US wind developers overhaul O&M strategies ahead of tax credit removal

Wind power firms are re-evaluating operations and maintenance (O&M) spending against asset values and new metrics to combat rising wholesale market competition, leading wind executives said.

After a significant drop in wind power costs in recent years, wind farm operators are now examining new ways to profit from technological advancements and ensure sustainable income streams in a highly competitive market.

The expiry of U.S. Production Tax Credits (PTCs) for ageing turbines and the gradual removal of PTC support for new projects have prompted operators to re-examine operations and maintenance (O&M) activities. The PTC system provides 10 years of tax credits at $23/MWh for projects started by the end of 2016 and is scaled down annually to zero support for projects started by 2020.

The wind power industry must optimize service contracts and operational practices to take into account the falling revenues and rising costs of ageing turbines, Patrick Woodson, E.ON Chairman, North America, said at the Wind O&M Dallas 2017 conference on April 11.

"There is an emerging mismatch between availability and profitability which are not really in the owner's interests...We have to look at the evolution of the revenues over time and see how we can maximize these projects," he said.

Windfarm revenues can drop by a third following the removal of the PTC and many of these windfarms also are also outside the window for acquiring a PPA, Woodson noted.

"By the end of 2017 we are going to have 20 GW of projects which no longer have any PTC values, most of which are facing extremely low power prices. It's going continue to be a big challenge for all of us," he said.

   Monthly average wholesale power prices at US trading hubs

Source: Energy Information Administration (EIA).

Future operating strategies must reflect the value point of each individual asset and apply appropriate metrics, Woodson said.

"For us, availability isn't really the right metric any more. We think there needs to be a greater risk-sharing approach now between service providers and owners," he said.

Cost pressure

An industry drive towards lower costs has raised the profile of O&M efficiencies and firms are channelling learnings into plant development phases.

"We get a tremendous amount of pressure to reduce O&M costs, just in the development of new assets," Andrea Miller, Vice President of Asset Management Apex Clean Energy, told the conference in Dallas.

"At Apex we are investing pretty heavily in the tracking of parts costs and data associated with parts life and always looking for opportunities to find ways to reduce costs…"there will be continued pressure to drive down the cost of O&M and parts expenses, just to keep driving down the cost of energy without the PTC to help support the projects," Miller said.

In the past, wind farm operators may have been comfortable with O&M costs at around $10/MWh but increased market competition could see prices of around $5/MWh in the coming years, Chris Shugart, Senior Vice President Operations, Pattern Energy, told attendees.

"We are getting close to that [level]...We are going to need those kinds of contributions from every piece of the value chain," he said.

O&M efficiencies are being fed back into new projects amid aggressive competition for PPA contracts. The falling cost of wind power has attracted new commercial and industrial customers to the PPA market, following significant demand from utilities in recent years.

"Probably the majority of power deals we have signed the last year were with industrials," Shugart said.

Turbine test

The deployment of larger capacity turbines with higher performance levels has been a major driver of cost reductions.

Experts predict turbine capacities will continue to rise going forward and project partners must mitigate the risk of a "step change" in costs to accommodate larger equipment, Brian Hayes, Executive Vice President, Asset Operations at EDP Renewables, said.

"It's something we are definitely watching as turbines continue to get larger-how this will affect [balance of plant] costs as far as installation goes," he said.

Wind projects are also being developed in a wider range of site conditions, producing fresh challenges for installers and maintenance technicians.

Developers are increasingly opting to use different turbine models within the same windfarm to optimize site conditions and drive down costs, Shugart said.

Pattern Energy recently commissioned a windfarm which uses two different models on different ridges within the site.

"It is definitely going to throw some curveballs on how do [we] operate something like that," Shugart said.

Deeper analysis

Sustained low wholesale prices are driving operators to find new ways to improve O&M practices.

E.ON has been conducting a systematic review of its operating activities to ensure all maintenance activities are relevant in the low wholesale price environment, Gerrud Wallaert, Vice President of Regional Operations at E.ON, said.

“We’re challenging every assumption at the moment,” he said.

Going forward, companies will look to collect more feedback from turbine technicians working remotely from operations and maintenance offices, so that on-the-ground learnings feed operating models, Hayes said.

“That’s another level that I hope we can peel back as we go…I think there is a big opportunity there,” he said.

A combination of on-the-ground feedback and top-down technological direction will be required to fully optimize costs, according to Wallaert.

“A lot of initiatives that we have looked at in the past within E.ON have been more a top down approach…that frontline has to be engaged…we view it is top down, bottom up-- together, that’s how you start to move the dial,” he said.

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