O&M is Best Served Prix Fixe, Not á La Carte

Asset owners want competitive pricing when they go to market, as any buyer would. But here’s the problem: the market is often responding to asset owners with deceptive contracts that cut prices and scope, trimming corrective maintenance or eliminating it altogether.

September 10, 2020

By Michael Eyman
Managing Director, Origis Services

When is a low-price O&M contract not a low-price O&M contract?
When it excludes corrective maintenance.

The common price range for PV service agreements tends to exclude costs for vegetation management, module cleaning, and necessary corrective maintenance, as noted in Wood Mackenzie’s Global Solar PV Operations & Maintenance 2020 report.

Asset owners want competitive pricing when they go to market, as any buyer would. But here’s the problem: the market is often responding to asset owners with deceptive contracts that cut prices and scope, trimming corrective maintenance or eliminating it altogether.

This is bad for the asset owner. It obscures the true cost of O&M, setting owners up for significantly higher costs than if they paid upfront for the full scope of preventive maintenance, corrective maintenance, and ancillary services that all high-performing projects need.

Wouldn’t it be nice if we had the power to reduce the need for corrective maintenance with the stroke of a pen? Nobody can, unfortunately. So what can we do?

We can provide contracting transparency and a conservative scope of service, locking in a low price and delivering only the service you need.

Consider the owner’s perspective

O&M market trends have been challenging for asset owners.

Services has become a larger part of the cost stack with 70 percent or more of hard costs attributable to manpower. To understand what’s driving the increase in labor costs, read on to section 3 of this post where we’ll discuss how to get better performance at a lower cost.

From the owner’s perspective, the immediate question is: What to do about rising costs? How should the owner respond?

Ready for Predictable O&M, Asset Management Costs?

Some are looking to split up O&M service categories so that one company handles ongoing scheduled maintenance along with some amount of troubleshooting and warranty management while another company handles vegetation management and module washing. Maybe even through bulk contracting, if the owner has a sizable portfolio.

This response has only intensified the price pressure in the market. O&M prices in 2018 had dropped about 58 percent compared to just a few years prior, according to WoodMac.

If you’re dealing with an untrusty service provider who first tells you what you want to hear and later charges a premium for essential services, it’s sensible to look for a different provider.

But what if you have a trustworthy service provider who brings deep experience, having resolved just about every operational challenge you can find? In this case, taking a pass on industry-leading expertise to save a few bucks on management fees doesn’t make sense. Pennywise, yes. But also pound foolish.

What is the true cost of solar O&M?

Using project data from the Origis Services portfolio combined with industry standard time studies and pricing models, we offered a transparent look at the true cost of O&M in the kWh Analytics Solar Risk Assessment: 2020 report.

The key result: If corrective maintenance is excluded from the annual scope, O&M costs go up to 28 percent higher than planned or budgeted.

When projects exclude corrective maintenance, they also face higher service price volatility, relying on dispatched services. These projects also lose out on the efficiencies provided by dedicated plant personnel.

In addition, one-off services aren’t linked to a performance guarantee, increasing risks for asset owners, as WoodMac principal analyst Leila Garcia da Fonseca noted in the Solar Risk Assessment.
“It makes sense for asset owners just to go with a full wrap contract,” Garcia da Fonseca said. “In the long term, they’re going to incur fewer expenses than doing it ad hoc.”

Our True Cost of O&M analysis demonstrates that the most effective way to reduce overall O&M costs for the asset owner is to include roughly 70 percent of corrective maintenance into the annual service agreement.

For a 100 MW site, with 70 percent of corrective maintenance baked in, the true cost of O&M starts at $4 per kW. That provides immediate savings and 15-25 percent long-term savings with better performance overall.

Better performance at a lower cost

It’s not every day that someone offers better service, a lower cost, and a plain and simple explanation of how it’s done.

What a lot of O&M service providers won’t tell you is that they can charge vastly different rates for the same services.

  • For prepaid service that you use or lose, market rate is about $60 an hour.
  • For a negotiated hourly rate with local labor, you’ll pay about $100 an hour.
  • For out-of-town labor dispatched to the site, you can easily pay $180.00 or more in some cases much more, plus an additional 15 percent charged by the service provider for management of those services

Service providers generally know your project’s appetite for O&M. Some will mislead you into believing you can save money by reducing scope in the annual contract, knowing you will pay a premium down the road.

We believe transparency is better for everyone. By recognizing the true long-term cost of O&M, we enhance service model stability, investing in dedicated, on-site staff who come to know your project as well as anyone and treat it as their own.

Pancakes, anyone?

Imagine that it’s Sunday morning. You’ve ordered the weekend special at the neighborhood breakfast joint, a golden fluffy pancake for only $2. It tastes so good; you order three more. When it’s time to pay the bill, you find that the full stack cost $20.

This is what’s happening in the O&M market. Low-price contracts work like the pancake special.

Service providers offering these contracts know that a project’s appetite for corrective maintenance is like your appetite for pancakes. One pancake isn’t enough. Nor is a reduced scope of maintenance.

Order your maintenance off the prix fixe menu, not à la carte.

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