Operators move to revenue-based maintenance contracts in post-tariff era
Europe's wind operators are turning to market-responsive contracts and data analytics to maximize wholesale market gains and cut costs as feed in tariffs give way to competitive project tenders, experts told Wind Energy Update.
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Expiring feed in tariffs (FiTs) are raising operators’ exposure to low wholesale prices and new competitive tenders will test developers’ ability to lower operations and maintenance (O&M) costs in project bids.
Germany's new EEG rules implemented January 1 impose a competitive auction process for all future onshore wind contracts, requiring developers to bid against each other to receive a tariff.
The legislation caps new onshore wind power capacity at 2.8 GW per year-- including repowering projects-- and will impact plants completed from 2019.
Germany installed around 3.5 GW of onshore wind power in 2015, including 484 MW of repowered capacity, raising the total installed capacity to around 42 GW.
New wind capacity in 2015 by EU member state
Note: Includes onshore and offshore wind capacity.
Source: WindEurope's 2015 European Statistics
O&M costs represent up to 25% of total lifetime costs and the global introduction of competitive tenders has sliced project prices and increased the pricing pressure on the O&M supply chain.
Recent low prices in Argentina and Mexico show the competition in the global wind market, Feng Zhao, Senior Director at FTI Consulting, said.
Argentina's first power auction held in September saw wind projects priced as low as $49.10/MWh, according to Bloomberg. Mexico’s latest renewable energy tender, also held in September, reportedly saw prices average $33.47/MWh.
“On those prices, you can see why developers are even more aware they must get a return on their investment,” Feng Zhao, Senior Director at FTI Consulting, said.
In Europe and U.S., OEMs and independent service providers are competing for O&M contracts by offering a widening range of services while larger operators are bringing O&M activities in-house to maximise gains.
Experts predict O&M optimization will require service contracts that allow operators to leverage big data and predictive maintenance tools to maximize returns on investment.
“Competition with other renewables, especially solar PV is waking up the wind energy world,” said Luc Goosen, Director in charge of Wind, Hydro & Geothermal Power Generation at France’s Engie (formerly GDF Suez).
“O&M cost reduction...is one of the key elements. A tendency ongoing for several years already, shows operators evaluating more and more alternatives to long-term service agreements,” he said.
Market risk
Wind operators are demanding more performance-based O&M terms to minimize market risks and compete against other generation types.
Industry participants are increasingly referring to revenue-based O&M contracts which can respond to wholesale power market movements, said Keegan Kruger at Bloomberg New Energy Finance.
“As a power generator, if you can respond to a price spike and accrue additional revenue that you might not have costed into your project finance model...that’s money in the bank for you,” he said.
By exceeding revenue targets early on, an operator could have more flexibility to schedule maintenance more effectively to respond to power demand and pricing, Kruger said.
Going forward, OEMs may be further incentivized to hit or exceed asset revenue targets via a profit sharing arrangement that could see service providers work more closely with asset owners, Kruger added.
"There are early stage talks with asset managers and OEMs about how these schemes could work," he said.
Weekly average wholesale power prices in Central and Western Europe
EEX DE represents Germany, APX NL Netherlands, EPEX FR France and BPX BE Belgium
Source: European Commission's Quarterly Report on European Electricity Markets. Data Source: Platts
Steen Broust Nielsen, partner at Make Consulting, said the effective implementation of big data analytics and condition monitoring systems will be key to driving up project value. Forthcoming German auctions would illustrate how economies of scale and service-footprint density would become increasingly important in reducing operating expenditure, he said.
“When OEM’s engage in multibrand service, then they can increase the footprint density of serviceable turbines within a given distance of their service centres thereby increasing economies of scale and improving cost competitiveness," Nielsen said.
Companies must seek solutions that fit around their operations strategies in the post-FiT era, said Anders Hvashøj, who was Vice President, Vestas Smart Data and Consultancy Business until he left the post on December 1, 2016.
The challenge for businesses is more about "business enablement than technology development," he said.
“Some people think the holy grail is simply to analyze some data, but you need first and foremost to understand your business strategy and how that can be enabled by advanced analytics. Here the biggest challenge is in fact the application of insights and change to the current business,” Hvashøj said.
Big Data analytics in O&M is “not an IT initiative, it’s a business initiative that needs to be driven by the P&L [profit and loss] owner and directly show a return on investment,” he said.
Replacement costs
Ageing turbines further complicate fleet O&M strategies as operators must decide between extending lifetimes of turbines and repowering the assets by installing new models with associated service agreements.
"You may decide it’s too pricey to extend the life of the turbine, and more economic to get a new one with higher power output,” Philipp Stukenbrock, head of sales and marketing at 8.2 Consulting, a German renewables consultancy, said.
In Germany, around 7,000 wind turbines (5 GW) are expected to come to the end of their design life by 2021 and requirements for expensive component replacements towards the end of life can significantly impact costs, Stukenbrock said.
According to Hvashøj, larger wind operators will continue to unbundle O&M contracts, taking a higher degree of risk on O&M activities, while smaller operators "are more likely to stay with the OEM.”
ISPs and OEMs will continue to compete for scheduled and unscheduled maintenance contracts and in some cases larger asset owners will seek O&M partners that will harvest cost synergies for the fleet and lock in long-term market risks, Hvashøj said.
"Larger financial players (pension funds) and corporates like Google and Ikea, view the asset as a long-term investment and when they enter projects they want to lock in that risk for 20 years,” he said.
By Richard Wachman