Flexibility is the key to profitability in the new generation business. Dynamic markets will constantly be in a state of change. Maximizing flexibility requires:

• Understanding rapidly-changing markets,
• Creating operational and asset flexibility, and
• Acting rapidly with changing conditions.

Some of the methods that generation companies can use to gain a competitive edge are to:

Effectively use information. Information is the lifeblood of a flexible company. Generation companies are full of information, but often it does not get out of the silo where it is generated. An effective information strategy is not just an IT concern, but also involves significant organizational issues.

Exploit market volatility. Price volatility is a key determinant of market opportunities and risks. Volatility is that portion of the variation in prices which is not systematic and cannot be predicted. Even so, patterns of volatility can be understood. Companies that gain this understanding and are able to exploit it will have a competitive edge. Yet, understanding volatility patterns and what they mean requires a degree of commitment. For example, different measures of volatility may be used and it is important to use the most appropriate measure. Volatility also changes over time, sometimes in systematic ways. Anticipating changes in volatility may be just as important as anticipating overall price shifts.

Value embedded fuel and asset options. Financial options are increasingly being used in the energy market place. While these are an important and have garnered much management attention, companies may have many unrecognized options. Many fuel supply and transportation contracts, particularly for coal, for example, contain embedded options. Typical examples include:

• Variable-take clauses,
• Options to extend or terminate,
• Market reopeners,
• Alternative pricing mechanisms,
• Meet future environmental regulations,
• Quality flexibility, and
• Source or delivery point choices

Existing assets may also provide flexibility that can be viewed as real options, for example:

• The ability to serve multiple markets;
• Ability to sell different outputs (e.g., energy, capacity, ancillary services);
• Fuel flexibility;
• Modularity;
• Staging of new investments; and
• Positioning in a marketplace.

These options may add considerable value to the contract, yet no specific value may have been placed on them. In the new market place, participants will be increasingly setting prices on options. It is important for companies to understand the value of options, both to the company that holds them and to others in the marketplace.

Create asset-market synergy. Many generation companies are struggling with the issue of how to best organize for competition. RDC has developed a business model for generation companies called Asset-Market Synergy (AMS). AMS strategically combines the complementary capabilities of generation company assets with those of market operations to realize opportunities that neither could achieve alone, as shown in the nearby figure. This is difficult because it means careful alignment of virtually every aspect of the company's activities. Effective alignment requires recognition and close coordination of what each function brings to the Genco table. RDC has developed an approach to help companies realize the benefits of AMS.

Develop a technology strategy. Advanced technology have the potential to provide competitive advantages to generation companies. Taking advantage of new technologies requires carefully positioning the company to exploit technologies with uncertain payoffs when and if they are ready, and doing so without "betting the company." This involves implementing a system to:

• Monitor potentially promising technologies that fit your business,
• Create a low-cost option position in the most promising technologies,
• Select prudent decision criteria for making commitments, and
• Exploit the opportunity or exit as conditions warrant.