TJ Rolfing, Holmes Murphy & Associates, www.holmesmurphy.com/expertise/renewable-energy
A third-party warranty doesn’t have the time constraints an OEM’s warranty includes. This makes them a good option when projects don’t complete. They can continue the OEM’s warranty so turbines and equipment can be resold.
One of the single most important components to the viability, longevity, and ability to secure financing for a wind farm is the turbine’s warranty. Until recently the OEM was the only option for a warranty, and then it came with restrictions such as time frames, service providers, replacement parts, and contract nuances that could limit coverage. In this economic climate, project owners and financial lenders are looking for an alternative. A few options are available. They include third-party warranty-financial guarantee, and even performance guarantees.
There are differences between what a warranty covers and coverage from an insurance company’s equipment-breakdown product. Equipment-breakdown coverage includes equipment after a “fortuitous” loss. This means for the coverage to respond, the loss must have a “trigger” or sudden and accidental cause of loss. What few realize is this traditional coverage is not intended or priced to be a first line of defense. In fact, most equipment-breakdown policies have exclusions specifically addressing this issue, stating that if coverage was provided by warranty, or should have been provided by warranty, then no coverage will be awarded through the equipment-breakdown policy. Other exclusions, such as design flaws or manufacturing defects, are also found within these policies.
Over the past seven years the wind industry has seen a multitude of variations related to what OEMs are offering for their warranties. The variations have ebbed and flowed depending on how hard or soft the market is at any given time. This uncertainty leaves project owners and financial lending institutions nervous about the long-term performance and viability of their wind farm investment. Today, some financial instruments are available that act as a bridge, either wrapping around an existing OEM warranty or extending the warranty coverage beyond what was the industry norm.
A warranty is intended to be a first line of defense. It is designed to cover all issues whether fortuitous or non-fortuitous. It includes parts, resulting damage and related direct cost (crane, labor), serial loss, availability, liquidated damages, power curve, and noise warranty.
The third-party warranty-financial guarantee and performance guarantee now available can be secured in one of two ways: directly by project owners, or through a few selective O&M service providers. When the warranty or extended warranty is secured directly by the project owner there are some obligations the owner will be responsible for, such as the payment of warranty and absorbing a deductible associated with it. If the warranty or extended warranty is secured through one of the selective O&M service providers, it gets wrapped into the overall package of services offered by the O&M provider. This option offers owners one contract and one payment for all of their O&M and warranty needs.
One of the advantages of a third-party warranty is the ability to get financing. Over the last several years the equity market has tightened up putting many projects in a state of perpetual purgatory. One main reason for this stagnation is that lending institutions have had a lack of confidence in some of the equipment selected and how that equipment will be taken care of when warranty claims arise. By implementing a third-party warranty, the project is essentially renting an investment-grade balance sheet and assuring the warranty provisions of the turbine service agreement, which in turn eliminates many concerns of lending to second tier, third tier, and overseas OEMs. Other applications in which a third-party warranty makes financial sense is on grey-market turbines and parts-only warranties. Over the past couple of years there have been a growing number of projects that have not been able to complete. Some of these projects had already secured their equipment and now hold turbines that cannot be used. The easy solution would be to sell the equipment to a party that can use the assets. The problem is the warranty clock has been ticking. Typically the warranty has time constraints: the lesser of 24 months after commissioning or 30 months after shipping. These provisions make it difficult to re-sell turbines. A third-party warranty can continue the OEM’s warranty for the remainder of the term or act as the primary warranty if the term has already expired. The other scenario in which a third-party warranty would supplement an OEM’s warranty is if parts only were offered. In this case the third-party warranty would wrap around the OEM’s parts warranty and supplement coverages not included.
The third-party warranty and extended warranty acts just like a normal warranty, set up to guarantee and safeguard a project’s performance and assets. Typically the programs are written on a five-year term with an option to extend additional years. These programs are applicable to any location within North America and anywhere else in the world upon request and approval. The warranty and extended warranty covers:
• Resulting damage
• Related direct costs (crane, labor)
• Serial loss
• Liquidated damages
• Noise warranty
Wind projects have a long list of hurdles to overcome, from financing to simply the unknown of what might happen after year two or five of the project. The goal, therefore, is to install and commission the project while also safeguarding and guaranteeing the viability and longevity of the investment. Third-party warranty programs let project owners more fully safeguard their significant investment.
Filed Under: Policy, Safety