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Caring for the next generation … the case for asset management

Caring for the next generation … the case for asset management

Australia is undergoing a dramatic structural shift in its energy generating base as coal moves toward its inevitable shutdown and replacement with competitive clean technology. In 2018 the percentage contribution of renewable energy to total annual electricity generation was 21% against 13.47% in 2014 (the equivalent of an additional 16,595GWh from renewable sources), and this is just the beginning. By the end of 2018, 14.5GW of new generation was under construction or financially committed. A series of new state government programs suggest that 2019 will eclipse the records set in 2018.

Even though the numbers look very positive for the renewable energy industry, it is important to learn from the mistakes made in more mature markets and keep in mind the complexity of Australia not only as a market but also as a country.

Australia represents a challenge in so many different ways that it is difficult to identify another market that fully compares. Australia is home to the world’s longest interconnected power system – from Port Douglas in Queensland to Port Lincoln in South Australia – a distance of around 5,000km, as opposed to many European countries where the transmission network is meshed and of far higher density.

From the generation/demand perspective, a typical level of demand for electricity across the NEM is about 25,000MW on a business day of average temperatures – and there is currently ample supply available in the already overloaded system to meet this level of demand. In fact, electricity supply only comes under pressure for a few hours on just a few days of extreme high temperature each year.

Australia’s electricity system can therefore be pictured as unique in terms of its long distances, low density and long, thin structure – and its small demand in comparison to the continuously increasing generation pipeline.

From the investment point of view, these considerations lead to challenges with potentially significant financial impacts, such as declining marginal loss factors (MLFs), project curtailment and more onerous grid connection requirements.

All these issues are present before raising the pure logistical challenges associated with the country’s remote location in relation to other mature markets and the individual remote situations of most plant locations, often far from a readily available supply chain. Resulting procurement timings are long and maintenance costly.

Challenges ahead

After a brief market overview it becomes obvious that even though Australia is a vast country with exceptional solar and wind resources it is a challenging environment for investment that requires strong expertise and hands on management. From the investor’s perspective, in order to ensure the successful completion and entry into operation of a project – and hence achieve investment targets – investors and asset owners need to build the right strategy to optimize the performance and operation of the project and ensure its capabilities to reach those targets.

Rather than a traditional short-term investment approach where taking projects from construction into operation combined with appropriate financial structuring leads to attractive investment returns, successful investment in the Australian market is proving to require a longer-term and deeper management perspective. Focused hands-on asset management and monitoring – both during and after construction, ensuring compliance with the technical standards and industry best practices – are critical to drive projects that anticipate rather than only react to regulatory and market requirements and changes.

In order to build the right strategy, the first step must be to identify and differentiate the main stakeholders involved in the project operation:

Asset owner: Typically, an asset owner will be a financial investor with strong experience in evaluating project risks and negotiating financing and transaction contracts with a senior high-cost team. Often the asset owner will rely on external expert advisors to support this execution process, but after acquiring the asset may or may not have the experience or resources to manage all facets of the operational supervision and management of their assets.

Asset manager (AM): Asset management is the ongoing management of financial, commercial and administrative tasks necessary to ensure optimal financial performance of an asset. While this may be carried out by the asset owner, the need for wide-ranging expertise in the technical, financial, monitoring, market trading and compliance elements of a project have made outsourcing of this function to dedicated service providers the staple in most mature renewable energy markets.

EPC contractor (EPC): Engineering, procurement and construction (EPC) is a particular form of contracting arrangement used in some industries where the EPC contractor is made responsible for all the activities to project conclusion, from design, procurement, construction and commissioning to handover of the project to the asset owner. EPCs typically provide wide-scope performance and defect warranties during the first two years of plant operation, making this a critical period for the asset owner to ensure that it identifies all potential asset issues before “final acceptance” of the asset from the EPC.

O&M contractor (O&M): Following the construction process, operations and maintenance (O&M) is a set of activities of technical nature that enable power plants to produce energy in line with pre-agreed key performance indicators (KPIs). Typically, O&M contractors will provide strong service level commitments for remediation of asset issues, but with limited covenant strength relative to the asset value and, in the absence of asset management, it can be difficult to validate the performance of these service level commitments.

In relation to the project timelines, the EPC contractor will typically be involved in the project operation during the two years following practical completion, to cover the warranty period of the project. In parallel, operation and maintenance and asset management will look after the project following the commissioning phase.

The operation of the project from the O&M and AM perspective cover a wide range of activities that can be split as follows:

Asset management: Project monitoring, contract management, market participation, operations management, regulatory compliance, stakeholder management, finance and accounting.

Operation and management: preventive and corrective maintenance, performance monitoring, HSE management, landscape and environmental management, spare parts management.


Project overview

The variety of activities included to ensure the proper operation of the plants in the asset management, and operation and maintenance, highlights the fact that assets are not self-maintained, and there is life after the project commissioning.

In most scenarios, asset owners may not be prepared to cover all the different areas that require their attention and rely on EPC and O&M contracts alone, without hands-on asset management. This however can lead to a failure from asset owners to benefit from the contractual protections and service level obligations.

