Energize RE 4: Renewable Energy Supplement - March 2016 – Page 32

Management/Planning

In order to describe the different organisational structures that are in use to operate a renewable energy power plant, all required tasks will be broken down and categorised. For the purpose of this exercise, five basic categories will be used and the main tasks under these categories will be mentioned (Table 1). The list of subtasks is not fully inclusive but merely serves to specify the category. It must be noted that individual IPPs allocate some subtasks in different categories. For example, it possible that the care of roads can be allocated to the operation and maintenance (O&M) contractor for one IPP and to the site manager for the other IPP. The categories include:

l Owners representation

l Site management

l Commerc ia l management and administration

l Operations and maintenance

l Economic development initiatives

DIY vs. outsourcing

The main challenge when setting up the organisational structure of an IPP is to list and categorise all talks and find the right balance between outsourcing and DIY. Theoretically every task in every category can be performed by the project owner. The task most likely performed by an external contractor in the early lifecycle of a RE power plant is the operations and maintenance of the power generation equipment in order to retain the manufacturer ’s warranties. However, just because a task can be performed DIY by the project owner does not mean that it ’s beneficial to do so. To find the right balance between in-house and outsourcing, the power plant owner has to understand his own strategic intention and comparable strength and weakness. It is helpful to consider the following questions in order to understand what role the power plant owner wants to play.

Organisational concepts for the asset management of renewable energy power plantsby Florien Kroeber, 3Energy

Renewable energy (RE) power plants that deliver electricity to the national grid and that are owned by independent power producers are a new concept in South Africa. Only since the first successful projects of REI4P achieved commercial operations date (COD) in late 2013 and early 2014 have we had a local industry of private entities whose business it is to generate and sell electricity. Due to the lack of an IPP industry, South Africa had, up until this time, no established asset management industry and skills to operate a RE power plant. In addition, the new project owners had very different ideas of the required organisational structure to run an IPP power plant. This article will describe the different organisational setups that IPPs have chosen to operate their asset and lessons learned this far.

l Do we want to hold the asset or retain the option of selling on? A new investor tends to discount the value of an asset if the old owner is the main custodian of operational knowledge. A power plant that is operated by independent entities is easier to sell on.

l Are we big enough to do certain tasks in-house? Building up a comprehensive asset management structure requires a big enough number of power plants to work efficiently. Otherwise a power plant will be disadvantaged due to a slow learning curve and the inability to share resources and experience. It is further difficult to level the utilisation of staff on a small number of power plants. The utilisation efficiency of staff and equipment increases with the number of power plants.

l What are our strength and weaknesses? Most IPPs have core competencies that are more biased toward managerial, technical or social tasks.

l Are we comfortable with the potential conflict of interest? Power plant owners that take a high degree of operational responsibility are compromised in their supervisory function as board members. This can lead to conflicts with other shareholder representatives.

l What is the most cost effective solution? With tariffs for RE decreasing, IPPs are more inclined to find the most cost effective solution to asset management.

Once the internal (DIY) and external (outsourcing) work packages are defined, it is crucial to find the right contractor and skills to perform the task. When seeking to employ

Table 1: Task breakdown and subtasks, asset management.

Task Subtasks

Owners representationPerformance monitor tier 1 contractor.

Facilitate communication with shareholder.

Site management

Data capturing, reporting, generations forecast and plant optimisation.

Contract monitoring including inspections of BOP and BOS.

Site management and standby.

Communication with grid provider, land owner, NERSA, DOE and other stakeholders.

Care of ground and security.

Compliance (Environmental, Health and Safety, Machinery Act)

Commercial management and administration

Accounting and budgets.

Secretarial and legal.

Management reports and reporting obligations.

Banking and payments.

Operations and maintenance

Generation equipment.

Electrical balance of plant.

Roads and buildings.

Economic development initiatives

Enterprise development.

Socio economic development.

Reporting.

Energize RE 4: Renewable Energy Supplement - March 2016 – Page 34

Management/Planning

own staff, the IPP will find that industry-specific experience is still scarce given the infant character of the RE industry in South Africa. It is often a challenge to attract potential employees to live in the remote areas where RE power plants are located. The fact that most parts of the local industry such as mining and automotive are decreasing their workforce rather than employing at the moment comes as a blessing in disguise, because it helps to free up qualified staff for the RE industry. When building up own capacity it is crucial to keep in mind that the workload on a power plant is highly variable and a team might be idling for most of the time and stretched to the limit at other times. It must be further considered that individual employees must not become the sole and pivotal holder of operational knowledge. When losing such a pivotal employee, the efficient operations of the power plant could be jeopardised.

