Why it might be time to revisit wind farm self-performance
Published on 7th of August 2019
Head of Service and Aftermarket Sales at Vestas Americas
Part 1 of The Frugal Owner Series
Operations are the heart of the wind industry. Everyone relies on them to keep the blades spinning so we have a growing industry supplying power to the rest of the economy.
During the last several years, many operational leaders within asset owners have argued that their companies are better off self-performing, maintaining their wind farms using internal staff and resources.
But are they considering all the key inputs and considerations they need to? What is the most important part of wind farm operations? At the end of the day, what it really comes down to is LCOE. And there is quite a bit more to defining operational LCOE than traditionally thought.
Let’s unpack operational LCOE and review the inputs and considerations:
- How much for labor?
- How much labor are you sharing / allocating on average per site?
- How much buying power do you have for consumables, minors, majors, and crane vendors compared to the OEM?
- How much is your fixed cost allocations for administration, accounting, finance, etc. across all your vendors?
- How much are you investing in annual R&D for continuous performance improvements?
- How do you model your opex costs, 5, 10, and 20 years from now for new technology platforms across multiple suppliers?
- Are you able to include future AEP improvements from operations in your present-day proformas?
- What is your production availability?
- Is your operational expenditure aligned with your revenue streams?
- How many new performance improvement products are you realizing through the life of your asset?
- Are you investing in data analytics platforms? If so, how are you monetizing the benefit?
Risk (this is the most overlooked item within today’s proformas)
- Are you using the modern-day OEM service offering as a baseline for your long-term internal price assumptions but don’t want to commit long term? If so, how are you factoring in our cost-out assumptions? Are the margins you assume for the modern-day OEM correct?
- How much risk are you adding for your failure predictions long term on new WTG technology?
- Do you have liquidated damages in case your assets do not perform?
- If you have multiple suppliers per asset, are you accounting for loss production risks & higher failure rates due to a complex group of suppliers that are not fully invested in your sites?
Due to the fast-evolving renewable market – the value of scale, forward cost-out assumptions, aggressive margins, technology innovation – asset owners should resist making the same assumptions today as they successfully made in the past. Cost, performance, and risk assumptions are often miscalculated in today’s proformas (especially risk). To put it simply, the OEM is working diligently to lower LCOE, and there isn’t further room for inefficiency.
Still, there are some VPs of Operations who argue to self-perform for four reasons:
- They can learn from manufacturers about how to service equipment, then try to maintain and operate it more cheaply.
- If investors see that they can take care of critical assets on their own, it will build their confidence in the company and strengthen their valuations, lower their cost of capital, etc. They believe they will take care of their assets better than the OEM.
- Operation and maintenance services (O&M) offered by the OEM continues to decrease over time. Why lock themselves into their current prices and prevent themselves from getting a better bargain in the future?
- If they learn to perform maintenance well, they can offer O&M services to other wind farm owners as an additional revenue line.
But in this changing landscape, if you’re not accounting for everything that goes into operational LCOE, how can you know if it makes sense to begin self-performing after 1-3-year service warranties?
In the weeks ahead, my goal is to provide wind farm operations leaders and their executive teams with the most up-to-date information so they can kick the tires on their self-performance programs and maximize profitability.
As the world’s and the U.S.’s largest maker of wind turbines, we have some perspective on cost reduction and performance data that no one else has. We think our customers should be able to access what we know as they make increasingly important decisions about their operations.
(This is Part 1 of The Frugal Owner Series)