United States

United States

Owners will decide who wins service battle in US

Last year was a bumper year for wind installation in the US, with more than 13GW of new capacity added. While extraordinary, this figure does not reveal the unfolding story that could reshape the North American wind industry as the battle lines are drawn in the fight to dominate the all-important market for operations and maintenance (O&M) services.

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Although the revenues from service contracts are growing in importance everywhere with an expanding fleet of installed turbines, the US stands apart from other national markets due to its sheer scale. There are currently 45,000 installed machines and the market for O&M is anticipated to reach $6 billion a year by 2025.

It is not only the size of the O&M market that stands out. As is widely accepted in many other industries, providing after-sales services can be seriously good business. For manufacturers of products such as automobiles and medical equipment, after-sales activity accounts for a disproportionate share of profits. A study by Deloitte of 120 manufacturers from a range of industries found that after-sales services accounted for 26% of revenues, but 46% of profits.

Unlike in many European countries where turbine manufacturers are pre-eminent, O&M in the US is provided by a diverse mix of firms.

In the heat of the wind-farm construction boom of the last decade, turbine makers neglected the service market in favour of meeting the hunger for hardware. But recent weaker demand and a global oversupply of turbines has seen them reappraise the value of O&M as a steady source of revenue. Returning to the market, they are finding that things have changed in their absence.

While the manufacturers' backs were turned, a crop of new firms emerged offering service contracts to US project owners. Now, these independent service providers (ISPs) - many of which are regional or local - are experienced and diverse enough to offer a degree of choice that global manufacturers may struggle to match. At the same time, frustrated by manufacturers' apparent unwillingness to support their products outside of the warranty period, some wind-farm owners have taken ontheir own O&M. This has yielded valuable experience in controlling operational costs. Some have even gone as far as to extend their service to other owners.

Alongside external competition from ISPs and hands-on owners, manufacturers face some daunting internal challenges. Re-tooling a company geared up to build and sell new turbines for the tricky task of fixing broken ones is no mean feat, and is probably among the reasons they fell out of love with O&M in the first place.

But, in a sector where knowledge is (quite literally) power, the manufacturers hold the technology cards. ISPs are already finding that they are increasingly cagey about sharing information with new-found competitors.

The jet engine business provides a prime example of the value of intellectual property. Rolls Royce monitors the performance of its global fleet of aero engines 24/7, allowing them to respond quickly and avoid failures as well as giving the company a huge data resource to draw on when designing new products or updating old ones. This vast knowledge base, growing daily, serves to dissuade ISPs from entering the maintenance market. Aero-engine companies also blur the boundary between product and service by retaining ownership of the engines attached to their customers' aircraft and selling "power by the hour" rather than equipment.

Wind-turbine makers, while stopping short of this business model, are offering new turbines with longer warranties than ever before. Backing up a warranty lasting ten years or more demands serious financial heft, something that small-scale ISPs simply do not have.

Long-term service contracts

Wind turbine O&M costs in the US may have risen in recent years, but the fact that long-term service contracts are available hints at growing confidence in Scada analysis and other data-driven preventative maintenance techniques to accurately predict turbine behaviour. Better understanding of what is happening inside a turbine promises to improve reliability and drive down cost, to everyone's benefit.

For wind-farm owners, however, long-term fixed-price service contracts present something of a dilemma. Fixing costs, for a fee, reduces risk but may hand the manufacturer any future benefit from improved O&M techniques. A do-it-yourself approach or a flexible contract with an ISP is riskier but allows owners to share in savings if costs fall. The future landscape of the US wind industry will be determined by wind-farm owners' response to this dilemma. The scope for nimble firms of all types to innovate and bring forward new ways of doing things is clear - but in the impending battle of wits, the stakes could not be higher.

Oscar Fitch-Roy is a senior policy consultant at renewables consultancy GL Garrad Hassan's strategy and policy unit

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