The clean energy industry finds itself once again in a curious position: needing to build and maintain rapidly expanding solar capacity while also reacting to a potential economic recession, significant inflation in the costs of goods and services, and global supply chain issues. Where is O&M pricing heading in reaction to all this, and what technology trends may improve the future? Wood Mackenzie principal analyst Leila Garcia da Fonseca joins Michael Eyman of Origis Services to discuss the future of solar O&M and how asset owners can best allocate operational expenses.
MEET THE PLAYERS
Leila Garcia da Fonseca is responsible for Wind and Solar Operation & Maintenance market research for the Americas region within Wood Mackenzie Power & Renewables. She brings more than a decade of experience in the renewable energy industry, having worked in both mature and developing markets from Denmark and the US to Brazil and Mexico. Prior to joining Wood Mackenzie, Leila worked as marketing leader for Vestas, as well as marketing manager for GE Renewables in Mexico. Leila is currently located in Vancouver, Canada, and holds an engineering degree from Pontifícia Universidade Católica MG in Brazil and a Masters in Renewable Energy from German Carl von Ossietzky University of Oldenburg.
With more than 20 years of leadership and operations experience, Michael Eyman is leading the team responsible for Origis Service’s rapidly growing solar and energy storage portfolio.
O&M Costs Will Track Rising Labor Costs
Over the last decade the clean energy industry has grown accustomed to shrinking prices. Most significantly, a nearly 85% decrease in module prices helped accelerate solar adoption across the country. Likewise average O&M costs decreased, following equipment costs and greater economies of scale. This trend, however, is coming to an end.
“We’ve been publishing reports about solar O&M for more than five years,” says Wood Mackenzie analyst Leila Garcia de Fonseca, “and what we’ve been seeing over the years is that pricing has been going down very consistently. So, we decided to do a bottom-up approach, a model where we see what the true cost is for solar O&M. And we found that the cost is not expected to decrease any further. Instead, it’s going to increase with time, as the O&M solar service is based on labor.”
In fact, nearly 70% of the true cost of solar O&M comes from labor-based inflationary costs, according to Origis Services and Wood Mackenzie research. On top of that, O&M profit margins are already at tight levels, as Fonseca calls out: “the prices that we’ve seen in the industry, they are very close to the actual cost. So, one of the main concerns and takeaways from this exercise is how are O&M providers going to remain profitable if the asset owners are expecting further price decreases, if the cost is not about to decrease?”
While O&M profitability is not an asset owner’s concern, O&M response times, technical abilities, and access to resources are. When asked why asset owners should care, Fonseca was clear: “it’s because they are also interested in getting very high-quality services. And for that, you need qualified technicians. And to have qualified technicians, you have to pay them well and have systems in place, and this all requires investment.”
When Price Shopping, Compare Apples to Apples
Part of the challenge arises from how asset owners discover and compare pricing. As Fonseca remarks: “We have to compare apples to apples. So, when you go to an industry event, it’s very common for an owner/operator to say, ‘How much are you paying for your project? I’m paying $3 per kilowatt per year.’ And another person might say, ‘Oh, I’m paying $6, so I’m paying double. So, I’m going to go back to my service provider and tell them that I want this for $3.’” But as Eyman and Fonseca both point out, each solar site has its unique advantages and disadvantages that influence costs. A site in the desert may not need much vegetative management, but module washing may be a large expense. A site with uniform modules and inverters is easier to maintain than one with multiple brands. A large site or one located near others will be easier to dispatch services to. Focusing only on the dollar amount overlooks the unique challenges that maintenance will someday need to address.
It may seem smart to switch to the lowest priced O&M but chasing the lowest price could end up costing far more in the long run. As Eyman describes, “The reality is if they are going to hit the production on these sites that they’ve modeled, if they have any hope of doing it at all, that means people have to be really well-trained, really familiar with the site, and they have to get to those issues very, very quickly. If you are constantly churning through service providers, and churning through employees, chasing a dollar, what you’re going to get is service providers and employees that are not familiar with those sites, that cannot resolve those issues as quickly as they can. Ultimately that is going to come out in the production, and in the financials of those facilities.” Adding to his point, Fonseca pointed to the misleading benefits of low-service agreements: “If enough corrective maintenance, for example, is not within the service agreement, or you don’t have a performance warranty in place, you’re going to pay for those ad hoc. Hiring those kind of services on as-needed basis, will be more expensive than if they were included in a full-wrap service contract. So, the whole dollar per kilowatt per year thing can be very misleading for asset owners, and for the industry, because it does not reflect all the maintenance activities a solar power plant needs, to perform well, or perform as it should, over the lifetime.”
O&M Automations Are Still Unproven Financially
This isn’t to say that innovations and improvements can’t make O&M services more efficient in the future. Fonseca mentions aerial thermography as being a recent disruptive improvement for utility-scale solar. “That’s something that is really being used now, is commercially available, and we can see already the results in terms of how many hours of technicians we can save with using this kind of technology.” Throughout their conversation, both Eyman and Fonseca also bring up strategic site design, equipment standardization, and bifacial tracking as upfront elements that improve downstream O&M costs.
As for the future, focusing on the two very labor-intensive tasks, module washing and vegetation management, may be the next big improvement. However, current technologies like waterless module washing and robotic lawnmowing have not proven themselves in terms of Capex investment. “Because they have not been deployed in a very high-scale kind of way, we can’t come up with numbers to justify this investment just yet. . . You still need the technician there, overseeing what the machine is doing, or even kind of correcting some missed places, especially for the vegetation management, depending on the terrain, and depending on how you have your modules distributed.” Though promising, even automation services are strongly influenced by labor costs.
When asked for closing thoughts, Fonseca keeps it simple: “My message here is really to start comparing apples to apples. Don’t be misled by a dollar per kilowatt figure. I believe each site is different. Also, consider each site is ageing. We have a lot of sites now that are 10 years old, and they will require even more special attention.” In addition, Wood Mackenzie is expecting the U.S. solar market to increase from 140 gigawatts of installed capacity in 2022 to more than 530 gigawatts by 2030. “We are going to have four times what we have today of cumulative volume of solar installations. And that’s when we—if the industry doesn’t work together to really make the operation and maintenance of those solar projects easier—we are going to feel the pain in a few years.”
Three Takeaways on O&M Costs:
- O&M Costs Will Track Rising Labor Costs
- When Price Shopping, Compare Apples to Apples
- O&M Automations Are Still Unproven Financially
We’d like to thank special guest Leila Garcia da Fonseca and Power Players host Michael Eyman for a forward-looking discussion grounded in data and extensive solar experience.