Keeping maintenance costs in line over the long haul

Transcription

1 Keeping maintenance costs in line over the long haul Long-term service agreements might be the right choice for gas power plants Of special interest to: Chief financial officer Chief operating officer Chief risk officer Chief procurement officer Head of power generation

2 Long-term service agreements a valuable proposition LTSAs are tailored to meet the business requirements of individual customers across a range of services, which can include all aspects of gas-fired turbine support (e.g., fleet management, inventory management, repair and overhaul, provision of day-to-day technical support). LTSAs help utilities achieve more predictable maintenance and asset management costs. In addition, LTSAs can reduce total cost to own and drive up capacity factors through higher-performance parts. Shale gas Gas plant capacity factors Gas prices Exhibit 1 Natural gas build-out stimulated by variety of factors As depressed natural gas prices continue to limit power prices and abundant shale gas deposits remain accessible, natural gas-fired plants are the most attractive fossil fuel for new capacity. An increasing number of utilities and independent power producers have built, or are in the process of building, new natural gas-fired power plants. As these units come on line, questions about non-fuel operations and maintenance (NFOM) costs, maintenance philosophy, and asset management trade-offs are emerging as critical risk and cost factors. Given an aging workforce in the utility sector the question of who will handle vital maintenance tasks becomes more important than ever. 2 5: insights for executives Given these fundamentals, it is no surprise that there is a significant upswing in natural gas generation facilities. Coal plant retirements are at an all-time high, which amplifies natural gas plants growing position as both the prevailing fuel on the margin and as a vital firming resource for intermittent growing renewable production. Gas plant additions are dominating the market for new fossil-fired capacity. EPA s Clean Air Act Macro factors Coal plant retirements Firming wind resources Gas plant additions

3 Exhibit 2 Natural gas-fired generation vs. other sources Gas prices are forecast to be below $4.00 per mmbtu through 2019 and below $4.50 until 2022, 2 a low level that shale gas discoveries and development efforts are expected to sustain. Low gas prices move gas-fired units up in the dispatch queue, which increases capacity factors and requires stronger plant maintenance regimes. Further, the expected impact of Section 111(d) the US Environmental Protection Agency s Clean Air Act is widely viewed as another stimulus for natural gas production, as the act is expected to displace coal while making gas-fired units more economically viable. Projected US new capacity by operating date GWs Legend: Solar thermal Solar PV rooftop Onshore wind Nuclear Gas OC Gas CC Bituminous Sub-bituminous Lignite Source: Composite new energy forecast from EIA, Ventyx, Bloomberg and SEIA. What s the issue? Attractive gas prices and increasingly stringent environmental requirements for coal units have many fleet owners considering buying or building natural gas units and/or converting existing coal units to gas. At the same time, original equipment manufacturers (OEMs) are contending with a relatively strong demand for new units. The increased demand for new plants impacts the availability, quality and pricing for long-term maintenance options from OEMs. At the same time, owners are looking to bring maintenance costs down while optimizing operating flexibility and reliability. Most operators and their procurement teams are focused on obtaining maximum value from LTSAs and/or optimizing the in-house skill set to self-perform maintenance. 1 Future prices at Henry Hub, November : insights for executives 3

