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Dissecting the pros and cons of 15+ year service contracts

We’re delighted to welcome back Christian Holmgaard, CEO and Senior Consultant Project Manager for WTG Partners. In this issue, he turns his critical eye to the thorny issue of long-term contracts.

Today several of the major wind turbine manufactures offer long-term OMS contracts with coverage for scheduled and unscheduled maintenance, with all spare parts and components included, and even an availability guarantee.

This should in theory cover the client’s investment for most financial and operational risks and our experience is that the OEMs have trained their clients well – as today, most long-term service contract holders fail to see the importance of diligence in technical and operational aspects.
This means that many feel they do not need to analyse, inspect or in any other way be involved in the technical and operational aspects of their turbines because as they say; we have a 15 year warranty and maintenance contract and we are covered by these contracts in all aspects and doing further to assure safe operation and maximize output from the plant is not needed as there are insensitive payment structures that will motivate the OEM to do this for us.

It has been a very attractive offering and a majority of the new turbine contracts has been signed with the above-mentioned service contracts. However, one of the issues is that the wind turbine market is suffering, and several of the wind turbine manufactures are operating with loses and have difficulties servicing their debts.
Imagine that your service providers are in default and the service has not been done according to the schedule, industry standards and service manuals – or at all, for that matter. This could be the result of a company in financial crisis and if you, as a turbine owner, do not perform periodic quality assurance on power output as well as the technical aspects of the turbines, you may not detect this neglect of your assets until it is too late. But by staying on top of your warranty and service provider you have the ability to take appropriate measures in a timely manner and if needs-be, make use of the bank warranty, which is used to back the warranty and service contract.

The trouble here is that most of these contracts have a cap of 5%-15% of the EPC purchasing price or the yearly value of the service contract. If your turbines were operating for any real amount of time at a compromised state or the service had been neglected, you would quickly cap out on compensation, and by diligently monitoring the work in the field you will never be more than one quarterly payment out of pocket and as such you are able to minimize your losses.

I am not saying that any of the larger OEMs will fold in the foreseeable future, but if they do can you afford to take over the cost of operation and potentially the need to perform capital investments in fixes such as gearboxes or generator replacements out of pocket? Remember, the service provider should be the one setting aside means for this type of situation from your quarterly or annual payments.


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