The Blind Man in the Dark Room with an Elephant: Estimating O & M Costs Post

WarrantyPresented by: Andrew Chant, ORTECH Power

CanWEA: Montreal, QuébecNovember 2, 2010

WHO IS ORTECH Power?

• Offices in Mississauga, Ontario• Division of ORTECH Consulting• 40 professionals & technicians• Over 40 years of experience in atmospheric

sciences, over 10 dedicated to the wind industry• Principals of ORTECH Power have backgrounds

as renewable energy developers• Client base of independent developers and

financial institutions and infrastructure investors

• Complete range of services to the wind industry• Unique in that we bring financial and economic

analysis to wind projects; client base requires conservative outlook – real peoples’ money

Defining the ElephantWhat are O & M Costs?

In accountant-speak: • O & M Costs are direct costs affecting turbine

operations; Revenue less O & M Costs gives Net Operating Income before GS & A costs;

• O & M Costs do not include expenses such as municipal taxes, payments to landowners, accounting and legal;

• These GS & A costs are generally fixed. except for royalty-like lease costs, are site market specific and easy to predict;

• Some costs are borderline such as BoP Maintenance, environmental monitoring;

• True O & M Costs are a measure of operating efficiency of a wind facility.

How Important are O & M Costs?

• Short answer – highly critical• Combination of shortfall in production and

unplanned increase in O & M Costs of 12 to 15% will produce negative rate of return

• Recent experience in US indicates most facilities operating 10-11% under P50 estimates for a variety of reasons:i) Inherent inaccuracies in energy output forecasts – is there a plus P50 or is the P50 the upper limit of output?ii) Grid curtailment issuesiii) Availability issues such as gearbox failures

Revenue & Op Costs Sensitivity

How Big is this Elephant?Forecasting O & M Costs

General Approach - Estimate each Type of O & M Costs including Contingency:

1. Routine Maintenance: Check gearbox lubricating oil, bearings, temperature, torque testing of bolts, yaw alignment, all in accordance with OEM’s operating & maintenance manual on monthly, semi-annual & annual basis.

2. Planned Maintenance: Major repairs & refurbishment to all major components such as gearboxes & generators; carried out in six to eight year cycles depending on nature of site & operational history of turbines –designed to reduce incidence of unplanned maintenance.

3. Preventative Maintenance: Consists of monitoring of turbine performance with aim of carrying out major repairs & refurbishments on major turbine components only when signs of deterioration begin to appear: should have higher contingency than Planned Maintenance; consider condition monitoring.

4. Unplanned Maintenance: Also known as Unscheduled/Reactive Maintenance; caused by unexpected breakdown of turbine components; most expensive form of maintenance in terms of repair costs and downtime.

5. BoP Maintenance: Snow clearing, access road maintenance, substation and connection point testing; generally covers everything excluded in turbine OEM’s warranty & service contract coverage; often contracted out.

Forecasting O & M Costs

• Routine/Scheduled Maintenance relatively easy: 1 technician for every 8 to 10 WTGs plus consumables

• Approximately $1,500 to $2,500/year/WTG in consumables and tools including vehicles for BoP maintenance

• Skimping on Scheduled Maintenance unwise; leads to higher Unplanned/Reactive Maintenance costs

Planned Maintenance• Determine if facility is performing as expected; compare

actual output against wind adjusted output less factors beyond control such as grid outages

• Look at operating history of wind facility; review SCADA records & Operator’s Logs; what are the most frequent problems?

• Separate WTGs into under, average and superior performers

• Look at component life cycles then adjust for complex terrain/ extreme weather = turbulence = higher mechanical stress on gearboxes and drive trains

• Do thorough mechanical inspections using NDT techniques or install condition monitoring to detect deterioration before component failure

• Devise spare parts program; keep on hand spare yaw motors, calculate frequency of lightning strikes – necessity to replace blades

Planned Maintenance (Cont’d)

• Based on operations analysis and mechanical inspections, plan major repair and refurbishment “campaign”