Filling the gaps between the different parties involved in the project, and coordinating the operations on site, will become vital to ensure all scenarios are correctly managed during the project lifecycle.

Where there’s overlap

Despite the different scope of work, there is a degree of overlap between the AM and O&M roles. Asset managers must have a technical background to be able to supervise the operations on site by the different stakeholders (O&Ms, EPCs, network service providers, etc). Without understanding the physical engineering requirements, the complexity of the construction and maintenance contracts, and the impact on the financial performance, an asset manager will be ill equipped to identify and enforce contractual projections and service level obligations to ensure optimal investment outcomes.

On the other hand, O&M contractors should be able to combine technical expertise with a good understanding of commercial and financial side of the project, and how a low performance in relation to their contractual responsibilities can be translated to availability-liquidated damages or performance-liquidated damages.

A generator’s priorities

Focusing on the Australian industry, and the challenges projects are facing due to the particularities of this market – beyond the already known issues such as generator performance standards, marginal loss factor and all the difficulties around the commissioning process – there are important topics that require the generator’s attention through the project lifecycle.

From the asset management perspective, a key factor in an asset owner’s capability to optimise the value from its investments is establishing the right strategy around life expectancy and the risks associated as the asset degrades. Optimising each phase of an asset throughout its entire lifecycle and anticipating developments are effective ways of increasing returns and reducing risk exposure, using the following strategies:

  • Project compliance maintenance: Managing and reviewing project documentation to ensure assets withstand the electrical, environmental and operational demands that will be placed upon them play a fundamental role to guarantee the long-term project health. Identifying changes to technical conditions at site during the evolution of a plant in operation may be critical to avoiding major compliance risks, particularly in the areas of health and safety, manufacturer warranties and development approvals, not to mention generator performance standards compliance. Significant recent regulatory tightening around qualification of contractor personnel in Queensland is indicative of the regulatory focus on quality standards in the industry. In a similar way, ensuring that plants deliver compliance with grid and energy market standards, not only at commissioning but through operational life, will be critical to seeing those standards evolve to encourage rather than supress the industry.
  • Operations management and supervision: Awareness of where an asset sits along its operations phase, and understanding what this means in regard to the current site health, and how this relates to the contractual requirements.
  • Enforcing contractual terms and supervising the contractor’s operations: It is becoming vital in a market where the resources (both manpower and equipment) are quite limited and competitiveness is forcing contractors in some cases to cut corners in order to match the “market price”. Anticipating and pre-diagnosing faults and equipment failures, sometimes even in very low-cost components, is especially critical in the Australian context due to procurement timelines and site sizes meaning hundreds of thousands of dollars can be at stake when an asset owner, or its contractor, is ill prepared for a failure event.
  • Performance monitoring: Driving asset management decisions through data to prevent failures.
  • Data analysis, and the use and understanding of the right metrics and key performance indicators, can help to minimize loss of production through a prompt identification of faults that may require corrective maintenance. As above, this is critically important where procurement is more challenging and such monitoring and fault anticipation should not be left only in the hands of O&M or EPC contractors, who typically stand to bear additional costs when such issues are identified.
  • Capital expenditure and operating expenditure management: Proactively planning operational and capital costs, and the management of reactive costs through preventative actions – that is, reducing corrective maintenance through investment on preventive maintenance and data analysis.
  • Learning from experience: Learning from failures and understanding an asset’s common failure modes, the effect of faults and the steps to be taken for a prompt resolution. Asset managers overseeing multiple assets may bring the benefit of applying knowledge from fault identification or resolution across multiple assets enabling anticipation of up-coming issues.

Shared objective

With all the above, is the role of an asset manager is to facilitate the successful and high-quality operation of the projects on behalf of the asset owners. This approach is critical in a strongly regulated industry where any failure of the renewable energy generators to meet compliance standards could be the trigger for further escalation in regulatory impediments to investment.

Failure to manage and comply with critical issues such as market participation, development approval or health and safety could not only affect a single project but the industry as a whole. It is the owner’s responsibility to ensure assets are properly managed.

Australia’s renewable industry has achieved a remarkable feat, funding and building a multibillion-dollar multi-gigawatt-scale generating fleet within not much more than 24 months. However, the successful integration and operation of the first generation of renewable energy generators in Australia will be the crucial driver to successful acceptance of renewables in the market, and the first step in a smooth structural shift in Australia’s energy infrastructure to bring competitive clean technology.

It is not the past 24 months of growth that will define Australia’s generation mix but the next 24 years, and more, of high-quality management and performance of our asset fleet.


Beatriz Toribio López has over seven years of experience in the renewable energy sector, including monitoring systems, contract and site management and operations supervision for solar sites. She was a founding employee of solar specialist Bluefield Services and worked in electrical supply chain management at ABB. Beatriz has postgraduate qualifications in industrial engineering, renewable energies and business practices.

Blueshore provides asset management services for renewable energy assets. The company has provided technical, financial and commercial asset management services to over 750MW of projects across Europe and Australia.