OPINION: O&M ready for take-off
Last month I was in Berlin at a conference on wind farm management organised by industrial group SKF.
Now, operations and maintenance may not seem the sexiest subject, but look again. Many of the developments that will define the fortunes of the biggest companies in the renewables space come down to services.
“Servitisation” is the process through which companies in mature industries develop their business models from largely selling products to mainly providing services.
The most commonly cited example is aviation. Engine maker Rolls-Royce progressed from providing spare parts, to maintenance and overhaul services, and finally ended up providing “power by the hour” packages, where customers buy the capability the engines deliver, while Rolls-Royce retains responsibility for maintenance and risk.
Other companies involved in servitisation include ABB, Caterpillar, GE and IBM. Big software companies such as Adobe have moved towards the SaaS (software as a service) model, charging subscription fees instead of the customer owning the platform.
To what extent will we see wind and solar companies take the same path?
Turbine companies have long seen services as a key growth opportunity. As the base of installed turbines grows and machines come out of warranty, the amount of revenue from services tends to grow organically. But exactly how big services revenues become depends on how business models evolve among vendors and customers.
Others, including many small German wind producers, are happy to hand over control to a company such as Enercon in return for profit-related performance guarantees. Many big investors, especially in the US, have the same approach. As a Siemens official pointed out at the conference, “Warren Buffet is not interested in running his wind farm, he just wants to see the output and revenue.”
Meanwhile, OEMs’ business models are evolving competitively. Vestas, which has been seeing its service model grow by 19% a year, has moved to adopt the profit-sharing model. And OEMs have upped the ante by operating specific packages to upgrade turbine output (for example, GE’s PowerUp and Vestas’ PowerPlus) and extend turbine lifetimes (Gamesa).
Some analysts consider that a two-sided market is emerging, with utilities and independent service providers able to provide basic maintenance, often at cheaper prices than the OEMs, but with the manufacturers uniquely able to operate in the high-end segment.
On a wider level, though, how likely is the turbine business model to become predominantly service-based? It is instructive to look at the booming PV market in the US, where SunEdison and SolarCity provide power to customers through power-purchase agreements, rather than the systems themselves.
Wind projects are often on a much bigger scale than commercial or residential PV rooftop plants. But the same logic applies. Manufacturers are looking to shift big-ticket items to often cash-strapped customers, while gaining long-term revenue streams from maintaining and upgrading their products.
Innovative finance is needed in the wind space, particularly because of the squeeze on utilities’ balance sheets. When a company like GE provides financing for a project, supplies the turbines and then signs a long-term agreement to maintain them, we are not far from a TaaS (turbines as a service) model. Watch this space, because services are likely to become a whole lot sexier.