Wind farm developers trying to get the perfect O&M contracts, therefore, have more choice than ever before. But this does not imply a race to the bottom, with the cheapest bidder winning each time. In the current economic climate, it is the offer that makes the most business sense and gives developers the greatest security that usually wins the day. We ask five experts what they have learned through their work with wind farm contracts, and what to look out for when searching for a new deal.
QUICK RESPONSE MINIMISES PRODUCTION LOSS
Hermann Bohlen, head of customer relations at German turbine manufacturer Enercon
Enercon's maintenance division PartnerKonzept (EPK) is said by some to be the gold standard of O&M, giving contracts of 12, even 17 years, which tend to be very popular, particularly with small developers and banks.
Hermann Bohlen is convinced that his company has found the best O&M solution for wind farm developers. He says that covering "all eventualities with one single long-term contract [offers] the best possible shortcut from error signals from the WEC [wind energy conversion] to maintenance or repair".
He adds that by doing away with lengthy processes, like extra inspections, preparation of estimates or order placement, the EPK guarantees a quick response in case of faults, thus minimising energy production loss.
Bohlen says his company is aware of market shifts with the arrival of ISPs, but is unconcerned about competition. "We are deeply convinced of our service concept," he says. "Among the strongest arguments is the fact that more than 93% of national and international customers have signed an EPK agreement as of March 2010." Bohlen points to customer surveys which claim to have only 1.3% of respondents wishing to change to other providers. "This," he says, "is because, in the long run, an ISP will hardly ever be able to guarantee service quality on the same level high level as a manufacturer."
SEPARATE OUT CRANE SERVICE
Joe Dalton, asset operations manager, Mainstream Renewable Power
Taking a standard two-year service and maintenance agreement should be considered in the context of an end-of-warranty inspection, which is necessary if the warranty is to terminate after this short time period, says Joe Dalton. "A high quality inspection can cost anything up to €25,000 and possibly more, so it's worth considering extending the warranty to at least five years," he says.
"The costs of longer-term warranty arrangements tend to be driven by elements linked to component replacement costs, the costs of cranes and availability," he says, with supplier's price structures based on conservative allowances for availability and crane costs, multiplied by conservative projected failure rates. So he advises separating out the crane service costs.
In a long-term warranty, he says, look at how many full-time personnel really need to be committed to the wind farm, if the arrangements facilitate outages during low-generation periods, and what monitoring is provided in addition to bodies on the ground. He advises investigating "how successful the provider is at eliminating those niggling reset issues that keep arising".
"Regardless of what arrangements are put in place, ensure that support is retained for control updates from the OEM," he says. "Consider some sort of longer-term update support arrangement and if decent turbine condition monitoring is available, consider targeting inspections on bad actors rather than looking at all machines." Likewise, if a 10-year warranty is taken up, check to see what will be replaced, he suggests.
LARGE COMPANIES ARE LOCKING IN TO EXTENDED ARRANGEMENTS
Simon Luby, advisory services manager at renewable energy engineering consultancy Sgurr Energy
Simon Luby is keen to highlight the importance of O&M and the benefits it can bring wind farm developers. "People are realising with wind that they can't just turn it on and walk away," he says. "They need to build maintenance and management capabilities between themselves and the maintenance contractor, and to be able to react immediately to any issues that arise. Those projects which have strong management teams in place, with robust budgets and comprehensive maintenance contracts, may have higher costs but, by and large, these higher costs are more than offset by the superior levels of availability that are achieved."
Developers may be restricted in their choice of contract, warns Luby. "If a wind farm is project financed, this will influence the approach to maintenance strategy, contracts and budgets," he says. "Banks want to see that there is technical experience and financial backing behind the maintenance contract for such important requirements as availability guarantees and price certainty. Project finance also requires a long-term view and confidence - years six to ten and more importantly from year ten out to the end of the loan period - with regard to renewing or replacing maintenance contracts with acceptable alternatives, backed by robust budgets and contingencies."
This generally means taking out an O&M contract with one of the bigger suppliers, many of which are following Enercon's lead and offering ten-year or longer agreements, either as well as or in place of their traditional five years with a five-year renewal period, says Luby: "This means they can write off equipment costs over a longer period, lock in their services for longer - and lock out the competition - and offer lower prices.
"Some suppliers still treat phrases such as serial defects as rude words, but depending on the specific turbine they are essentially ready to give you a ten-year warranty via the terms of their maintenance agreement, which means you pay an expensive fee and they effectively agree to replace anything."
"For smaller players seeking project finance," he adds, "this type of contract offers certainty in terms of cost, scope and availability - 96-97% availability pays for itself. Some developers are even happy to pay an incentive to ensure these higher figures are regularly achieved."
Nonetheless, says Luby, third-party maintenance services have been commonplace in countries such as Germany and Denmark for a number of years, alongside long-term maintenance contracts from original suppliers. "In some countries with younger wind industries in terms of installed capacity, such as France and the UK," he adds, "we are starting to see growth in third parties running O&M contracts at the end of the turbine warranty period; typically the end of the second or fifth year."
