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Wind power firms share production risk in push for long-term value
As wind power competition mounts, asset partners are favoring production-based availability guarantees and bonus incentives to align interests and ensure long-term value, industry leaders said.
Rapid falls in wind power costs have raised the importance of operations and maintenance (O&M) efficiencies and increased competition in the O&M sector.
Growing installed capacity means the wind power industry is "moving away from a niche market into more of a commodity" and firms must retain a long-term view on O&M to avoid unnecessary costs in the future, Dan Barker, Managing Director - Service, Enercon Canada, told the Wind O&M Canada 2017 conference on December 4.
Canada has installed 6,500 turbines for 12.2 GW of capacity and the median age of turbines is between five and six years, similar to the U.S. average. This implies the wind industry has moved out of its infancy and into a "sweet spot" which could offer many years of useful life with relatively low-cost O&M, Barker said.
However, O&M costs will rise as turbines age and Barker warned decisions made at this point will impact the duration of this lower-cost period.
"These are long-term assets and that requires a long-term mindset and strategy in how we manage those assets...Maintaining that long-term view and avoiding the temptation to reduce costs is important, " he said.
Wind industry partners must work together to reduce the impact of reactive maintenance on owner revenues, Barker said. Unplanned O&M costs represent an estimated two thirds of wind operations costs, compared with only 20% for conventional power plant types, according to a recent report by MAKE consultancy.
"As an industry, we have a huge opportunity to optimize our O&M costs by reducing the amount of unplanned work as an industry. I think this is critical to our success in [the] future market," Barker said.
Production-based availability guarantees, rather than time-based arrangements, are a highly effective way to align the interests of O&M partners and optimising spending, industry experts told the conference.
Global energy group Engie owns 560 MW of wind assets in Canada and the company had originally planned to switch from a short-term "full-wrap" original equipment Manufacturer (OEM) agreement to in-house operations after around five or seven years of operations, Augusto Di Maria, Director, Operations Wind & Solar Canada, Engie Canada, said.
Following renegotiations with OEMs, the company decided instead to enter into a long-term full wrap arrangement which offered cost savings and "better alignment" with OEM goals, he said.
"When we renegotiated, one of the major drivers was to get a production-based availability...That helped us to both be on the same page with respect to getting the most out of the parts that we could," Di Maria said.
Engie's renegotiated contracts also introduced OEM penalties for underperformance and a bonus-based incentive for overachieving, Di Maria said.
"With a production-based availability and a bonus type structure, whether it's a strict bonus or a variable fee or something along those lines, you ultimately align yourself with what's of interest to both of you," Di Maria said.
Average length of service packages offered by major western OEMs (2016)
Source: Wind energy operations & maintenance report 2017. Data source: Survey by MAKE Consulting (2016).
Production-based availability guarantees encourage partners to apply a long-term vision to wind farm assets, Casey Kennedy, Customer Account Manager, EDF Renewable Services, said.
"As the projects mature and we see more ISPs [independent service providers] come into the marketplace, [Production-based guarantees] will be the owners' mechanism to ensure that we share that vision," he said.
EDF Renewable Services manages around 1.4 GW of wind capacity in Canada. The company manages around 80% of this capacity on a balance of plant basis and continues to seek full service wrap contracts following the expiration of OEM guarantee periods, Kennedy said.
"For us to be competitive in that space...we have to get into a full wrap, an FSA [full service agreement]-type structure where we are de-risking-- taking the risk away from the ownership group and putting more on us," he said.
To prepare for greater risk responsibilities, independent service providers (ISPs) should look to leverage growing data analytics capabilities and ensure they have a deep understanding of parts procurement lead times, Kennedy said.
When assessing O&M partners, owners should evaluate the core activities in the O&M value chain of their assets and allocate risk for mutual gain between partners, Barker said.
"In a partnership, both parties have to benefit over the long-term…The only way to do that is to really ensure that both parties in the partnership have aligned interests," he said.
In the last few years, Enercon has invested in its service activities process, to provide greater transparency and ensure quality standards are consistently met, Barker said.
These improvements aim to ensure best practices are "repeatable and continuously improved through very clearly documented and followed procedures," he said.
Key elements to consider in O&M partnerships include the internal resources available to perform multiple segments of scheduled maintenance, remote monitoring and technical diagnostics capabilities, expected lead times for major component replacement and spare parts procurement, and access to R&D and reliability improvements, Barker said.
Economies of scale can help companies optimize spare parts procurement, he said.
"Having access to information and having the experience to know how to optimize stock levels and where to optimize stock levels so that you hedge your lead times is important to manage the [production] risk.”
Kennedy noted that as wind farms age and technologies change, ISPs and OEMs will have to demonstrate to owners they have a long-term vision on parts procurement for major components.
"That's a key factor that you have to present to your investors...that you have a vision on those parts and a long-term plan to make those available," he said.
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