A Multi-Year Contract for a New Era of Power PlantsRobert Rapier
The multi-year contract has evolved in response to customer demands in an era of deregulation in the power industry.
Multi-year contracts have generally been popular among plant managers because they pushed the burden of responsibility for scheduling and conducting basic maintenance functions from the plant to the OEM. However, as federal and state governments have begun to deregulate electric utilities, power producers have found their needs beginning to shift. As a result, some OEMs have made changes to the traditional multi-year contract to satisfy the needs of today's power plants.
It's clear competition and environmental regulations have impacted how power producers must run their plants. That, in turn, has generated a need for variations on the traditional service agreements between the power producer and the OEM. New multi-year agreements (MYAs) often include provisions that can be utilized to address current power plant challenges, including:
Beyond the routine maintenance of yesterday's multi-year contract, a need for reliability and performance guarantees has been on the rise. In short, MYAs may now emphasize asset performance and outputs. Deregulation has introduced competition into the picture where it previously didn't exist. Because a plant may no longer be the only power producer in the market, it must be able to be rapidly ramped up or down in response to fluctuating demand. This has become a pressing issue as more intermittent wind turbines are connected to the grid. As wind speeds pick up and die down, a producer may need to change output quickly, placing unusual stress on plant components.
Today, many MYAs include reliability and performance guarantees covering equipment such as heat-recovery steam generators and other key components. These guarantees help ensure plants run at maximum efficiency and reliability, giving the power producer an edge in a more competitive market.
Oftentimes, the least efficient plants are the first ones idled during times of lower demand, making the efficiency of power production increasingly important. In addition to reliability, today's power producers must focus more intently on the cost of production.
With this in mind, some contracts now include incentives for maximizing the thermal efficiency of power plants. This has become particularly relevant for some coal-fired power producers due to pressure to reduce carbon dioxide emissions. A plant performing at higher thermal efficiency has reduced coal inputs for equivalent power production, reducing the carbon dioxide emissions per unit of power production.
Flexibility around the duration of agreements has also risen as many plant managers anticipate a fast-changing landscape over the next five years. Billing structures and payment terms can now be negotiated in many MYAs.
Coverage beyond the key power plant components has also become vital. With MYAs, plants share the business risk with the OEM and receive additional operational support as well. MYAs can be customized to meet specific plants' needs and business outcomes, and help connect the plants' physical assets with digital technology.
As the power industry has undergone a tremendous shift over the past two decades, so have the terms of multi-year agreements. Plant managers planning for the future should seek OEMs that have kept pace with the industry's evolution to deliver greater value through flexible MYAs.
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