He notes that many ISPs are regional, such as B9 in the UK and Ireland, looking after small-scale projects with older turbines. That could change if in the UK, for example, French and Spanish third parties follow their compatriot utilities across the Channel.
As most offshore projects are relatively recent, with turbines still under warranty, there has been little need for external O&M contracts, explains Luby, who deals with commercial and construction risk of offshore projects at Sgurr.
"One exception is Horns Rev, where [owner] Dong took over 100% owner-maintenance," he notes, and expects it may become more common. "Utilities, which install the vast majority of offshore projects, are starting to treat them as they would one of their power stations, with more comprehensive and robust asset management teams and day-to-day management of overall wind farm affairs and issues. The operator of at least one major new offshore project is training up its own people, who should then be able to take over maintenance after the initial five years."
If ISPs want a greater share of the market, they must act quickly, he says: "We see the slow entry of third parties into offshore, but they will have to ramp it up soon, or others will have agreed long-term maintenance contracts," he notes.
Ross Walker, from renewable energy consultancy Garrad Hassan
Those looking to sign an O&M contract need to be aware of the different types on offer and the changes in recent years, says Ross Walker. "Traditionally, operators tended to enter into an original contract for a fixed period depending on the individual manufacturer - up to 15 years for some, just two for others," says Walker. "These included all maintenance, notably scheduled checks, breakdowns, availability warranty and remote monitoring."
But this status quo has now changed. "Over the last 10 years, we have gone through three periods" of O&M contracts, Walker says. The first was where "manufacturers offered all-inclusive contracts, but demanded a substantial cost increase if negotiating an extension". This began to change four to five years ago, "when manufacturers started to withdraw from offering all-inclusive extension contracts everywhere except Germany, and to limit themselves to carrying out scheduled maintenance and remote monitoring". On top of this basic contract "everything else was worked out on a cost-plus basis - operators had to shell out a fixed fee for a limited service and everything else was additional. Sometimes these contained availability guarantees, sometimes not".
According to Walker, the situation changed again: "About a year to 18 months ago, either as a result of the downturn or, coincidentally, manufacturers became more interested in offering inclusive contracts with extended warranties." This means that "most of the mainstream manufactures will now offer an extended five-year agreement on very similar terms as existed for the first five years, though there may still be a change in cost".
Walker explains that the type of contract offered has varied widely across Europe. Germany, for example, "started using very long agreement terms because the purchasers tended to be small companies or groups of small-scale owners rather than big industrial firms or utilities". He says: "As a result, German companies developed packages with service-and-maintenance contracts of ten, 12 or 17 years, which were quite often backed by an insurance scheme so that manufacturers were not taking all the risk". This same model has been widely rolled out by German turbine manufacturers in other countries, in competition with the shorter O&M contracts modelled on "those that have traditionally been offered for thermal plant equipment".
He agrees with Luby's assessment that deciding to use one of the main turbine developers for O&M can help convince the banks about the viability of a project. "Banks wouldn't dictate to a client regarding a maintenance contract, but they would feel a lot more confident with an experienced service provider, even if this means a company paying a premium," he says. But he believes that many of the utilities that want control of the process will still look to others for some jobs. "Most, but not all, utilities want to bring everything in-house or at least control it in-house and then perhaps sub-contract to an ISP or a turbine manufacturer for a specific requirement," he says.
But, he draws attention to the potential geographical limitations of an ISP and possible cost-risk difficulties. According to Walker, Global Energy Services is the only established international third-party service provider: "Others have voiced an interest but nobody provides the coverage that an international portfolio would demand. If a developer or owner wants to use a third party there is a cost-risk element," he says. "A third party may say that they can provide, for instance, scheduled maintenance for a fixed fee, but they would expect to be paid extra for breakdowns and spare parts."
Walker also insists on the fact that end-of-warranty inspections are becoming more common and more detailed to ensure that turbine manufacturers or other service providers perform in line with their commitments.
INDEPENDENTS' SHARE GROWS
Gouri Kumar, wind industry market analyst at research team Frost and Sullivan
Gouri Kumar highlights the significant growth that has taken place in the O&M market in recent years; a key indication of its importance for wind developers. She cites a 2008 report from Frost and Sullivan, which claims the value of the European O&M market should reach €4.6 billion in 2014, up from €1.6 billion in 2007 (see chart below).
While the big suppliers offer a safe pair of hands, this has not stopped ISPs entering the market. Kumar is currently updating a report on renewable energy operations-and-maintenance markets. "In the old report dating from 2008," she says, "wind turbine manufacturers had a 70% share of the European O&M contracts market and ISPs 25%.
This will change in the new report with ISPs gaining a larger market share ... by about 5 to 15%." Kumar believes the market share of ISPs will be higher in more mature markets such as Germany, Denmark and Spain compared with, say, Eastern Europe.
Nonetheless, Kumar believes that ISPs are likely to remain niche players, with manufacturers keeping a grip on some sectors of the O&M market. Others will remain virtually off limits for ISPs - for example offshore.