Technical Insights Empower Savvy Bidders for Renewable Energy Projects (Part II)
In part one of this blog series, we covered the benefits of performing energy assessments and the useful life of wind and solar assets to optimize valuation of renewable energy projects. Today’s blog will focus on the repowering of wind farms and the O&M costs related to these renewable energy projects.
Repowering of wind projects has emerged as a hot topic and potential value driver in the U.S. market, given the possibility of recapturing PTCs if the project owner has established a means of qualification, such as buying new turbine components. Full repowering entails complete replacement of all turbine components; effectively redesigning and constructing a new project on an existing site to leverage permits, land leases, and interconnection. Partial repowering refers to the replacement of certain turbine components (e.g. nacelle and rotor) and re-use of other existing components (e.g. foundation and tower). In both cases, the replacement turbines are often of higher rating, larger rotor diameter, and greater efficiency.
Partial repowering requires careful evaluation of reused components and foundations, since the same considerations as for extended life operation apply. Some turbine manufacturers offer warranty or certification of turbines in a repowered configuration. However, this is not universal, may be subject to contractual caveats, and does not address risk to turbine foundations. Therefore, the fatigue life should be evaluated based on the turbine and foundation designs and operational history, combined with the expected loading in the repowered configuration. Thanks to advances in blade construction and turbine control systems, in some cases loading in the repowered configuration—even with greater production—may decrease rather than increase, extending expected operating life. Finally, review of the operational history and turbine technology sheds light on the expected maintenance costs and informs decisions regarding O&M strategy to manage risk and optimize cash flows for a repowered project.
O&M costs: Reality Check
For an equity investor, O&M cost assumptions are a key driver for investment returns and must be considered when bidding wind and solar projects. Careful evaluation uncovers the risks of O&M cost increases, as well as potential upsides based on operational history or changes in operational strategy.
Wind turbines, solar modules and trackers, inverters and other equipment will naturally require additional unscheduled maintenance and inspection as they age. Yet, many bidders assume flat-lined O&M costs in real dollars rather than increased costs over time. This may be appropriate in certain cases, where projects are covered by full-wrap, fixed-price, long-term O&M contracts with robust caps and minimal carve-outs. For many projects, however, it is an optimistic assumption.
Proper technical evaluation of O&M costs yields more accurate valuation of the assets. Understanding the failure rate distributions of individual wind turbine components and combining these with repair costs based on industry data provides intelligence on both the baseline cost estimates, as well as the expected range of such costs. Financial inputs for PV plants should appropriately consider inverter reserve timing and sizing, as well as module replacement plans, considering technology, operational history, and desired useful life. Finally, contractual strategy and terms weigh heavily on incurred O&M costs, and may offer opportunities to mitigate risk (e.g. reallocation of risk to an O&M provider), or reduce costs (e.g. transitioning to a self-perform arrangement).
Understanding realistic expectations for project O&M costs need not constrain a commercial bidding strategy. Rather, savvy bidders can use such intelligence to quantify their risks, evaluate realistic upside potential, and inform decisions about asset valuation for bid purposes commensurate with their risk tolerance.
Our final blog post in this series will focus on the potential project revenue and the impact of battery storage on renewable energy projects. Stay tuned to learn more!
Questions? Contact Ken Elser to learn more or leave a comment below.