Welcome to the Solar O&M Insider, the podcast series dedicated to solar operations, maintenance and asset management. This series is brought to you by Alectris, a global solar asset care innovation firm. I’m Glenna Wiseman of Identity3 your host.
Our topic today is Maximizing Returns and Effectiveness: The Role of Solar O&M (operations and maintenance). We are talking to Vassilis Papaeconomou, managing director for Alectris.
In this podcast, Vassilis offers these insider insights into solar O&M:
- “How can I make sure my solar asset is performing as expected?”
- Solar O&M Contractor as a Long Term Investor Partner
- Investment Community’s Perspective of Solar O&M
- Gap Between International Investment Community Expectations of Solar O&M and Expertise in Emerging Markets
- Solar O&M Guarantees
- The Pros and Cons of Solar O&M Pre Packaged Service Levels
- Geographic Parameters for Solar O&M in Emerging Markets
- “If you split the O and the M, who provides the warranties?”
- Case Study on a Poorly Maintained Solar Plant
- The Extra Performance Generated from a Good Operating Solar Plant Can Make an Enormous Difference to the Investor
We want to thank Alectris for providing this valuable overview of SolarPlaza’s Making Solar Bankable event.
Full Transcript
Glenna: Welcome Vassilis to the show. I want to start by acknowledging that Alectris is part of an upcoming event called ‘Making Solar Bankable.” This relates to emerging solar markets. Let’s start today by asking you, why is this event important to your team?
Vassilis: Thanks, Glenna. First of all, it is not important only for us; I think it’s important globally for the solar business. What we have experienced in just a short history; what we’ve been experiencing the last many years actually I would say, starting in Europe, was a booming solar market. Europe stopped. U.S. is ramping up, but what we see right now is a lot of activity in solar-developing countries. India for example, Middle East, Japan. Now, Europe had the chance, also U.S., both had the chance to have some time to gain experience and know-how through this process.
The technology has improved quite a bit and has matured quite a lot. So what we see in new markets is the pace, the speed of new development of additions of capacity in the grid is much bigger than it used to be. Now, these countries do not have the luxury of having some years to straighten out “What’s going to happen after these assets are operational?” And what we see currently is, in the developing countries, and if I remember well a survey I was reading some weeks ago, we do see right now more solar investment in developing countries and less investment in the developed countries.
So what we’re experiencing is a lot of new capacity being added in these countries and there’s not so much experience. EPC is okay, but the O&M is way behind that. So getting to the bankability status for the operational phase, which is going to be the longest phase, over twenty years; it’s a major thing that these countries will have to deal with. So this is a very important aspect, not just for us as a company, I think it’s going to be a global challenge, that we’re going to be faced with.
Maximizing Returns and Effectiveness: The Role of Solar O&M
Glenna: All right, so it sounds like the role of O&M, which is your topic at this SolarPlaza event is “Maximizing Returns and Effectiveness: The Role of Solar O&M.” Sounds to me like part of the role is taking the best practices learned in the more mature markets and applying those in the emerging markets so that those emerging markets don’t have that ramp-up phase. Is that correct?
Vassilis: That’s absolutely correct and to put that in simple numbers, starting again from Europe where our company is from, we’re currently managing assets that are six, seven years old. And we see challenges come to the surface after the first or second year where the projects all are under EPC warranties. So indeed, we do have a lot more experience of reality; we have seen them happening in Europe and we expect similar things to be happening in this market. Let me underline though, that focusing just on the maximizing aspect is not the only challenge.
“How can I make sure my solar asset is performing as expected?”
What we’ve seen in European markets is that investors should by no means take for granted that at least they’re going to have their, let’s say “budgeted numbers.” When we talk about maximizing, usually people think, “Okay, I have a very well-performing asset, how can I get more out of it?” That’s a long debate and there’s lots to say about that, but I think we should also address other issues like “How can I make sure that my asset is performing as expected?” So this is the risk factor that concerns also the lenders and that’s where the bankability comes into play.
Solar O&M Contractor as Long Term Investor Partner
Glenna: All right. Well, it sounds like the O&M activities really should be considered up-front in the design phase, is that the view that your firm is taking? That this should be considered by investors and project developers at what stage?
Vassilis: Absolutely, yes. And again, I’ll get back to our experience; I don’t want to talk theoretically on that. A big part of the challenges with operational assets is that they have not been properly maintained, but also a second parameter; they have been not properly designed. So when an EPC constructs a project and designs a project, the main focus is, of course, profitability which is fine; that’s the way a company works.
There is no interests aligned with the investor after the two years and that is where the O&M contractor, a professional O&M contractor, is actually a significant partner. The O&M contractor typically stays as a long-term partner of the investor and stays with the investor, in the investment, for the next at least 20 years. So the perspective that the O&M contractor evaluates an asset is slightly different from the EPC contractor. I believe you need to have both, and it’s our firm opinion that both should be engaged actually at the very early stage so you have opinions from both worlds, basically.
