When it comes to operations and maintenance, one might expect the oldest and most mature PV markets to be the most consolidated, but the latest report from GTM Research and SOLICHAMBA indicates the opposite.
According to Global Solar PV O&M 2017-2022: Markets, Services and Competitors, Germany and Japan are the most fragmented of the top O&M markets, while Chile is by far the most consolidated. In fact, the top 10 O&M players in Chile maintain close to 100 percent of the PV installed base (residential systems excluded), as shown in the chart below.
In all O&M markets, the broader trend is toward consolidation, but the pace is notably different.
Plant and portfolio size drive O&M consolidation
The Chilean market is characterized by very large plant sizes (above 50 megawatts) so the gigawatt-scale installed base consists of a limited number of assets owned by a small group of investors. This situation leads to a natural state of consolidation in the O&M market. As new capacity continues to get built in Chile in the years to come, with smaller plant sizes and a more diverse investor population, we are likely to see an uptick in O&M fragmentation as well.
Typical PV plants in the U.K. are much smaller than in Chile, but investor portfolios are very large. As more plants pass the two-year final acceptance certificate milestone and get sold on the secondary market, ownership consolidation in the U.K. continues to increase to levels unparalleled in Europe. Final acceptance also gives owners the opportunity to transfer O&M activities away from the original engineering, procurement and construction (EPC) firm to another provider (or to an in-house team), so O&M consolidation is progressing even beyond ownership consolidation. Because new construction activity stopped after the end of the U.K.'s Renewables Obligation incentive program in the first quarter, some EPC firms are exiting the market and selling their O&M business (or simply disappearing), which results in even more consolidation.
If large plants and investor portfolios drive O&M consolidation, the reverse trend holds true as well: smaller plants and portfolios lead to greater O&M fragmentation. That's the case in Germany, Italy and Spain, as well as Japan's large commercial and industrial PV segments, where system capacity ranges between 20 kilowatts and 5 megawatts and a typical investor may only own one to a handful of assets. EPC markets are also fragmented in these markets, and logically O&M markets follow suit.
Long-term O&M contracts freeze the market landscape
As markets mature and plants age out of warranty periods, investors commonly transfer contracts from the original O&M provider (usually the EPC or development firm) to a service provider or an in-house team. This consolidation process gets accelerated when the original contract holder disappears or goes bankrupt (like SunEdison and many others).
In Germany, however, transferring O&M services to a different provider remains a rare phenomenon because of long-term contracts that prove very difficult to terminate (unless the provider undergoes a change in ownership or fails to deliver the services). As a result, the main driver for O&M consolidation in Germany has been mergers and acquisitions; a few large players like Enovos Renewables O&M, ENcome and greentech grew their O&M portfolios by acquiring the service businesses of troubled EPC and development firms.
Ownership fragmentation drives up the cost of sales
Even in Italy where investors have more flexibility to exit contracts, consolidation has been relatively slow. A few large players are battling for O&M contracts with large asset owners, but portfolio size drops precipitously past the top 10 or 20 investors. During the interviews conducted by SOLICHAMBA to prepare the new GTM Research report, several Italian O&M vendors reported that their average customer owns between 1 and 2 megawatts. With such small portfolios, vendors face challenges and high costs to acquire new customers, and the market consolidates at a slower pace.
Investors don’t like change
Here is the scenario that drives O&M vendors crazy: An investor issues a competitive tender for an O&M provider to take over their portfolio. Then, instead of transferring the contract to the best bidder, the investor asks her current provider to match the price and terms of the best offer. From the investor’s perspective, this makes perfect sense -- she gets the benefit of the best market price and service terms, while avoiding the cost and effort of switching to a new vendor. From a vendor’s perspective, however, this means spending time and resources responding to tenders with very little payback.
Despite challenges, consolidation is happening
While we have been discussing a lot of obstacles to consolidation, the long-term trend is clear: O&M markets are consolidating. The factors above only impact the pace at which this consolidation occurs, which is extremely fast in markets like the U.K, slower in Italy, and slower still in Germany.
Some markets are moving in the opposite direction, typically those where construction activity draws new players into the fray. Australia exemplifies this scenario with its utility-scale PV boom that broadens the market for EPC and consequently for O&M as well.
What about the U.S.?
The O&M consolidation level is high in the U.S., especially for a market that continues to add new capacity at a fast clip. This situation stems from the dominance of a few large firms in each part of the value chain in the utility-scale segment: development, EPC and ownership. Secondary market activity has increased ownership consolidation, but the potential Section 201 trade case remedies and inclusion of the BEAT provision in the new tax code are causing uncertainty and could lead to changes in market dynamics.
***For more details about O&M markets, trends, and detailed competitive landscape analysis by country and segment (including 128 vendors), as well as market forecasts to 2022 and more than 70 detailed vendor profiles, refer to the latest GTM Research and SOLICHAMBA report: Global Solar PV O&M 2017-2022: Markets, Services and Competitors