4 Why now? Long-term maintenance commitments for any generating equipment are a strategic consideration and require careful, advanced deliberation as new unit contracts are negotiated. Combustion and hot gas path parts are of particular concern. They carry a high price tag stemming from the hightech, space-age technology coatings applied to withstand extreme heat exposure. These parts are frequently under patent protection, are produced in small batches and require skilled labor for installation and maintenance. Equipment availability is a critical consideration when determining a supply chain strategy for gas-fired turbines. Along with availability comes the requirement for top-notch repair facilities qualified to restore the parts removed during each maintenance event. Needless to say, a number of these parts carry price tags above $1 million, and the associated parts risk (availability, repair-ability, cycle time) must be considered when making a long-term maintenance decision. Hence, the right time to plan for long-term maintenance is now and throughout the lifetime of the asset. How does it affect you? Given high gas plant capacity factors, maintenance needs and construction trends, the delivery of LTSAs and related services is likely to suffer. Typically, the best and brightest of the OEM s resources are focused on new plant development. The most severe impacts of any constraints will be felt by those operators with the least contractual protection and/or those lacking the size to attract OEMs attention. The cost impacts from interruptions in gas turbine maintenance can be severe, ranging from cost overruns during scheduled maintenance to extended outages in cases where spare parts are not available and the turbine is idle while parts are out for repair. If precautions are not taken, disruptive events like these can seriously impact profitability. 4 5: insights for executives

5 What s the fix? As managers continue to hone their long-term maintenance philosophy, it s vital to clarify their in-house maintenance capabilities. On one end of the spectrum are organizations with deep gas turbine maintenance experience, a large gas turbine fleet and a well-staffed maintenance department. These organizations can realize lower costs and more effective risk management by performing gas turbine maintenance in-house. On the other end of the spectrum are generators that are new to gas turbines, have little experience with asset management and maintenance requirements, and possess a small maintenance department that is ill-equipped to perform major maintenance work on gas turbines. The first step is a critical skills assessment to help determine the most appropriate long-term maintenance philosophy. From there, it makes sense to develop the total cost of ownership (TCO) for several long-term maintenance approaches, accounting for the various levels of risks involved in each approach. These TCO models should be updated continuously during negotiations and beyond to compare assumptions to actual performance. A viable supplier relationship management (SRM) process involves continuous assessment and implementation of internal and external improvement opportunities. LTSAs are a strong candidate for more mature supplier partnerships due to their cost, duration and complexity. A well-run SRM process would encompass the following key elements: Exhibit 3 LTSA SRM process Adjust LTSAs to reflect agreed-upon opportunities Engage suppliers to test opportunity hypothesis in formal periodic meetings Negotiate to establish cost savings and implementation plans Adjust agreements Develop joint implementation plans, communications plans and change management plan Adjust savings forecast and timing of benefits GenCo internal opportunity assessment review Apply SRM levers to each category to identify additional opportunities Conduct formal assessment of market dynamics and supplier costs Conduct analysis and cost modeling of opportunities Evaluate and prioritize opportunities Develop list of hypothesis to test with suppliers Adjust agreements to reflect agreed-upon opportunities Internal opportunity assessment review Ongoing. improvement cycle Track and measure supplier and GenCo performance Establish and communicate category expectations Implement improvements and supplier development programs Establish and communicate category expectations Communicate product and service expectations internally and with suppliers Implement service-level agreements (SLAs) that include penalties and incentives Define and communicate supplier s reporting requirements Implement continuous improvement and development programs Identify and implement agreed-upon changes Own problem resolution and mitigation process Track and measure supplier and generation fleet performance Implement supplier scorecards to track supplier performance relative to metrics Establish and maintain processes and tools to consistently track volume and pricing terms Track realized benefits vs. planned 5: insights for executives 5

6 What s the bottom line? A well-developed long-term maintenance strategy can help inform decisions for years to come. As more natural gas-fired capacity comes on the market and gas prices stay at a historical low, a main differentiator for operators will be NFOM expenses. Maintenance cost is a major component of NFOM and can 6 5: insights for executives be managed for cost and risk ahead of time. Large cost savings and reduced risk are the products of a well-planned and -executed maintenance philosophy.

7 Want to learn more? The answers in this issue are supplied by: Mark Scherluebbe Manager Power & Utilities Advisory, Strategy Ernst & Young LLP Dana Hanson Power & Utilities Leader Americas Ernst & Young LLP Andrew Patterson Principal Advisory Services Ernst & Young LLP For related thought leadership, visit ey.com/5. 5: insights for executives 7

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