In the post-PTC era, the trend toward self-performers is cause for concern
Published on 2nd of July 2019
President of Sales and Service in the United States and Canada at Vestas
In late May my team went down to Houston for WINDPOWER. Every time I go to WINDPOWER, I’m reminded of how far the industry has come.
There have been many incredible positive developments in the wind industry during the past five years. There’s roughly 100 GW of U.S. wind power installed throughout the nation – and of that – Vestas has 30 GW installed.
The economics of wind make this renewable power the most economical power source in major U.S. power markets. That’s why I am confident that wind is set to grow in the post-PTC landscape.
But I’m concerned about some of the current trends and direction the industry is taking. There are too many asset owners in the wind industry who are choosing to self-perform on their turbines when it costs more, and the economics are stacked against them.
Vestas service sites spread across the U.S. by size. (Click to enlarge)
Austin Schroll, our Head of Service and Aftermarket Sales, has been watching this play out in real time. From the industry numbers we see, if this trend continues, it will hurt the entire industry post-PTC as LCOE erosion continues and low-cost capital investors demand de-risked projects.
OEMs like Vestas have helped cut wind’s LCOE by 70% during the past decade. OEMs have historically controlled 70% of the cost associated with wind projects. Wind project costs consist of 60% CapEx, 20% O&M, 20% development, financing, and management. Because of technology advancements and investments in R&D – to the tune of $50 million annually and the buying power of Vestas – there is a smaller percentage of potential profitability and cost-cutting remaining from the CapEx components of wind projects.
We should all be proud of these significant cost reductions. But now, as the industry eyes up areas to become more efficient and reduce costs during a time when the margins will become thinner in the post-PTC era, some wind farm owners think they can self-perform on their turbines and save money doing so.
The problem on a small-scale is that they can’t. Vestas’ buying power is equivalent to the top 20 self-performers combined. We will be able to service and buy new components cheaper than anyone else. If each asset owner were charged with bringing their service and repair contracts to public utility commissions to ensure ratepayer money is not being wasted, OEMs such as Vestas would almost always be chosen to perform services on turbines based on the economics.
On a case-by-case basis, this doesn’t seem like a big deal. But when a handful of players here and a handful of players there are making uneconomical “strategic” decisions, it adds up.
If this continues, the industry might wake up soon enough and realize OEMs cannot use their significant market leverage to drive down servicing costs for the entire industry as it has to the tune of 70% for other project components.
In the coming weeks and months, Austin Schroll will be sharing his insights on the cost, performance, and risk of self-performers. I suggest everyone plays close attention to this trend. If self-performers continue to self-perform, we all might miss the boat post-PTC.
As featured on LinkedIn on 01/07/2019.