EMI: Maintaining Turbines While Capping Costs
By Holly B McGlinn, CPCU, AU
In the wind industry, turbine maintenance costs have far surpassed anyone’s initial projections. This is why a proactive and efficient approach to maintaining turbines is essential to keeping projects in the black. The American Wind Energy Association’s (AWEA) Wind Project Performance & Reliability Workshop, in January of this year, opened with a shocking statistic given by AWEA’s Stephen Miner: In the coming year, approximately $40 billion dollars worth of turbines are facing warranty expiration.
Now is the time to take a serious look at the future, and the options available. Controlling maintenance costs can make the difference between a profitable wind farm and an unprofitable one. Turbine maintenance is a reality—whether scheduled and preventative, or unscheduled and done in a crisis situation. However, there’s no need to wait until a crisis arises before investing in maintenance protection. There’s a new solution to this problem: Equipment Maintenance Insurance (EMI).
EMI makes sense for the long term, especially considering the significant financial investment required to get a wind farm up and running. Maintenance costs for an individual wind farm vary considerably, based on turbine size and age, as well as overall project size. For newer, larger utility-scale projects, $9 per megawatt hour is a reasonable estimate when determining maintenance costs per the 2009 Department of Energy Wind Technologies Market Report. Keep in mind, maintenance costs tend to increase as a project ages. Using $9 per megawatt-hour as a starting point, it would cost $41,391 per year to maintain a single 1.5 MW turbine, assuming a 35% capacity factor. This doesn’t account for the economies of scale that larger projects realize. Nevertheless, costs like this turn scheduled maintenance into a substantial monetary commitment.
Not surprisingly, multiple surveys site a staggering number of turbines are behind in scheduled maintenance. Yet, maintenance performed in a crisis situation can be costly on a number of fronts. Because a crisis can occur at any time, there’s little way of predicting or properly budgeting for it. If a wind farm owner doesn’t pay immediately to rectify the damaged or malfunctioning turbines, he can end up in default of his power purchase agreement, in addition to the lost income of those idle turbines. Furthermore, an owner can be boxed into a corner when negotiating the cost of repairs with a potential vendor because, at this point, there’s no time to shop around for the most competitive prices on parts and labor.
To date, the
status quo in the industry has been to set up a maintenance program, either through an Operations & Maintenance (O&M) company specializing in servicing wind turbines, or by purchasing a service contract or extended warranty through an Original Equipment Manufacturer (OEM). By adhering to a preventative maintenance schedule, the stage is set for a fleet of efficient and reliable turbines. However, maintenance programs often require a large up-front commitment and, during unexpected, non-routine breakdowns, the required service can go beyond the standard service contract.
With EMI, project owners can maintain complete control of who services their equipment and can cap their overall maintenance costs knowing there’s coverage in place for unexpected breakdowns. EMI is new to wind power, but the concept has a proven track record in other industries. Historically, rates average 15% to 30% lower than traditional maintenance plans. The insurance contract is based on the payment of a premium and a deductible. This combined amount of premium and deductible equals the total annual maintenance cost. Scheduled maintenance, including in-house repairs, accrue to meet the deductible. Once this is met, the insurance company takes over the scheduled and unscheduled maintenance payments, subject to the limit in the contract. A total equipment failure necessitating replacement can also be covered in this agreement.
EMI is different than traditional property, equipment breakdown, and warranty insurance, as there’s no overlap between these policies. EMI covers and reduces the cost of predictable maintenance expenses while providing an added benefit of coverage for unscheduled, emergency maintenance, and repairs. For example, assume a wind farm has an annual service contract at a price of $1,000,000. If an EMI is selected for purchase, the premium would be $250,000 and the deductible would be $600,000. The maximum out-of-pocket cost to the project owner in this scenario is $850,000. This model works because EMI is running on a leaner profit margin than traditional maintenance contracts, and the risk is spread over many clients and industries.
Not all EMI policyholders will max out their deductible, however. With more consistent maintenance practices over the long term, overall maintenance disasters and costs are reduced. The deductible can be met through any combination of scheduled, preventative, and unscheduled maintenance calls. Once the $600,000 threshold is met, future invoices are submitted directly to the insurance company for payment to the service provider or reimbursement for in-house labor and repairs. The premium, deductible, and contract terms are highly customized according to the needs of each project and their capacity to take on risk.
Although it’s up to an owner’s discretion as to who services his turbines, it’s worth noting that he’ll have to restructure his agreements to fit within the context of EMI. So, instead of engaging in an annual contract with an OEM or an O&M firm, the owner would need to go forward on a parts and labor basis. This might result in some pushback on the front end, but once the deductible is met, the service provider can rest assured that they’ll be paid directly by the insurance company. The service provider loses some stability that comes with an annual contract, but gains some stability in guaranteed payments from the insurance company.
EMI can also work to a wind farm owner’s advantage when seeking financing. With EMI, owners have hard proof to show potential lenders their turbines will be serviced; plus, they can pinpoint what the maximum maintenance expenses will be. The risk of turbines sitting fallow for lack of funds for repair is neutralized. Likewise, the risk of an owner defaulting on other debt due to overspending on maintenance is controlled. EMI can have a direct impact on securing financing and negotiating favorable rates.
The cost of wind turbine maintenance is significant and can cripple a project if ignored or not managed properly. It’s critical that earlier generation turbines are maintained in a way to keep them spinning and profitable. EMI gives wind farm owners the ability to commit to preventative and affordable maintenance, so maintenance cost uncertainty becomes certain.
Alcott Wind Insurance Agency
www.alcottwindinsurance.com
