Ensuring Plant O&M Expense Matches its Market Mission

Managing operations and maintenance (O&M) expense is a critical component in ensuring a company’s competitive position within the market.
By Cliff Watson | August 27, 2020

Managing operations and maintenance (O&M) expense is a critical component in ensuring a company’s competitive position within the market.  For biomass-fueled power generation facilities, it is of key importance that operating companies understand the market mission of each of their facilities and develop spending rationale that supports that mission.

Market mission can vary significantly from plant to plant, even within the same company. Numerous determinant variables can influence the mission, such as market opportunity and contractual commitments. The market mission, once understood, will help companies determine what is most important among the three keys to success: cost control, reliability and efficiency. Although all are important to the economic success of each facility (and the corporation), this article focuses on O&M cost control relative to plant O&M expense and its relationship to reliability.

An important balance exists between maintenance spending and reliability revenue (Figure 1).  It is typical, especially when operating with thin margin revenues, for operating companies to initiate cost reductions as the first step toward desired improvement in financial performance. Although this approach can produce initial positive results from a financial perspective, history and data have shown that underbudgeting eventually leads to increases in unavailability, expenditure due to high unavailability, commercial risk and lost revenue opportunity.

Once a unit experiences poor reliability due to underfunding, it generally takes several years and significant funding to return the unit to the desired operational reliability. Cost control is of high importance to be able to stay in the game. This begs the question, “What is the right balance for your plant?” 

There are a couple of key points that data review, analysis and experience reveal:

• It is not possible to “cost cut” your way to improved reliability.

• Maintenance cost is driven by reliability (or lack thereof).

Taking these considerations into account helps answer the balance question: The combination of effective maintenance spending and reliability revenue produces the best bottom line results for a plant.

It is unlikely that two identical biomass plants exist within a company, or even across the globe.  There are differences from plant to plant, including those with simple configurations to those with very complex operations, or fuel quality situations that can cause variance in spending above the norm.  Ultimately, the market does not care how complex a plant’s operations are, nor the quality of the fuel. What the market does care about is the price of the electric commodity, and how reliably the units produce. This is where the use of data and effective normalization can—and should—be used to appropriate spending.

Many factors enter the equation that should be considered to establish effective maintenance spending budgets. Differing forms of normalization can be used, depending on the capacity factor at which a unit operates.  The typical normalization for generating units operating at high capacity factors is on a production basis (megawatt-hour) denominator, whereas units operating at low capacity factors typically utilize installed capacity (megawatt) denominator for normalization. 

A third method of normalization that has proven to be very effective takes the following factors (and others) into account:

• Configuration: equipment installed, technology, size and age

• Fuel: heating value, characteristics (percent ash, sulfur, etc.)

• Utilization: Net capacity factor, net output factor, production levels, service hours and number of starts

Normalization of spending (Figure 2) can combine nonfuel O&M + CapEx (black line) with variance in unavailability Colors are too close; can't. This combining can help identify the sweet spot for the aforementioned balance.

A combination of the three normalization methods described above can lead to informed decision making when establishing plant budgets that will provide the right balance and satisfy the demands of market. 

Fuel Quality Impact
For power generation assets consuming solid fuels such as biomass, fuel quality is a significant driver of nonfuel O&M costs that must also be considered in establishing proper and effective budgets.  For example, consider the comparison of solid fuel units that consume lower-grade fuel (less than 8,400 British thermal units per pound (Btu/lb) or less than 19.54 megajoule/kilogram (MJ/kg) to those that consume higher-grade fuel (greater than 8,400 Btu/lb or greater than 19.54 MJ/kg). Depending on fuel qualities, the cost per megawatt-hour generated can be expected to be as much as 50% higher for the pulverizer or hammer mill components, with an even higher impact for the baghouse and nearly 35% higher for the precipitator components, if the unit is consuming a lower-quality fuel. 
Fuel quality can also have a significant impact on component availability. For example, utilizing the same comparative groups described above, the equivalent unplanned outage factor (EFOR) for pulverizer or hammer mill components can be expected to be approximately 25% higher for lower-grade fuels when compared to higher-grade fuels.

Plotting operating expenditures (OpEx) less fuel as a function of unit capacity factor can be useful in a company’s fleet management financial planning. Incorporating the cost versus utilization function (Figure 3) for each unit in a fleet can refine a company’s active fleet dispatch or long-term planning utilization models to improve the net cash margin given the fuel quality environment. This can be applied to refine unit marginal costs for producing additional MW given a certain load. This is the area where cost versus capacity relationships may have the greatest influence on fleet net cash margin.

Understanding a facility’s market mission is the first key step to being successful in any given market.  Once understood, appropriate spending levels (i.e., budgets) can be established that ensure the proper balance between maintenance spending and reliability revenue. 

Quantifying the tradeoffs between fuel quality and fuel cost can significantly impact an O&M budget and the unit’s reliability performance. Are you paying less for lower-quality fuel, only to spend more in your maintenance budget? Does the lower-quality fuel get you higher dispatch levels, but also cost you more when unavailability occurs?

Normalizing the data and considering the impacts of differing grades of fuel quality are also important steps toward managing O&M expense to ensure competitive position within the market. 

Market mission is defined as the primary key performance indicator (KPI) that optimizes the economic performance of any given asset.  The major categories for power generation assets include reliability, efficiency and cost control. Examples could be high-availability base load, low-variable cost of production, or low, fixed-cost producer market missions, respectively. Although all performance indicators are important, identifying and focusing on the primary KPI will guide executives and plant personnel to long- and short-term business decisions that maximize opportunities for success. Having a primary market mission KPI also indicates that other performance indicators are second-tier performance indicators, and that when business decisions are made, there are tradeoffs in the real world.

Author: Cliff Watson
Consultant, Solomon Associates