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Summit keynote puts operational expenditures under the microscope

By Paul Dvorak | August 6, 2013

One slide from Dan Schreve’s presentation weighed ideas for AEP increases , such as blade tip extensions, and their cost.

One slide from Dan Schreve’s presentation weighed ideas for AEP increases , such as blade tip extensions, and their cost.

Wind farms can get into financial trouble fast with just one unforeseen event, such as an unplanned gearbox change-out or a serious blade issue. And don’t try to make up the difference by cutting expenses and wages too low or you’ll fail to attract the quality of technician needed to run a profitable wind farm.

On those happy thoughts, Dan Shreve, Partner with Make Consulting began his keynote address to the recent Wind Energy O&M Summit in Dallas. Shreve’s remarks spanned a range of financial topics centered on O&M functions and costs, and the near-term future of the wind industry especially with regard to its operational expenditures and profitability. The summit was sponsored by Wind Energy Update.

“This is a capital intensive business,” says Shreve. “Although the fuel is free, the machines are not. Engagement requires huge capital expenses and the cost of capital has a significant impact in terms of the overall cost of electricity through the life of the assets.”

Equally important are the operating expenses – opex as the finance people like to call it – although not as significant in terms of overall impact of capital expenditures or capex. “Capacity factors suffer when things go wrong, and that underscores the importance of proper planning for scheduled and unscheduled maintenance,” he says. “So let’s examine the components of opex in budgeting,” he began.Technical upgrades_opt

Scheduled maintenance will remain a critical item. It’s the foundation from which a successful O&M program grows. A lot of discussion over the last few years has been how to best tackle this part of the job and remain profitable, especially considering the hyper-competitive nature of this industry. “Turbine OEMs, ISPs, asset owners, and others want a piece of the pie so everyone is aggressive with their pricing. That means there is not much maneuvering room when considering the primary components in an opex budget. A colleague recently asked if there is a floor or lower bound on this market. After all, owners can only cut expenditures so low because at some point, technicians could be paid too little and that does not attract the quality of needed people.” O&M work is not an easy job. It calls for quality wind technicians – responsible people who can work on their own. They must be safety minded and technically competent. What’s more, specialized tools, trucks, remote monitoring facilities, spare-part warehousing, and a host of back-office functions all translate into a lot of overhead costs that support field work.

Costs for technicians and overhead are of large part of opex that is often underestimated, says Shreve. “There is a hidden factory behind the guys out there,” he says.

A second part of the O&M market place is referred to as technical services. It is more technology focused in terms of remote operations, SCADA systems, and diagnostics which try to understand what is going on in each turbine. The goal is to avoid large scale failures. For example, consider the impact of a failed $5,000 part. It could shut down a turbine for days. But detecting its impending failure early on can get the part onsite in a timely manner, thereby minimizing lost production.

Also, what is the impact if the part is not there on time? The lost-production factor increases, especially on large MW turbines. “The impact of lost production will increase significantly on the next generation of 6 to 8-MW offshore turbines, especially given access challenges. It makes folks appreciate the level redundancy in larger systems.”

However, it’s difficult to afford redundancy in the onshore market. Turbine OEMs must get costs out to reduce LCOE and remain competitive. Thankfully, condition-monitoring has gained acceptance in the market, with new monitoring techniques and lower cost sensors increasing the ROI on turbine upgrades. And then there are the big ticket items, such as gearboxes, blades, and generators, for which competition is improving the availability and cost of down-tower repairs, while condition monitoring and new turbine and component designs are enabling, more up-tower repairs.

The good news, says Shreve, is that a lot of companies are getting a grasp on their gearbox issues. He predicts that the next critical focus area for major repairs will be blades. Many companies are discussing preventive blades-maintenance programs, and examining the cost benefit of increasing the frequency of blade inspections to avoid higher cost repairs and replacements.

Generators are also becoming an area of concern, due in large part to the adoption of permanent-magnet generators. Traditionally serviced uptower for most repairs, the powerful magnets in PM generators often require special tools, jigs, and enhanced contamination controls. Capital repairs will represent a huge part of operation expenditures, says Shreve, in terms of proper scheduling and budgeting. Be sure you are well prepared to take care of these items, he cautions.

Upgrade issues have prompted the recurring question: Are they worth it? “The answer is usually yes, but that depends on the type of repair philosophy held. It would be difficult for some operators to justify the capex associated with some knee-jerk turbine upgrade programs.”

If you make a gearbox upgrade, and the repairer says it will last an extra five years, be a bit leery. Few will warranty a gearbox for 10 years, and without a warranty, owners accept a lot on faith. There are extremely advanced testing mechanisms in the market, he adds, especially in Germany. Those are pushing reliability up and in particular for gearboxes. Reliability is getting better. WPE


Filed Under: Financing, News
Tagged With: makeconsulting, schreve
 

About The Author

Paul Dvorak

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