Junior Isles, Associate Publisher
A long term servicing agreement is one way of managing and predicting maintenance costs and the risk associated with power plant equipment – especially advanced gas turbines. At this year’s Power-Gen Europe conference and exhibition, a special round table session* addressed the key concerns for users, equipment manufacturers and financial institutions. Junior Isles caught up with the players who took part in the session.
In today’s competitive power market, cost effective equipment servicing is believed by many to be one of the most important parts of the business – for manufacturers and plant owners alike. Even the financial entities involved in financing or insuring power plant see it as a key ingredient in running a successful generating business.
There are various types of servicing agreements and service providers that can be used for power plant maintenance, and how an operator chooses will depend on his requirements. Yet one which has become increasingly popular over the last several years is the long term servicing agreement (LTSA).
As the term suggests, an LTSA is a contract between a plant owner and an original equipment manufacturer (OEM) which typically runs for six or 12 years. Basically, under the contract the OEM agrees to undertake scheduled and unscheduled maintenance and repairs for a fixed fee. This essentially transfers any maintenance risks to the OEM.
Figure 1. Increasing customer value through LTSAs
The evolution of LTSAs
Certainly maintenance has come more under the spotlight as the requirements on power plant have changed. In today’s developed power markets, many plants originally designed for baseload operation are now forced to operate in cyclic mode. This daily stop-start operation is harder on the equipment and can alter maintenance intervals.
LTSAs really came into play over the last half of the 1990s with the onset of deregulation and the subsequent boom in gas turbine sales. With the focus moving to financial returns, there was a need to reduce costs while having the best performing plant. This drove OEMs and owners to explore and develop more efficient technology.
The drive for higher efficiency saw the introduction of large advanced “G” and “F” gas turbines. Faced with the need to reduce operating costs while maintaining the reliability of these advanced turbines, owners turned to outsourcing turbine maintenance.
Mark Confer, director of Global Gas Turbine Service at Siemens Power Generation explained: “We began doing LTSAs when the technology began to outpace the customer’s in-house engineering and support capabilities. It was not cost effective to invest in more advanced [in-house] maintenance capabilities and they needed people who could provide turnkey service and maintenance.”
This view was echoed by two of the industry’s other large gas turbine manufacturers. Michael Volk, service sales and marketing director at Mitsubishi Power Systems pointed out: “The sophisticated nature of the high temperature technology means that people need to know what they are doing when maintaining these units. The high turbine temperatures etc. mean they have to know about thermal coatings, maintaining hot parts etc.”
Similarly, Knud Nielsen, vice president of customer relations Alstom Power Services Region 3, commented: “Operators and investors were looking for technical support, especially with complex machines. In the event of unforeseen circumstances, they want to be sure that the parts and people are available to do the work. It is important that they have the certainty that they can run the plant with high availability.”
Yet the growth in LTSAs has been driven by more than just a lack of operator knowledge of new technology. Many argue that the main driver is cost control. Owners and operators see LTSAs as part of their strategy to manage risk by providing long term technical and financial certainty.
From a financial standpoint, an LTSA provides owners with stable and predictable cash flows which makes a project more attractive to potential investors.
Speaking at Power-Gen Europe, Mick Avison, senior manager of project development, RWE Power noted: “Our main driver [for entering into an LTSA] is to control costs, present and future. It is true that we become locked into a contract for six to 12 years and run the risk of someone manufacturing parts cheaper than the OEM, but the OEM is also locked into prices and cannot easily take advantage of charging higher prices if the market becomes more favourable to the vendor… the principle is that long term agreements provide higher stability and certainty no matter who they are contracted with – whether it is with the OEM or a smaller competitor.”
Figure 2. The fuel systems, combustion chambers, blades and vanes could all need extensive repairs after 24 000 hours
RWE also argued that favourable prices for parts and labour can be obtained through a well negotiated contract, thus reducing costs and improving returns. The owner is also guaranteed technical support for future improvements and modifications to the plant.
Using LTSAs to manage risk is also an issue for financial institutions. Prior to deregulation, power generation was a utility business. But with the growth in IPPs and merchant plant, the financial people backing these plant wanted to know that the plant they were investing in would be in a condition to return an income which would allow the owner to repay a loan.
- Alan Baker, head of power investment at Credit Lyonnaise outlined the key points a bank was looking for when financing a plant. These were:
- Certainty of margins (revenues and costs)
- Plant reliability and efficiency
- Consistency of performance
- Through life asset value – security value.
From a financial viewpoint, healthy debt service cover ratio (DSCR) projection may give confidence to institutions to lend the funds at favourable interest rates thus improving shareholder returns.
On the technical side, an LTSA can provide comfort to lenders with respect to asset management strategy thus enabling the project to service the debt effectively. Technical support from an OEM also provides confidence to shareholders to invest knowing that the OEM is contractually bound to support technology long term.
During the discussion at Power-Gen Europe, Baker noted that an LTSA “would almost certainly be a condition of the financing for a new CCGT plant which is being debt financed”.
Certainly in today’s power business, everyone is a lot more careful with their money. As Mike Stonell, vice president of power and utility engineering, American International Underwriters (AIG) pointed out: “The energy sector of the insurance industry is still going through tough times, with few financially secure insurers available.”
The issues for the insurers are similar to those of the lenders. For example, the insurance industry also needs to be assured that the owners are using qualified processes and original parts to reduce their insurance risks. an LTSA gives comfort to insurers through shared risk and reduced exposure. Further, reduced lead time for spare parts through contractual agreement reduces exposure to business interruption losses.
Notably, Stonell said: “Generally insurers are in favour of LTSAs, but generally only consider them necessary for “F” machines and later. Following a breakdown there is more security in obtaining spares. Also, the price of replacement parts are usually defined in the contract.”