Investment Community’s Perspective of Solar O&M
Glenna: So, Vassilis, are you seeing examples in some of these emerging markets that your firm is looking at and active in? Are you seeing examples where the investment community wants to see what’s happening on the O&M side in the very beginning of the development stage?
Vassilis: We certainty do. A very nice success story for our company is a case study we have announced quite recently in Jordan, and where we have gotten ourselves involved in a very early stage in a 12 megawatt plant. Jordan and generally the Middle East is an emerging market, a very promising market in solar, so yes, we do have this feedback. And we see more and more companies from these regions, these emerging regions, and more specifically Japan for example, India and Middle East where we are active, we see the lack of knowledge.
And we get a lot of requests on O&M matters, “What happens after that?” “How I can plan my investment so that I can be secure that it does perform at least as budgeted?” So it’s not just a tendency, it’s not just a theoretical issue. I think these regions start to realize that…and I’m happy to see that because Europe did that very late, too late I would say. They start to realize already now that this is something quite significant. We’ve seen that also in Japan for example where the market started three years ago. And to the best of my knowledge at least, they have already above 20 gigawatts installed. That’s a very significant capacity in a very short time.
Typically during the development and construction phase, investors do focus on the construction grid connection of the project. And once this is completed, they start making considerations on what happens next. We’re happy to see that this is happening really early when the plans are really quite new, and they don’t wait for five years to see the issues come to the surface and then take action. That’s a major difference from what we’ve seen in Europe; Europe waited too long and we had a lot of engagement in revamping and fixing plants. We’re happy to see that on this new market, people realized that at a very early stage and they do want to engage a professional bankable O&M contractor early enough so that they don’t step into the same problems as it happened in Europe.
Gap Between International Investment Community Expectations of Solar O&M and Expertise in Emerging Markets
Glenna: What kind of specific items do you see? Because it sounds to me like you’re saying the investment community is much more aware of the operational phase of the solar plants so that they’re looking for some specific things. Are there any things that come to mind in terms of what are the kinds of things they’re looking for in the overall plan for the plant?
Vassilis: What we see in all these regions I mentioned, the investors, the international investors that are active there are no different than the ones that we know in the other markets. The requirements of the investors is not so different at the end of the day from what we have seen in Europe and the States. What is changing is the local know-how. There is a huge discrepancy of the expectations of an international investor on the level of know-how that local companies have achieved to be able to serve these requirements, and even understand these requirements, I would say. And there is a big gap because you have a very huge installed basis before you.
The investors are looking for local companies who are able to serve them the way that they know and provide the services that they’re expecting from other markets, but they simply cannot find these competencies there. And there is a big gap as I said, and it’s going to take some time to close that gap with local companies. Whereas for companies coming out from these already matured markets, there is a very good understanding of the needs and requirements.
Solar O&M Guarantees
Glenna: So let’s talk about something that we hear a lot about in relationship to O&M, and I guess we could clarify that as “Operation and Maintenance;” we hear the word “guarantee” a lot in the industry. What does that mean, and how does your firm handle guarantees?
Vassilis: A solar plant is actually an investment. An investor needs to have a certain level of guarantees, including manufacturer’s warranties. What they require from an O&M provider…and you correctly differentiated between the two, and I always underline the operations aspects of that. They want a partner who can give them some sort of warranty of a minimum performance because they need that to make their financial planning. Otherwise, there’s no number to plan. So warranty is something quite significant and it’s a definite need in the market when you go larger scale like an international investor, and especially when banks are involved.
For the banks to issue loans, they need to measure, let’s say, their expectations or measure their risk against their expectations to issue a loan. And that is where the O&M contractor actually plays a very significant role and the know-how is not just from the scope of services that they’re going to be provided, not just the field activities, but how all these operations are organized and how to make sure, as an operator of the plant, that these minimum guaranteed values are met. And I would say I will take that even further; not just meeting the minimum requirements, even exceeding these requirements and that’s more for the interest of the investor, obviously.
The Pros and Cons of Solar O&M Pre Packaged Service Levels
Glenna: Okay, excellent. All right, so let’s talk just briefly about some recommendations that you would have for solar operators in emerging markets related to service levels because one of the things I think we see a lot is gold, bronze, silver and these kinds of things where companies are tying package service offerings into understandable levels. And so if you’re an operator in an emerging market plant, what kinds of recommendation would you have for looking at those service levels?
