O&M opinions and insights for the offshore wind industry

The key to success in wind projects is the contract

Get it right the first time and save a lot of time and money. The right and proper contract for a wind farm is the roadmap to a solid business case. This calls for knowledge, insight, understanding and, importantly, dialogue on both sides of the negotiation table from utilities and developers.

Today’s wind projects cannot rely on a standard contract from the wind turbine manufacturer. The costs of capex and opex are so high that there has to be a robust contract that secures an investment that should stretch beyond 20 years.

Wild West

In the past, many cowboys, as I like to call them, made fast money on dubious projects or contracts giving the wind energy industry from time to time a Wild West image. Those days are luckily gone and now focus are on reviewing contracts properly from a legal and technical point of view to secure the profitability for all parties involved.

At K2 Management, we have supported clients over the years in all the major procurement and tendering processes as we have extensive and first-hand working experience with all the important players in the wind industry. This includes facilitating tendering auctions, bid schedules, evaluations, and negotiations; monitoring of contract implementation, commissioning of plants, formal contract management, and follow-up and claims management.

We see that good project management starts at the earliest stages of project planning and design decisions. The right or wrong contracting strategy will have a major influence on the outcome of any project. Factors such as how the project will be financed will also influence decisions and risks.

Jigsaw puzzle

Wind projects are often based on multi-vendor or EPC contracting where several construction and procurement contracts have to be managed and coordinated. Such a jigsaw puzzle of terms and conditions requires best in class management, monitoring, and control to help ensure successful implementation, and optimal return on investment.

Project development and purchase of wind turbines, service and balance of plant are complex processes requiring knowledge and experience in order to protect the business case. It is critical to be aware of the factors that affect the business case before initiating the project development and signing the contract.

The main objective is always how to minimize costs through project development and purchase of wind turbines, service and balance of plant. To succeed multiple contracting strategies and the key points and pitfalls in turbine supply agreements (“TSA”‘s), service (operations and maintenance) agreements and subcontracting must be investigated. Additionally other key factors affecting project costs as site selection, land lease, wind measurements, site evaluation, constructability, wind assessment, environmental impact assessment, permits, grid, turbine selection, feasibility study etc. should be taken into consideration.

You have to ask yourself, how to divide and mitigate risks? What to do in cause of delays, takeover of project, tests on completion, force majeure, intellectual property rights, financial guarantees, direct agreements, escrow agreements, warranties, termination, governing law and disputes.

Moreover, what about the types of service agreements, availability and yield warranties, liquidated damages, force majeure?

Here it’s key to have some insights and experience from previous wind projects, so you do not make the same mistakes or reinvent the wheel

Being on top

Many wind projects today operate with a risk interface matrix to assess each contractor’s deliverables and the risk associated with theirs specific scope of supply. The primary goal is to capture a clear overview of the scope responsibility and to verify that all areas have been reviewed and assessed, with a specific owner identified. The creation of such a thorough and complete project plan during the development phase ensures a higher success rate for a smooth implementation of the project.

Being on top of a project requires experience and knowledge concerning the accurate durations of each major activity, based on actual historical data, which helps ensure schedule accuracy and optimization, and the associated cost reductions. This overall approach is today widely accepted by key players in the wind industry, including classification companies and authorities, as it helps to ensure swift, consistent, and high quality project plans are developed for any wind project.

The cost for a wind turbine is roughly EUR 1 million pr. MW, so it is worth spending some upfront resources and money securing a solid contract, service agreements and milestones for a wind project.

 

3 Responses to The key to success in wind projects is the contract

  1. Contracts play a major role in operations and maintenance of Offshore Wind farms as well and with a clever proactive strategy there is plenty of time and money to be saved. For jack-ups used during main component replacements this has historically been part of the agreement with the turbine OEMs during the warranty period. 

    After end of warranty there are various options and strategies for the wind farm owners to pursue. Either continue the existing setup and extend the services agreement with the OEM including the scope of jack-up supply, continue the services agreement without jack-ups supply from the OEM, take on the service completely in-house or with support from 3rd party provides.

    The different strategies requires different contracting approaches. One of the main trends at the moment is for Utilities to take on O&M themselves after warranty. This require the wind farm owner to directly source people, equipment, parts and vessels. Here framework agreements could be a smart approach until there is enough critical mass to look at long term commitment. The more commitment the supplier gets the better rates and terms he will be willing to offer. So increased commitment leads to increased certainty which reduces costs.

    Another future trend is that turbine OEM’s will start to offer long term services agreement – even lifetime agreements are being proposed. This will change the game of play once again and it will be very interesting to follow the next years development to see which way the wind blows.

    • As a wind farm owner or operator you constantly have to monitor the condition of main components and wear/tear parts. Already in the original contract you should specify expected conditions of these parts at end of warranty. End of warranty inspections and walk down of wind turbines have to happen randomly and on an ongoing basis to secure that your expectations as an asset owner are met. If things are out of order at the end of warranty inspection, it can be too late or expensive to correct. These inspections should focus on failure rates and failure intervals on component level, so you have more control with repeating failures. A standard report on availability doesn’t do the trick.

  2. As a wind farm owner or operator you constantly have to monitor the
    condition of main components and wear/tear parts. Already in the original
    contract you should specify expected conditions of these parts at end of
    warranty. End of warranty inspections and walk down of wind turbines have to
    happen randomly and on an ongoing basis to secure that your expectations as an
    asset owner are met. If things are out of order at the end of warranty
    inspection, it can be too late or expensive to correct. These inspections
    should focus on failure rates and intervals on component level, so you have
    more control with repeating failures. A standard report on availability doesn’t
    do the trick.