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No subsidies and higher OPEX: Adjusting to the new realities of wind

October 2018

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By Jonathan Chen

Why worry about the future of your business when the North American wind industry is in such great shape? 

According to the American Wind Energy Association (AWEA), wind power has tripled in the last decade to become the number one renewable energy resource in the United States. In four states, wind accounts for over 30% of all energy generated. Last year, the industry grew by 9%, compared to 2.3% for the U.S. economy as a whole. 

Growth like this is due to strong demand from customers who appreciate the predictability of wind prices, but there’s another key driver for wind’s success in the U.S.—subsidies. And those will soon be ending.

 

The end of tax credits? 

Since the PATH Act was signed in 2015, owners and operators of onshore wind farms have received a 2.3-cent production tax credit per kWh from the Federal Government to help stimulate growth—a hefty amount, given that the present cost of producing 1 kWh is 6 cents. 

But the subsidy is phasing out over the next two years. Even assuming the consequences are not dire, a big slowdown in builds seems practically inevitable. As the current crop of farms age, operation and maintenance (O&M) costs will climb. A study by IHS Markit predicts that O&M costs will rise by 40% by 2021 and continue to grow steadily thereafter. For the first time in recent history, OPEX is expected to eclipse CAPEX.

 

Preparing for a world without subsidies and higher OPEX 

To maintain a competitive advantage in this environment, performance benchmarking is an essential step towards technical viability, improved economies of scale, and greater productivity and profitability, achieved by assessing your data against regional competitors to highlight areas for improvement. While you may have to make some investment decisions such as phasing out poorly performing fleets for more efficient turbines, the future bottom line benefits can insulate your business against uncertainty. 

Performance benchmarking and corresponding improvement strategies are only as good as the dataset and experience that underlie them. Right now, one resource fits the bill: the Wind Power Performance Assessment (WPPA). Available to the industry thanks to a collaboration between A.T. Kearney and our team at innogy Consulting, the WPPA gives your business access to proprietary performance data from over 100 GW of working farms in Europe and the Americas, as you can see in the diagram below. In addition, the WPPA provides access to experts who have experience in leveraging comparative metrics for improvement. 

 

Revealing data and improvement opportunities 

Improved performance starts with assessing data that is granular in both time and space. In order to harness performance benchmarking to its maximum benefit, breaking down summative metrics such as OPEX to the level of individual wind parks enables a transparent view into each performance quartile, in comparison with peers and competitors. The next step is identifying where improvements are possible in your existing pipeline, with a risk and opportunity assessment for each stage of the value chain across your different markets. 

The chart below illustrates the findings of a benchmarking exercise for a client’s turbines in two different age categories. In both groups, production costs and capacity are far from optimal. After detailed planning with the WPPA consultants and other industry experts, risk and opportunity assessments and implementations of KPIs and other governance and management mechanisms, figures can be improved significantly. 

 


Putting your data to work
 

Effective benchmarking allows you to first better understand your business and where it can be improved through data assessment and second reveal levers that will enable you to do so. In particular, benchmarking can reveal significant savings opportunities and support strategic plans to see them through. 

An onshore wind operator client whom we supported to centralize purchasing based on benchmarking data was able to renegotiate more than 30% of their contracts and reduce their overall OPEX by 20%. In another case, we advised a client to turn their entire operation into a virtual power plant, increasing trading flexibility and profitability via economies of scale. 

Centralizing control is also one of our recommended strategies to enhance productivity and profitability. As a result of benchmarking, we helped a client unify reporting and KPIs across their wind portfolio in order to improve controllability, which created substantial efficiencies. Another onshore wind client improved reaction time and decreased the need for site-level personnel monitoring by introducing centralized, real-time monitoring.

Making the correct investment decisions for a leaner, more competitive wind business is becoming increasingly urgent. The means to understand where your business can be improved, plus the knowledge to act on that understanding, are available right now. If you are languishing near the bottom 25%, it’s time to speak to our WPPA consultants and industry insiders to improve your best practices and save on costs.

 

Don’t wait until tomorrow when you can take action for your company’s future today. 

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