Operations

Fail to prepare, prepare to fail: Operators will inherit the impact of greenflation – and they must be ready

BY EVGENIA GOLYSHEVA • VP OF STRATEGY AND OPERATIONS • ONYX INSIGHT

In their quest to lead the fi ght against climate change, clean energy industry stakeholders have had to overcome no end of challenges. And in doing so, huge progress has been made; the levelized cost of solar and wind energy has tumbled in the last decade, technology has evolved rapidly and now — at such a critical time for our planet — renewable energy sits right at the heart of the energy transition. It is undoubtedly seen as the weapon of choice for governments seeking to rapidly decarbonize their energy systems while enhancing their security.

But one very signifi cant challenge to the clean energy sector is increasingly coming into focus: greenfl ation.

What is greenfl ation?

Defi ned in simple terms, greenfl ation is the sharp rise in the price of materials like metals, minerals like lithium, and other resources such as labor, energy and fuel that are used in the creation of renewable energy technologies and projects.

There is presently no single trend behind price increases experienced by wind sector stakeholders. The COVID-19 pandemic has placed global supply chains under strain, leading to rising raw material costs and global labor shortages. The war in Ukraine and subsequent sanctions

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on Russia has compounded this — particularly when it comes to the costs of energy needed to produce and ship materials.

In turn, this has meant higher manufacturing and logistical costs throughout the value chain, including for components, capital equipment and technical resources.

According to various outlooks, forecasts and indices, commodity prices are surging — in spite of renewable energy development. Energy commodity prices published by The World Bank in March 2022 have surged 63.4% over the last 12 months, while non-energy commodities, including metals and minerals, increased 22.7%. Increases in both energy and non-energy commodity prices are causing renewable energy project development costs to rise.

The Refi nitiv CoreCommodity CRB Index, a composite measure of commodity prices, was up 46% on the year at the end of January, the largest one-year increase since 1995, when comparable data became available.

There are also demand-led causes. A push for new wind projects as countries seek to reach their net-zero goals, alongside a scramble to install as government subsidies begin to disappear, has stoked fi erce competition for limited assets and services. The supply chain, including maritime and maintenance service providers, has been stretched to capacity, even as their own costs increase.

International Monetary Fund research published in November 2021 stated that “the world’s historic pivot toward curbing carbon emissions is likely to spur unprecedented demand for some of the most crucial metals used to generate and store renewable energy in a net-zero emissions by 2050 scenario.”

It found that costs of these metals will surge, with the potential for lithium to rise from its 2020 level of around $6,000 per metric ton to about $15,000 late this decade — and stay elevated through most of the 2030s. Cobalt and nickel prices, the IMF says, could also see similar surges in coming years.

And a report published by Wood Mackenzie in August last year — prior to the Q4 gas price surge — highlighted that commodity price increases, coupled with a four-fold rise in logistics costs, would see turbine prices go up by 10%.

Greenfl ation is hitting OEMs hard

OEMs have been particularly impacted, with many reporting profi t warnings last year and posting huge losses through the fi rst half of 2022. This situation is unsustainable — OEMs are the lifeblood of the wind industry and without them nothing can be done.

It isn’t all bad news. These are temporary growing pains, arising partly from wider infl ationary pressures, but also due to growing demand. Renewable energy is scaling rapidly, with lower cost fi nancing available to green businesses from environmentally minded fi nanciers. That is cause for celebration.

Wind energy will overcome this challenge, as it has many others. However, while greenfl ation has a more immediate and signifi cant effect on developers and OEMs, owners and operators will inherit projects with tighter margins within the decade.

A future problem for operators

That is why building a robust understanding of effi cient operations is key to mitigating the effects of today’s greenfl ation, while continuing to drive down costs and improve effi ciencies in years to come.

With O&M accounting for almost 60% of total operational expenditure, wind project owners and operators can mitigate against the impacts of greenfl ation by optimizing their O&M strategies.

“Wind Power’s Greenfl ation Frustration,” a recent report by ONYX Insight, takes operators through the four steps they can take to bolster predictive maintenance programs, in turn reducing costs and safeguarding profi ts as greenfl ation begins to bite. A best practice predictive maintenance program could reduce OPEX costs by 17% on average.

Despite greenfl ation, operators can boost their portfolio’s long-term profi tability by thinking holistically — reducing labor and logistical costs, and component replacements.

Four steps that could ease operators’ future greenfl ation pain

There are four steps — underpinned by a series of self-analytical questions — that operators can take to safeguard against the long-term impacts of greenfl ation.

The fi rst way to do this is by looking at base level capability. A robust and reliable predictive maintenance strategy involves understanding the risks and opportunities for improvement across a wind portfolio. Most asset owners already have various software products deployed across their fl eet. They can start with gap analysis to identify areas for improvement.

The second is to build a greenfl ationproof business case. Greenfl ation is an evolving trend, but the risk profi le of a wind portfolio also changes with time. The historical performance of a wind farm does not reliably indicate the future performance since failure rates are not static.

By utilizing accurate, turbine-specifi c technology to predict failure rates, asset owners can forecast and implement solutions before reliability issues start to surface.

Third, operators should carefully select predictive maintenance technology.

OPERATIONS

Siemens Gamesa

Specifi c technologies that enable predictive maintenance include software tools such as analysis dashboards and data management platforms, sometimes enhanced by additional hardware such as vibration, oil quality/contamination and audio sensors.

Operators need to assess track record, accuracy and reliability, what components are covered and lead time on fault detection and the technology’s ability to manage diverse data streams (SCADA, sensors, non-structured data).

And fi nally, they need to implement and integrate a program. The relatively slow adoption of digital technologies in wind is in part due to owners and service providers relying on case studies instead of backing operational decisions with statistical analysis. Performance statistics are key to a systematic approach, enabling operators to create KPIs at the implementation stage that track the ability of digital technologies to achieve and maintain desired business outcomes, such as production-based availability, climbs per wind turbine per year, labor hours per component, and so on.

Enabling a holistic data-led O&M strategy allows operators to identify opportunities to pool resources, such as consolidating transport costs and technical resources or maintaining a joint inventory. Data integration — and sharing — is key to achieving this.

Fail to prepare, prepare to fail

So the old adage goes. Greenfl ation is not a short-term consideration. It represents a rebalancing of costs across the wind industry in line with wider macroeconomic trends. It sits alongside critical challenges such as the looming skills gap and increased exposure to merchant markets.

Wind farm owners globally are demonstrating that digital technologies are essential in improving asset profi tability, reducing uncertainty in energy production and optimizing operational effi ciency. Now they need to ensure that as they inherit the challenges currently being posed to the wind industry by greenfl ation, they have the capabilities to deal with it by being forensic in their approach to operations cost management. WPE