Operation and Maintenance (O&M) Contract of Solar Photovoltaic Power Plant

Author: Dr. Babu Ram

Solar photovoltaic power plants are increasingly being installed due to reduction of cost of photovoltaic technology, guaranteed off-taking of power produced, feed-in-tariffs plus production tax benefits. Feed-in-Tariffs are giving way to renewable energy auctions.  It is estimated that the demand for O&M services will significantly rise in near future.

The O&M practices comprise of preventive and reactive maintenance. The preventive maintenance is essential as it improves the plant output by 1-5%; it is planned in advance to upkeep the system. Key activities are washing panels and vegetation management, etc. The reactive maintenance arises due to unplanned outages caused by failure of power plant components such as inverters, AC subsystem, DC subsystem, etc. Of these, inverter breakdown tops the list of component failures. 60-65% of plant down time is ascribed to inverter breakdown, which is major cause of loss of electricity production.

O&M services can be outsourced from a third party. O&M contract’s cost and performance are significantly influenced by the warranty clause of the conditions of contract. The warranty clause phrasing should be precise to convey expectations to contractor; it should capture major equipment that are likely to fail. The O&M contractor generally provides 10 year warranty period. However, some service providers even quoted 15-20 year warranty period. That seems unrealistic as the plant may require major renovation & modernization of equipment after the 15th year of the plant life. The EPRI White Paper (Assessing Solar Photovoltaic Operations and Maintenance Challenges) raises doubts about the realism of warranty period above 10 year in terms of whether the system integrator understands the warranty concepts; and it makes adequate provision for warranty liability in the balance sheet.

From the accounting perspective, manufacturer/supplier records the expected cost of warranty liability in the balance sheet, as per GAAP requirement. At the same time, it records the estimated warranty expense in the income statement in the same period in which sales revenue is recorded. Liability amount is reduced with defective equipment/component replaced. The cost of inventory is also reduced in the same amount.

GAAP requires manufacturer/supplier to estimate the warranty claim as accurately as possible. However, it is not easy to predict rate of failure of equipment accurately. While estimating warranty liability, company is tempted to understate liability to report higher income in the current year. On the other hand, the company might overstate warranty liability to report lower earnings; in this way it creates additional liability -“cookie jar reserve” to use it to reduce future warranty expenses.

The Photovoltaic Plant owners should carefully state the warranty clause in the O&M contract as well as assess the earnings management practices of service provider in the financial statements versus competitors in negotiating an O&M contract.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: