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Consulting Made in Westerwald

Westerwald Future

The Westerwald is something special: economically strong with many small and medium-sized industrial and artisan businesses, yet not an industrial metropolis, but a scenically highly attractive location that visitors associate more with vacations than with work.

The strength of the local economy is demonstrated by the development of value creation: While the GDP nationwide has only increased by just under 17% in the last decade, growth in the Westerwald was nearly 50%, which is three times higher than the national average.

This provides local businesses with the best conditions to shape a successful future. However, success is not a constant, and this applies in the Westerwald as well as in any other region. Changes in boundary conditions, inefficient handling of scarce resources, or internal misjudgments can lead formerly successful business models to become unsustainable. To remain successful in the long term, companies should therefore fundamentally seek solutions to continuously enhance their future viability.

Solutions from the Westerwald

RNO-Consulting develops such tailor-made solutions. As a regionally rooted management consultancy, we not only utilize tried-and-true approaches but also consider the specific characteristics of businesses in the Westerwald – so that you not only remain successful but also strengthen your unique identity.

Risk minimized

Only those who recognize risks and threats can actively minimize them. RNO-Consulting assists you in efficiently identifying relevant risks and developing and implementing effective countermeasures. This way, we ensure the long-term security of your success.

Opportunities maximized

There are many opportunities and improvement possibilities, but they must be seized. We solve problems within your company, optimize processes and workflows, and assist you in establishing targeted innovation management. This enables you to fully unleash your potentials.

Success granted

Success doesn’t happen by chance; it’s the result of focused efforts. RNO-Consulting is your partner in guiding these efforts in the right direction. This ensures that you stay one step ahead of your competition.

Consultng Made in Westerwald

Consulting at the highest level according to international standards, implementation- and application-oriented for medium-sized businesses, down-to-earth and hands-on like the region – that’s consulting Made in Westerwald, and that’s what RNO-Consulting stands for.

Contact us and get to know us – without obligation and of course free of charge!

International standards – RNO-Consulting operates according to ISO 20700 and is listed with the International Council for Management Consulting Institutes through its owner, Dr. Tobias Panne.

Consulting for medium-sized businesses – since 2020, RNO-Consulting has been certified by the Bundesverband Mittelständischer Wirtschaft for its quality work as a consultant for the medium-sized business sector.

Made in Westerwald – from the region, for the region. As a Westerwald-based company, we are committed to the region and place special emphasis on strengthening it..

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Successfully implementing change – Part 2

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It was Christine’s dream job: project manager for a large digitization project at an established, economically strong medium-sized company. She had the opportunity to fully contribute her experience, the pay and working conditions were attractive, the company offered perspectives beyond the project, and the position itself was a significant career advancement for her.

The first few months were unexpectedly tough. Even though the entire management officially supported the project and its goals, no one wanted to engage in the associated changes. But with her persistent nature and her skills as a change manager, she was eventually able to anchor the necessity of change and form a leadership team that truly supported the project. Christine’s second challenge now was to successfully implement the project.

The power of status quo

The first part of this mini-series showed what obstacles make the preparation of change processes difficult and how important decisions are made in the planning of changes that significantly influence later success. But even if “planning is half the battle,” implementation remains the second half that contributes just as much to the success – or failure – of a project.

When implementing changes, it is also about overcoming the power of the status quo and the inhibiting forces described in the first part of this series. Four elements can help you successfully master this challenge.

Preconditions for successful change

If you want to reap the fruits of success after a good preparation of your change project, you should show your stakeholders that your initiative is successful. At first glance, this may sound like a catch-22 situation, but it can be achieved through four simple elements.

Enable employees

First and foremost, you need to ensure that your employees can act in line with your change project. In established companies, there are a multitude of defined processes and (partially unwritten) rules. These more or less fixed guidelines significantly determine how the company operates and functions.

Changes always mean that certain areas should be handled differently than before. This means that some of the existing guidelines need to be disregarded. However, this only works if you enable and encourage your employees to override existing norms and standards where necessary.

Generate quick wins

In most cases, a change project will not consist of a single measure, but rather a multitude of smaller steps. It is important to take the first relevant steps as quickly as possible.

This can demonstrate, on the one hand, that you are proactive and driving your initiative forward, and on the other hand, that you are heading in the right direction and your project is successful (despite any naysayers). If you can communicate early successes quickly, you solidify your position in the company and gain additional supporters who were initially skeptical of your project. This gives your project new momentum, which is essential for its further implementation.

Consolidate success and initiate further change

In addition to achieving early successes, it is critical to anchor the changes achieved sustainably in the organization. As just shown, achieving milestones leads to even hesitant employees supporting the project. However, if your organization quickly falls back into old habits, this is grist to the mill for those who would like to see the project fail.

At the same time, it is important not to rest on what has already been achieved, but to continue at the same pace and take further steps towards the stated goal.

Anchoring new behaviour

While at the beginning of a change project existing processes and rules need to be broken in order to enable change in the first place, at the end of the initiative it is necessary to establish and anchor new behaviors. Only in this way will the participants in the company also adhere to the new ways of working in the long term, and not fall back into previous patterns out of old habits.

If a company fulfills all four points in the implementation of change measures, it has a good chance of successfully completing the change project.

If you want to be successful in your next change project, contact us.

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