Datamonitor, London, UK
One of the few areas in which power plant owners can reduce costs is in operation, maintenance and repair. With heightened competition in power generation, operation and maintenance services is a growing market where prices are forecast to fall.
With increased competition, power plant owners are being forced to deliver electricity at the lowest possible price if they are to have any chance of being successful. Two crucial factors influencing the price of electricity are maintenance costs and availability, increasing the strategic importance of O&M activities.
An important question for power plant owners is what they can do to reduce the cost of generation. One of the few areas they can directly influence is the cost of operation, maintenance and repair. Fuel prices are subject to global market developments and cannot be influenced to any large extent. On the maintenance side, however, there are several areas where costs can be reduced. This is presenting power plant suppliers with opportunities to provide operation and maintenance services as well as refurbishment work.
In order to gain a clear picture of the structure of the European O&M market, and to establish which factors influence the choice of O&M supplier, Datamonitor conducted an end-user survey with a large number of industrial, utility and IPP power plant owners in Europe.
Interviews were conducted with power plant owners accounting for 18 per cent of total installed capacity in the 17 western European countries covered. Participants were asked questions about the following issues of importance to the O&M market:
- Contract type
- Contractual set-up
- Contract strategy
- Factors influencing the choice of O&M provider
- Spare parts strategy
In assessing the structure of the market it is important to understand how it is split between different types of contracts. The survey revealed that by far the largest percentage of power plants, 57.4 per cent, have a maintenance only contract. The second largest category, 27.2 per cent, said they have no specific contract in place. For many plant owners, particularly those of older plants that have low load factors, in-house maintenance provides the best option.
In total, just 11.7 per cent of respondents had a combined operation and maintenance contract or combined O&M contract including spare parts in place. However, when comparing the contract type by technology, some distinct trends emerge. The two newest technologies – combined cycle and cogeneration power plants – are the ones with the highest percentage of combined operation and maintenance contracts, 27.8 per cent and 17.5 per cent, respectively. Just 10.3 per cent of conventional thermal power plants and zero per cent of both hydro and nuclear power plants currently have an O&M contract.
For conventional thermal technology, the main reason for the low percentage of combined contracts is that these power plants are relatively older than combined cycle and cogeneration plants, and it can therefore be expected that a smaller percentage will have been involved with operation. For this technology, 64.1 per cent of respondents stated that they currently have a maintenance-only contract.
OEMs for O&M
The most common trend is for power plant owners to have O&M contracts with the original equipment supplier. A total of 55.7 per cent of the power plant owners surveyed said that this is the case. Other parties receiving O&M contracts are the engineering procurement and construction (EPC) contractor and other third party companies, with percentage shares of 19 per cent and 13.9 per cent respectively.
It is not surprising then that over half of O&M contracts are with the company that supplied the equipment. These companies know the technical details of the equipment and are therefore best suited to perform the task. Most often, third party suppliers come into the picture once the original contract needs to be renewed. At this stage the power plant owner has learnt more about the equipment and does not necessarily need the expertise of the OEM. In addition, a third party supplier might be able to supply the service at a lower cost than the OEM.
Simple strategies prevail
Respondents were also asked about which strategy lies behind their choice of contract type. The three strategies mentioned were:
- Fix it when it breaks
The least risk-based of the three, the preventative strategy, was the choice of the highest number of respondents. When choosing the preventative strategy, the power plant owner has the lowest risk of a sudden breakdown of the plant, as maintenance is carried out at regular intervals in order to ensure that no problems are occurring.
In addition to these single strategies, there were a number of combinations of the three. The reason for this is that power plant owners in some cases have different strategies for different parts of the plant. In second place was a combination of preventative and condition-orientated strategies. Following this was a combination of all three strategies.
Survey respondents were also asked which variables were important in influencing their choice of O&M supplier. The top eight variables are depicted in Figure 3.
No single variable stands out from the rest in terms of importance. Two variables, ‘low cost’ and ‘parts availability’ were mentioned most often – both by 10.5 per cent of the respondents. These findings indicate that there is a very sophisticated power plant owner base in Europe, and that the choice of supplier is not made on the basis of just one or two variables. Owners are taking a host of factors into account before choosing their supplier.
An ageing installed base
The age of power plants in Europe has a profound impact on the size of the O&M market both now and in the future. Nuclear, cogeneration, open cycle gas turbine (OCGT) and engine-based power plants in particular have a high average age, supporting the view that the installed base for which maintenance activities is essential is huge, and getting larger all the time. Around 80 per cent of both nuclear and engine power plants in the region are now more than 20 years old, whereas for cogeneration and OCGT technologies, more than 60 per cent of plants are over 20 years old.
Conventional thermal technology has by far the largest maintenance cost in Europe, accounting for more than 41 per cent of the total O&M cost in 1998. The main reasons for this are that this technology makes up more than one third of the total installed base in the region, and that the price paid for maintenance per kWh for conventional thermal plants is among the most expensive in Europe.
The second largest segment is cogeneration plants, accounting for close to 30 per cent of the total cost, despite only being the fourth largest technology in the region. The main reason for this high cost is that the price paid for maintenance per kWh for cogeneration plants is by far the highest in the region.
In the conventional thermal market for O&M, not only are the top five countries the largest electricity markets in the region, but a relatively large percentage of their installed base is made up of conventional thermal power plants. In all of the top five countries, apart from France, conventional thermal technology is the largest segment. For the more recent and environmentally friendly technologies, such as cogeneration, ‘smaller’ countries like Denmark, Sweden and Finland are among the countries with the largest maintenance cost.
The potential size of the O&M market in Europe is constantly increasing. Although competition in European energy markets will intensify, driving prices down, power equipment manufacturers are continuing to concentrate a large degree of their resources on O&M activities. Certain manufacturers in the region have even given up most of their equipment manufacturing to concentrate on after-sales services.
However, although the total market is expected to increase in terms of the volume of business available, actual prices paid for O&M work is expected to decrease slowly over the next few years, mainly due to increased competition. As industrial companies are also experiencing higher degrees of competition, it is likely that they will have to concentrate on their core competencies in order to remain competitive, resulting in more power plant O&M work being outsourced. This argument will, to a certain extent, also apply to utilities and IPPs, even though it is likely that these types of owners will want to have a higher degree of control over the performance of the plant.
Another reason for decreasing prices is a slow move towards sophisticated low-cost maintenance based predictive strategies instead of preventative strategies.
The trend towards falling price levels is also a result of power plant owners outsourcing larger volumes of work to O&M contractors. The O&M contractor is in a better position to negotiate prices than the company owning the power plant. It can offer its subcontractors larger volumes of work because O&M contractors often procure for more than one power plant at a time. This puts the contractor in a position where it can squeeze the subcontractor on price. On the other hand, utilities tend to procure on a plant by plant basis, which does not offer the subcontractors the same opportunities for large volumes of work.
It is expected that as prices fall, expenditure on maintenance will decrease more rapidly than the installed base will increase, resulting in the total European maintenance cost decreasing slightly over the next five years. The total maintenance cost is expected to decrease by just over three per cent in the period between 1999 and 2003.
Finally, it is important to mention that there is a distinction between the calculated maintenance cost above and the actual value of the market. The reason is that not all maintenance work is outsourced – some power plant owners do their own maintenance work. According to the end-user survey, a quarter of power plants have the maintenance work done in this way.