To date, I have focused on the revenue management of a German renewable energy asset. Today, I am switching to the money-grinding cost side. A unique feature of photovoltaic (PV) investments is that their costs are rather predictable; revenue estimates are also less susceptible to wild swings versus, for example, a retailer or a manufacturer who do not benefit from offtake contracts. Investors must demonstrate to the project financier that debt can be serviced while meeting the internal return targets.
A typical PV park, regardless of whether built in Germany or elsewhere in the world, has a fairly uniform operating cost structure comprising:
– Operations & Maintenance (O&M) Services
– Land lease (if not purchased)
– Other Expenses (electricity consumption of monitoring systems…)
The most important cost item by far is O&M services, an integral part of any project finance facility. If you don’t have these in place, either you need to provide certain guarantees to the bank or your project will most likely not be financed. The comprehensiveness varies immensely depending on the expenses and risks covered, emulating an insurance policy, ranging from minimal coverage to the premium all-inclusive package (sounds like going on vacation). Some contracts are quite limited and will only cover costs up to a few thousand Euros, others are customized and will comprise differing degrees of reaction times, spare parts, as well as inverter repair services. As with other multi-year projects, the ready supply of spare parts 15 or 20 years down the road is difficult to predict, particularly in a fast-moving, roller-coaster sector such as the PV industry, where once global reference companies have disappeared or are suffering serious financial distress. Thus, many investors and their financing banks insist on reputable, bankable, financially stable heavyweights, although this does not avoid surprises. Who would have foreseen the demise of Conergy, Q-cells, Suntech, Gehrlicher, Isofoton and Co. 10 years ago?
In the solar heydays on the back of serious buyer competition, time was of the essence. If you did not connect your park within a planned time frame, you risked foregoing a significant margin (would anyone’s strategy have changed if retroactive measures were anticipated?). This led to O&M contracts being signed without seriously questioning the service level. Developers would pressure buyers stating there was no time for lengthy negotiations, either they signed or lost out on the deal. Presently, the European PV industry is at a crossroads: what geographic areas and business segments should the diehards focus on? Due to evaporating PV construction activity in Europe, uncertain regulatory regimes (e.g. Spain, India…), significantly lower margins, the remaining EPCs and O&M suppliers are fighting for survival bidding down the cost of their services. This is hurting margins (asset owners are clicking their heels) and may actually accelerate the excess-capacity purging process. When selecting a new supplier, be sure to study their financial muscle, recent earnings and screen the news for potentially negative incidents.
If your O&M contract dates from 2011 or earlier, requesting the remaining, financially sound O&M companies for service proposals is a good first step (Milk The Sun also circulates your request for proposals). Due to the complex nature of the legal agreements, forwarding a copy of the current O&M contract would probably simplify the process by saving analysis time. New O&M service proposals, guaranteeing the same operations and maintenance conditions, can offer considerable savings – the older your O&M contract, the greater the probability of overpaying per kWp of installed capacity. Contracts signed in 2011 can save anywhere between 1 to 7 EUR/kWp/year, depending on what is acceptable to the investor and the bank – the higher the savings, the greater the risk, either because the service package is reduced to a minimum (asset owner will have to bear incidental cost risk) or because the company is desperately seeking new business. Provided the asset owner, bank and new supplier reach an agreement, the current O&M contract needs to be prematurely rescinded. Seeking legal advice on “how to” will be useful. At times, it may not even be necessary to switch your provider given the market situation, the risk of losing business is a surprisingly sufficiently incentivizing “carrot” to submit a more attractive offer going forwards.
Of the remaining expenses, land lease, accounting and legal costs are items that are difficult to optimize further, if at all. Accountants can be cheaper in certain parts of a country, but they also need to be reliable and experienced. Competition among insurance companies for a mature business may yield “small” savings. In a recent case, the asset owner could have saved some EUR 2,000 to EUR 3,000 per year. Simply contact an insurance broker or enlist German websites such as Milk The Sun, Verivox or Check24 as your footsoldiers. The most fat will likely be cut in the electricity consumption of the monitoring system. If extreme swings in energy consumption are noticed, a technical consultant may need to evaluate the system components. Requesting energy supply bids from various utilities (via previously mentioned websites) quickly leads to an optimized cost per consumed kWh.
Now with this “food for thought”, enjoy the sun!
This is the third part of a series of guest articles written by Martin Supancic. You can find the other articles in his series here: