January 12, 2022
Our prospect, an industrial-scale brewery, had a big decision to make.
Option 1 simply wasn’t an option at all! And an initial feasibility study favoured buying over renting. But while that study took all kinds of factors into account from the capital expenditure and service contract to overhead, depreciation and administration costs, it was based on one blatant assumption: a rate of utilization of 100%.
The reality, however, turned out to be a very different story!
Best-laid plans: planned expectations versus agile reality
Hindsight is a wonderful thing. The next best thing is agility. Which, in the contexts of this case study, could be defined as the capacity to adapt to unforeseen and unforeseeable events. Like a 3-month delay in the launch, for example, following a safety inspection. Or lengthy maintenance operations, disputes with suppliers, and losses on book value during divestment… All of which meant that renting the required power modules would have saved a considerable amount of money, not to mention time, administration, and heartache!
Budget vs. reality: A blow-by-blow account
2015: All components of the power plant and substation were delivered and installed on time.
Buy
The prospect’s project team did an outstanding job under serious pressure to ensure all components were delivered on time. And an installer worked day and night to have everything online before the deadline.
The extra overtime, however, resulted in slightly higher installation costs:
Rent
Atlas Copco Rental performed an in-depth analysis of the site and prepared all technical documentation including a 3D visualization of the solution.
- Budget: $80,000
- Reality: $95,000
- Budget: $80,000
- Reality: $80,000
2016: The first obstacle appears! Everything was ready to go and the people trained. However, a safety inspection reported certain risks that required reconfiguration. As a result, the first peak season was missed and demand dropped from 4MW to an average of 1MW.
Buy
The power plant was 100% online as of 1 January but was not commissioned until 3 months later!
Once online, it performed well without major technical issues. But most of the time, only 1 generator was running in rotation. Good redundancy was achieved though the plant was clearly over-dimensioned.
The real cost of service and maintenance also turned out more than initial estimates.
Rent
The installation could have easily been postponed until March.
After commissioning and an initial load test, the prospect would have had the flexibility to install just 2 power modules with a third added only in December when production picked up again.
- Budget: $361,000
- Reality: $338,000
- Budget: $531,000
- Reality: $315,000
2017: The first full year of operation! Production increased up to 60% and a second production line went online in June. Power demand doubled to an average of 2MW in Q2, achieving a maximum of 3MW around September before slowing down again during the last 2 months of the year.
Buy
Everything went smoothly until demand increased. Testing revealed that 1 of the engines in generator no. 2 had broken down out of warranty. Luckily, there was sufficient spare power to bridge the gap and no production losses were reported.
Repairs ended up costing around $45,000 and consumed a lot of time and energy on the part of management while disputing the coverage of the warranty!
Increased production also meant increased maintenance costs. Tough negotiations took place with the service provider to review overtime, which was underestimated at the beginning of the contract.
Rent
The third power module would have only been added to the array in June with rapid response times assured, even within 24 hours of ordering.
This third unit would also have been removed again in November.
- Budget: $361,000
- Reality: $411,000
- Budget: $531,000
- Reality: $445,000
2018: A near perfect year, production-wise. The plant is still not operating at full capacity but the 3 production lines are. A strong start to the year with the usual slowdown in Q4. The average power consumption was 2.5MW with peaks of 4MW during the summer. The grid was expected to be ready by the end of 2018 but another 6 months delay pushed that back to mid-2019.
Buy
No major “surprises” in terms of power. All units ran as expected with only minor repairs required. It seems that maintenance estimations, however, were not correct at feasibility stage and at full production, the additional cost is approx. $40,000.
Rent
With production picking up, an additional unit would have been rushed in in mid-January and removed again in October. And of course, all maintenance, servicing, and repairs are included in the rental fee.
- Budget: $361,000
- Reality: $405,000
- Budget: $531,000
- Reality: $465,000
2019: The glass plant is finally connected to the grid in November and the diesel power plant is taken offline. A downturn in the business, however, meant that the plant ran at 50% capacity and finished the year with just a single shift.
Buy
After the shutdown, negotiations begin for the sale and removal of all components. The target was to have everything off the books by end of the year, ideally above book value and in its current condition. Which proved to be a difficult task for the local team who had no experience in such deals.
Rent
Another unit would have been removed in March, leaving just 2 units in operation until the termination of the contract in November.
- Budget: $361,000
- Reality: $373,000
- Budget: $531,000
- Reality: $297,000
2020: Selling the used modules was not as easy as anyone expected. The best deal was 10% lower than book value, which took until March to clear. Painful from a financial viewpoint, with a negative impact of around $85,000 on 2020 results. Needless to say, renting could have avoided not just the financial loss but all the time, effort, and stress spent trying to offload the redundant equipment.
Conclusion: the total cost of usership
The real story of a 4 MW powerplant
If we put all the figures together, we arrive at the following totals:
Total |
Buy |
Rent |
Budget |
$1,524,000 |
$2,204,000 |
Reality |
$1,707,000 |
$1,602,000 |
This case study is an elegant demonstration of the value of agility, predictable cashflow, and above all peace of mind! Especially in today’s increasingly uncertain world, it is crucial that procurement decisions are not just based on the total cost of ownership but the total cost of usership.
Let’s take a look at your situation together! We can go over the specifics of your operations and quantify the impact of various scenarios. So you can base your decision on the most complete picture of your project.