• Schedule for low wind/ good weather months to reduce revenue loss

• Start with under-performing wind turbines • Organize replacement component plan - refurbished or

new gearbox goes in, gearbox for refurbishment goes to OEM

• Advantages:i) Catch deteriorating components before catastrophic failureii) Spreads crane costs over a number of turbines – estimated savings approximately $25.000/WTGiii) Reduces downtimeiv) Lowers but does not eliminate Unscheduled or Reactive Maintenance contingency reserves

Staring Down the Beady-Eyed Bean Counters

Justifying the Up-Front CostsReactive v. Planned Maintenance CostsComponent Reactive Planned SavingsGearboxesRefurbishment $250,000 $125,000 $125,000Crane Costs $100,000 $77,000

$23,000Downtime (Days) 14-21 2 12-19Lost Revenue @$1,008/WTG/Day $17,640 $2,016 $15,624Subtotal $367,640 $204,016Add 30% Contingency $110,292 $61,205 $49,087Total $477,932 $265,221Gross SavingsPlanned v. Reactive $212,711

Staring Down the Beady-Eyed Bean Counters

Justifying the Up-Front Costs (Cont’d)

Gross SavingsPlanned v. Reactive $212,711Assume 25 YearEconomic Life/WTG = 3 Repair & Refurbishment CyclesGross Savings/WTG = $638,133Annual Gross Savings/WTG $31,907Less: (i) Carrying Costs Spare Component Inventory $3,600(ii) Condition Monitoring $2,500Net Annual Savings/WTG in 2010 Dollars

$25,807Net Annual Savings for 50 WTG 100 MW Facility

$1,290,350Net Lifetime Savings in 2010 Dollars over 20 Years

$25,807,000

Lifetime Savings: Planned v. Reactive Maintenance

Net Operating Income for a Proactive and Reactive O & M Routine

$20.00

$21.00

$22.00

$23.00

$24.00

$25.00

$26.00

Year

Net

Op

era

tin

g I

nco

me (

$mil

lio

ns)

Reactive

Proactive

New Developments: Current Status of O & M Servicing Market

• To obtain warranty OEM’s require that WTGs be serviced by turbine manufacturer for minimum two year period following commissioning.

• Lenders will require warranty plus reserves for major repairs and refurbishment.

• Previously manufacturers offered a “serial defect” clause in warranty; required replacement of all of a particular component if a percentage (15-20%) failed in the facility – no longer available.

• Because of serial defect experience OEM’s shortened warranty period from 5 years to 2.

• Now re-entering the O & M Servicing market with various offerings:– i) terms of 2, 5, 8 and 10 years– ii) coverage from full service to parts only or remote monitoring.– iii) costs range from $40,000 to $100,000+ per turbine annually depending on

turbine model and size. • Obviously seen as area of growth.• Tendency for senior management to opt for longer term “full service”

package since shifts O & M & technology risk to service provider.

New Elephants in the RoomLarger & Unproven Turbines on the

MarketAn Example: GE 1.5 versus the GE 2.5Features:Nameplate Capacity 1.5 2.5Hub Height (m) 64.7/80/85

75/85/100Rotor Diameter (m) 77 100Swept Area (m²) 4,657 7,854Gearbox Type Multi-staged planetary helical Combined Spur

PlanetaryGear Ratio 1:72 1:117.4Generator Type Asynchronous, double fed induction Synchronous

permanent magnet

Generator RPM 1,500-1,800 1,650First Installed 2005 2006Number Installed 2010 (est.)* 14,000 200

*Source: German Wind Energy Association & GE Energy Website

Conclusions

• Using basic principles of operations analysis, understanding component life cycles and applying simple cost accounting methods, it is possible to quantify the savings from a planned maintenance program

• Can be adopted to specific site conditions and WTG characteristics

• Although there are upfront costs, over time there are larger and substantial savings

• Planning for future O & M Costs means assessing site & turbine characteristics, estimating future repair & refurbishment costs, evaluating the value of the certainty of OEM service contracts and understanding the degree of risk you are prepared to assume.

• The purpose of this presentation is to provide a framework for this risk analysis. .

Good Luck with Your Elephant Training Program

Remember: Watch Where you StepThey are Hard to Paper Train

Presented by: Andrew Chant, ORTECH Power CanWEA: Montreal, 2010Tel: 905-822-4120 ext 463

achant@ortech.ca