: Adam Nicolopoulos, president and chief executive of ADN Capital Ventures,...

PV Insider’s PV Operations & Maintenance 2014 event that took place recently in San Jose, California revealed some home truths about how plant owners and respective O&M budgets are perhaps unknowingly cranking up their risk profile.

Panelists within the risk and funding sectors highlighted why “penny pinching” budget strategies are potentially back firing on the industry’s cost effectiveness record and how optimising energy performance can in some cases boost your project’s equity several times over.

The premise of the event’s six month research exercise highlighted that the maturing nature of US solar means there is now greater scrutiny on what operators can do to reduce bank costs in their operations and maintenance strategies, even after the project is completed.

O&M is a full circle investment

If you are a US developer you would probably want to speak to a bank such as Wells Fargo before you start building your project.

But if you are a smart PV developer then you might want to catch up with Jon Previtali, Wells Fargo vice president of environmental finance, after you have finished your project, too.

Wells Fargo specialises in sale-leaseback deals, which involves acquiring third-party PV assets and making a profit on them for 20-year periods.

This means Previtali has a keen eye for successful operations and maintenance (O&M) strategies, and a grab bag of tips for plant owners. Using good equipment and testing systems are obvious pieces of advice. But not all are things you may have thought of.

At the recent PV Insider PV Operations & Maintenance USA event Previtali explained the types of funding and operational opportunities that the bank finds attractive: “One of the most important things that we look for in funding both utility scale and distributed rooftop solar power systems is the ability to have a hot backup service.

“We don’t need to be able to switch one operator to another operator immediately, but we should have the ability to do that within a short period of time, like a matter of days.”

To make sure it is covered against O&M failures, Wells Fargo installs parallel monitoring feeds at its sites and makes sure any service can be replicated at the same cost or less than the original, with alternative providers kept on standby with a small retainer.

All in the details and having a back-up plan

Engineering, procurement and construction (EPC) contractor handover documentation is also valuable to the bank, along with detailed contracts, a complete list of obligations and contacts, a ticketing system and an operations centre monitoring supervisory control and data acquisition.

“We like to see a performance guarantee,” says Previtali. “That’s expected. But we also like to see the operators share the upside. We only need a certain amount of money to cover our lease payments and the earnings after operating expenses can be shared by the operators.”

That creates an incentive to optimise energy performance, he says. However, Wells Fargo also takes a keen interest in the financial performance of its projects, using coverage ratios.

These are essentially the earnings before interest, taxes, depreciation and amortisation divided by debt service, tax equity distributions or lease payments.

Extremely valuable information

Wells Fargo calculates this information on its own and to get it direct from operators would be “extremely valuable,” Previtali says.

Perhaps surprisingly for a bank, Wells Fargo is also wary of penny pinching when it comes to O&M cover. “One of the problems that we are having right now is we suspect a lot of the budgets that have been set for O&M are too low,” chides Previtali.

“This is very problematic because it doesn’t give the project enough cash to pay for a backup O&M service if that is necessary. It’s very important for us to have enough money in the project to have a backup.”

Another speaker at PV Operations & Maintenance USA 2014, Frank Frazar, stressed the importance of O&M in reducing risks that could have a significant financial impact.

“Maybe the inverter goes out and only costs USD$30,000 or $40,000,” says Frazar, an assistant vice president of underwriting at Hartford Steam Boilers, an equipment breakdown insurer belonging to Munich Re, “but it causes business interruption that costs hundreds of thousands.”

When underwriting a project, insurance engineers look not just at ‘normal loss expected’ events, such as inverter failures, but also probable maximum losses and maximum foreseeable losses, up to the complete destruction of a plant.

O&M practices that reduce losses

O&M practices that reduce the chances of these losses occurring can help cut ongoing insurance premiums. Data from the German Insurance Association shows fire is the most costly cause of loss, followed by storms and over-voltage, but most of these events happen rarely.

Overall, says Michael Roy, a principal engineer at Hartford Steam Boilers: “Our highest loss is electrical. Electrical equipment needs four things: you need to keep it tight, dry, cool and clean. Keep it tight and keep dry: those are things that are directly impacted by O&M.”

Fellow PV Operations & Maintenance USA 2014 participant, Adam Nicolopoulos, president and chief executive of ADN Capital Ventures, stressed the value of O&M in creating profits for plant owners.

“Let’s say you’ve got a project that has a debt-to-equity ratio of five points of debt capital for one unit of equity,” he says. “For every percent of efficiency improvement in the project’s operating performance, the benefit to the equity can be five-fold.”

For Nicolopoulos, O&M considerations are so important to the long-term financial success of a project that they need to be considered as soon as possible. “There is a lot of pressure to economise, but this is money extremely well spent,” he says.