A key question addressed by Stonell was: what difference does an LTSA make to your insurance? “Insurers will definitely look on a risk more favourably if it has an LTSA. If it is a ‘difficult’ machine it may make a difference as to whether it is insurable or not but it is unlikely to change the insurance rate.”
OEM or third party?
Although LTSAs have a number of benefits such as price stability and certainty, they can also have drawbacks. Depending on how far the equipment is in its life, using a third party to provide maintenance as opposed to an OEM can be a cheaper option. “LT contractual arrangements can prevent cost savings on particular parts of the maintenance at a later date,” noted Baker.
Even the OEMs agree that there is a role for third parties. Confer commented: “Customers first need to assess their strategy. There’s a role for third parties in mature or low specification technology. At Siemens, we’ve created a division called Turbo Services Network (TSN) which allows us to provide maintenance on competing technologies.”
But if, or when, to turn maintenance over to a third party is not an exact science and, despite the savings, can still have risks. “There is no set time where you can say ‘after this time you can do your own maintenance’. You also have to be careful of third parties who can only maintain one part of a machine or provide certain services on the machine. We offer total maintenance, outage planning, plant improvement programmes etc. as a core competence,” said Nielsen.
The issue of total maintenance capability is an important one. Volk noted: “Third parties have attempted to provide parts and repairs for many years on equipment that has matured. At the end of a six or 12-year LTSA an owner could consider turning very limited risks over to a third party or do the maintenance themselves. But we can repair more than just a specific part. We have the depth to backup a customer’s operation with engineers, advice and support from our engineering and R&D departments. What’s more, we cannot act in the same way as a third party. OEMs have a reputation to protect and have to be scrupulous in how they treat their customers. If something goes wrong we incur excessive costs. In the past we have seen smaller repair houses taking some risks and customers have suffered. Ultimately, it is the customer who is left holding the bag because the repair house can walk away. We can’t do that.”
Certainly OEMs, potentially, have a lot to lose when undertaking LTSAs. The biggest cost at a plant, besides fuel, is the repair and replacement of the combustion parts of turbines. This is therefore a major issue when the customer is deciding what to do in terms of maintenance. “What we, through LTSAs, do is take the life risk and repair risk of these parts. We are also taking operational risks because if the plant doesn’t run, we don’t get paid,” said Confer.
With such risk and sometimes financial investment in a plant, it is important to the OEM that the plant is up and running with the maximum availability. Most OEMs plan maintenance schedules according to the machines equivalent operating hours (EOH). EOH takes into account real running hours along with the number of starts; number of load changes; fuel used e.g. number of fired hours on gas or oil for dual fuel machines etc.
Traditionally there are three types of inspection: A, B, and C, where each inspection would be carried out after a certain number of EOH. The first two are essentially preventative inspections – A is a visual inspection, while in B a few elements maybe opened in order to look at larger parts. These two visual inspections provide an overall image of the condition of the machine and provide the basis for scheduling the main outage and C inspection at which time parts would be replaced. A C-inspection would typically be performed in 25-35 days.
During an outage, time spent at site is the biggest risk to the OEM. Therefore most OEMs work on what is often called a roll-in, roll-out concept where spare parts are rolled in to replace turbine parts which are rolled-out and taken away for repair. No repairs are done on site. Confer explained this philosophy: “At say 24 000 hours, we know there is going to be a good chance that significant repairs will have to be done. The fuel systems, combustion chambers, blades and vanes could all have extensive repairs that need to be done. The outage duration is minimized by taking out all the parts that need to be inspected and repaired and doing the repairs off line. It is important to have spare parts on hand. We have a pooled inventory of parts. This saves the customer having to initially buy a large number of parts to roll-in during an outage or to be used as a replacement in an emergency.”
LTSAs can be structured in a number of ways to cover the preferred maintenance regimes but they all have a number of core elements:
- The supply of parts by the OEM
- The repair/refurbishment of parts
- Turnkey outage service including the provision of a dedicated programme manager with field engineers and technicians
- Diagnostics and support.
The cost of these contracts varies according to what customers want. “While an event-driven type of contract gives the OEM a plannable workload, one which covers emergency operation is more risky. We offer these agreements but our risk of having to deal with unforeseen repairs is reflected in the premium.” said Nielsen.
Figure 3. Siemens Power Diagnostics � a tool for risk mitigation
There is now a trend to extend the scope of individual LTSAs to cover a group or fleet of plants. This would allow the utility to gain economies of scale and eliminate variations in contracts. This was a move being adopted by Canadian utility TransAlta and US developer AES. Volk noted, however that: “The existing agreement would have to lend itself to adjustment. But we would be very flexible.”
Siemens noted that it was seeing a similar trend having signed a fleet agreement with US generator Reliant.
This type of fleet agreement naturally lends itself to the technology that is already being used to improve the OEMs service to the owner. Remote diagnostics is forming a key part of OEMs’ maintenance strategy.
All the manufacturers have developed advanced remote monitoring centres which allow the state of a machine to be monitored. The centres are typically web-enabled, therefore letting the OEM and operator look at the same information. This allows the OEM to inform the owner of trends he might see to allow him to take corrective action and thereby maximise the plant efficiency. Alstom notes that it monitors over 20 000 MW of installed units from centres in Switzerland and Sweden.
With these developments which allow fleet management and predictable maintenance costs, it would seem that LTSAs are here to stay. The key to their success is that they bringing certainty to an increasingly uncertain market.
- For the full presentations and key questions and answers from the Power-Gen Europe O&M panel session in Dusseldorf, please open the interactive CD-Rom in this issue.