Those are some of the reasons why most IPPs will decide to outsource a great majority of tasks to external specialist contractors. Although the market is still young, the IPP will find a number of South African-based companies that offer asset management services. Most of those companies are affiliated to international companies and therefore offer a comforting element of track record. Most asset managers are specialised to a certain element of the asset management scope such as electrical infrastructure, commercial administration or site management; others take a more holistic approach and operate across several categories.

Asset management fees can be structured in a number of ways. Some tasks avail themselves for a performance-based fee structure in order to align the contractors and owners interests. Many asset management contracts include fixed fees and a performance incentive that can be based on electricity generated or plant availability. Other contracts just include a monthly mixed service fee. In many cases a combination of monthly fixed fee and annual performance incentive is the best compromise for both parties.

When outsourcing services, the IPP will have to make sure to keep ownership of data such as maintenance schedules in order to have the flexibility to change the asset management contractor without losing crucial information.

Existing organisational setups

The IPP market in South Africa has developed a great variety of organisational structures to manage and operate a renewable energy

power plant. We can find models where four out of five categories are outsourced and others where only one out of five categories are outsourced. In the beginning, project owners tend to keep more tasks in-house, just to let go of tasks after some time. Project owners with a high number of power plants under control and a vibrant development pipeline tend to keep more tasks in-house. In those cases, it can often be seen that the care for operational power plants decreases in the times before submission of new bids.

The task category that is naturally performed by the owner is the “owner’s representation”. This includes the oversight of the tier 1 contractor, liaison with shareholder, lenders interface, etc. The number of tier 1 contractors can vary depending on the organisational setup, but will typically include the asset manager, economy development and O&M contractor. The owner’s representation category is in some cases covered by one of the shareholders employees who is seconded part time to the IPP and often takes the role of managing director. In other cases the owner’s representation is handled by a designated team. With the decrease in tariffs throughout the bidding rounds, the organisational structures get smaller without noticeable decrease in quality.

The one category that is mostly taken care of by a contractor is the O&M of the generation equipment (wind turbines, solar plant, etc). This task is taken care of by the OEM (original equipment manufacturer) for warranty purposes. The electrical balance of plant including medium voltage interconnections, switch gear and substation are sometimes part of this O&M contract and sometimes operated by a separate contractor or by the IPP.

In the very early stages of IPPs operating in South Africa, some power plant owners expected the O&M contract to cover the site management category in its entirety. This is clearly not the case and we see designated site management functions alongside the O&M. The security of the power plant site is another task that is often outsourced. The level of security varies vastly among different power plants from 24/7 access control to remote monitoring with CCVT.

The decision if any of the other tasks should be outsourced or not are often less obvious. Some owners find it unthinkable to outsource a specific task whereas another owner might consider that same task to be a no-brainer to outsource. Many IPPs gain greatly from outsourcing the commercial management and administration. This task category benefits extensively from the experience of an external

company whilst it provides a welcome check (four eye principle) on all processes and transactions. The benefits of an external service provider for this category are amplified when the service provider is specialised on renewable energy IPPs.

Another category that is being outsourced more regularly is the site management. This category avails itself to be outsourced because the work load is highly variable and an external contractor operating various sites will find it easier to level the workload between different sites. Another reason for this category to be outsourced is the fact that project owners find it challenging to keep the cost of the on-site team down to an acceptable level. Given the decrease in tariffs and the resulting profit squeeze, this argument becomes more prominent.

A diff icult category to manage is the economic development initiatives due to the fact that there is no international experience and no frame of reference on what is wrong and what is right. The South African experience with ED and SED initiatives come from industries such as mining where budgets are bigger and the initiator has the ability to employ large numbers from a community. Where initially many market participants have expected this category to be taken care of by external service provider only, it has proven quite popular to keep the tasks nested under this category within the IPP team.

Summary

Operating a renewable energy IPP is new to the South African business community. During the last 2,5 years the industr y has developed different organisational structures to respond to this challenge. We have broken down all tasks needed to operate a renewable energy IPP and created five categories. With the help of those categories, this article analyses the different organisational structures seen in the South African market this far, especially with regards to the different options of outsourcing and DiY. It is clear that each IPP has a different approach to asset management and the underlying structure. The right setup depends on the power plant owners strategic intend and ability. The growing market of experienced asset management service provider in South Africa gives power plant owners a substantial choice of high quality outsourcing options that can combine t rack record and attractive pricing.

Contact Florien Kroeber, 3Energy, Tel 031 301-6444, florian@3energy.co.za