Vassilis: Well, first of all, I will not lie to you. When we started as a company, we also wanted to “package” and offer silver, bronze, platinum levels. It simply doesn’t work. That’s, in my opinion, an oversimplification of the market. We haven’t seen a single customer with the same requirements as the previous one and also, in many cases, the same customer has different requirements for other assets. So I don’t believe this over-simplistic approach of packaging an offering makes sense. It’s something simple to present, simple to consume for a reader but if you go a bit further, if you go a bit deeper, at the end of the day, the bank plus the investor are going to put down their exact requirements, regardless of what packages you may be offering.
So we’ve never seen a case where we have a certain package and it doesn’t change, according to the requirements of the other parties. So I think this is something we see in over-simplified solutions and in cases where we’re talking about the M and not the O, where those companies providing field activities, maintenance activities, and they just do some basic stuff there. I don’t think this is something that is really of interest for large-scale investments and bankable investments.
Geographic Parameters for Solar O&M in Emerging Markets
Glenna: If you look at the countries that you just described, the geographic parameters of something in Japan versus in the Middle East is going to greatly impact what kinds of basic maintenance is done in the field, and even the management of that in the cloud, correct?
Vassilis: Yeah, absolutely, but I’m not talking just about the regional requirements; I mean, if you go in the desert, for example in Jordan, you certainly will have to do more panel cleaning than you’re going to be doing in Japan. But it’s also the services, the operational services around that, like the type of reporting, the frequency of reporting, the type of warranties, how these are backed and how these are structured. So there are substantial differences between O&M contracts, and it’s not just relating to the frequency of preventative maintenance alone, or the scope of preventative maintenance, it goes much deeper into the fine details of an O&M contract.
Glenna: Well, and there you just made the perfect case for why you need to…if you’re in a market that doesn’t have a sophisticated asset management firm, that you really need to bring that experience in.
Vassilis: Absolutely, I’ve seen quite a few cases in which we are acting more or less as a consultant. To be honest, just a few minutes ago, I was just discussing with my colleague in the States about an opportunity there. We were discussing how to explain to them what they have in mind simply doesn’t work. I cannot go into the details, but we had also yesterday, a very long discussion about the same subject and we realize it’s not just about making an offer; it’s explaining to them what they have in mind is simply not doable.
“If you split the O and the M, who at the end provides the warranties?”
You have to structure it in a way that it makes sense for the client and for the O&M contractor. For example, if someone asks the O&M contractor to provide warranties, you cannot just provide warranties, just sign the paper, you need to have certain prerequisites fulfilled before you can provide such warranties. As an example, the main condition is you have control of the activities, and I’m saying that because I see a lot of reports coming up in the press lately about a split between O&M. I’m not sure how viable this is because if you split the O and the M, who at the end provides the warranties? The maintenance provider or the operations provider? I mean, there must be someone who concentrates, who has the overall control let’s say, and hence the overall responsibility to be able to provide the warranties.
Case Study on Poorly Maintained Solar Plant
Glenna: Well, and you indeed have touched on a very interesting subject line that we can maybe address on a different day; the decoupling of the O and M. We definitely could tackle that one. It looks like you’re presenting a case study at the “Making Solar Bankable” event upcoming here in Amsterdam which is intriguing because it’s looking at what happens when the site is not maintained properly, is that correct?
Vassilis: Yes, indeed, and we’re presenting one of the most extreme cases obviously because just to highlight the dangers that may be there I can reassure you that there are lots of such cases that we have come across in the last few years. The one that we were presenting was something with a mixture of very bad things happening, from the EPC to the actual component design and choice, and of course later on in the O&M. So there are some plans that actually, everything was done wrong, and we had to step in and fix all that stuff. To make sure the plant was economically feasible, we had to fix the design, redesign a lot of things. We had to revamp and change components, and of course, we had to change the whole logic of operating and monitoring the plant.
It will be quite evident to what extent there is a risk in this plan. So you don’t just simply sign a contract, plan gets constructed, grid connected and then for 20 years, you enjoy your revenues. I’ve never seen any plans working like that, and there’s lots of pitfalls to get there. Of course, our discussion is not going to be how to do EPC. There are very good EPC companies to do the whole design and in equipment choice. Our competency is the O&M and it should definitely not be neglected.
The Extra Performance Generated from a Good Operating Solar Plant Can Make an Enormous Difference to the Investor
The extra performance that you can get out of a good operations structure is enormous. We’ve seen examples in the past that you can get certain percentage points, meaning two, three, four or five percent, and that may sound, to many people, something low, but it’s an enormous value that you create for the investors. At the end of the day, in many occasions, the O&M is actually no longer a cost for the investor; it actually brings more money than it actually costs.
Glenna: Well, Vassilis, good luck at the “Making Solar Bankable” event. I think it’s a very interesting topic, and you’re obviously already working in these emerging markets, out of your experience in the mature European market and the U.S. market. So thank you for joining us today. Listeners, you can get more information at Alectris.com, and we look forward to you joining us next time.
Vassilis: Thank you, Glenna. Hope to see everyone there.
