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By Bill Ray and Craig Nicholson

Long Term Service Agreements (LTSAs) are ubiquitous in the world of

servicing gas- red power plants. What began as a means to achieve a
lower price from a near sole source list of quali ed cutting-edge
technology providers, has evolved into a competitive solution across
multiple suppliers.  A well negotiated agreement is bene cial to the asset
owner, providing cost savings from these advantages:

 
 Preferred pricing achieved through the bulk purchase of parts and
services over the term of the agreement
Commercial and supply chain simplicity from a one-time buy versus a
repetitive bid process
Risk sharing and favorable commercial terms typically negotiated into
the contract
Indirect cost savings such as technical expertise, outage planning,
logistics and inventory administered and supplied by the LTSA provider
Bene ts of continuous improvement from the year-over-year continuity
and team effort of the LTSA provider and owner
Potential cash ow bene ts from inventory and payment terms

Another LTSA bene t allows owners with limited technical or commercial

resources or a minimal geographic presence to maintain complex
equipment cost effectively.  When coupled with an operations and
maintenance (O&M) agreement, the owner outsources much of the project
overhead, resulting in a cost-effective, lean, low-overhead asset with
predictable, de ned variable cost.  For some owners, a transferable LTSA
and O&M agreement provides exibility to trade or divest the underlying
asset as market conditions change with little impact to its own core
organization.

 

LTSAs are applicable to both existing equipment (Installed Base) and new
projects.  Virtually all new, advanced-class gas turbine projects require the
equipment suppliers to provide an equipment price plus LTSA.  The
equipment, along with other project metrics, are evaluated on a
combination of capital cost, performance guarantees, operating expenses,
cash ow and expected maintenance cost.  The resulting computation is
usually reconciled to a net present value over the project evaluation period
and allows a competitive rack and stack and baseline pro-forma
expectation from which to select the most cost-effective
equipment/service package.

“LTSAs are applicable to both existing equipment (Installed

Base) and new projects“

As the installed base assets have matured, the number of LTSA providers
has also grown, resulting in greater competition among providers.  As this
competition increased, the basic owner value elements have magni ed.
Competition yields the obvious pressure on price plus a willingness of
providers to accept greater scope and risk.  In addition to more favorable 
coverage on the prime mover, providers are willing to expand their contract
coverage beyond the gas turbine itself. Coverage may include other
principal components such as the generator and steam turbine or include
auxiliary items such as balance of plant, further reducing owners’
commercial and indirect costs.  

With the increase in coverage, the owner can increase risk sharing and
commercial term coverage.  While competition has greatly affected
owners’ options to expand scope, shift risk and drive a competitive
process, it should be noted that not all suppliers are equal and have
matching capabilities; and an “all in” contract may not be cost effective.
 For an installed base owner with years of operating experience, building
an experience-based bid speci cation from what is working well, what can
be improved, and which tasks the owner is willing to self-perform or at
least administer, should result in an improved, need-based LTSA.  With the
willingness to go through the commercial process and negotiate, the door
is open to achieve a viable, customized and cost-effective service
solution.

A large, soft bene t of an LTSA is the partnership developed between

owners and suppliers.  While “partnership” is an overused term, the

contract relationship in the LTSA will likely exceed 10 years.  Within that
time, such variables as fuel prices, asset pro tability, technology, key
personnel and plant dispatch pro le are all likely to change.  An LTSA
provider should be aligned with the owner and continually bring value and
evolve with changes to the original operating assumptions.


In its most minimal context, an LTSA is no more than a rm-price package
of parts, services and repairs occurring over the course of the agreement
term with no expectation beyond delivery of the contract scope.  However,
when properly executed, the LTSA provider — just as one would expect of
an employee or team member should increase competence and grow year
over year. Continuous improvement efforts should drive outage duration
down, quality up, reduce unexpected or unplanned expense, anticipate
upcoming maintenance needs, produce outcomes to match KPIs and
provide a pool of trained, repeat personnel with succession planning for
key personnel.  The asset owner makes a long-term commitment with the
LTSA provider to act as an extension of the owner’s maintenance staff. The
LTSA provider must accept the challenge, delivering ever-increasing quality
of work and keeping pace with external pressures affecting the viability of
the owner’s asset. It is common to link plant goals with supplier
performance contractually through guarantees and incentives — driving to
the proverbial “win-win.”   

Not all the bene ts of LTSAs reside with the asset owners.  The LTSA
providers also bene t from the commercial simplicity and ability to drive
productivity into a known backlog of work.  There is also bene t in
work ow planning in repair shops, factories and supply chain. Like all
businesses, LTSA providers are under pressure to grow their top and

bottom lines.  LTSA opportunities offer one-time chances to secure
signi cant portions of work. Succeed and there are years of bene t, while
losing means an opportunity gap for years to come. The LTSA providers
are therefore interested and motivated to be competitive.

LTSAs have proven, along with stable natural gas prices, to be the
cornerstone of high technology gas turbine success.  

Part 2 in the mini-blog series addresses LTSA content.

For additional discussion:

bill.ray@aimpowerconsulting.com
(mailto:bill.ray@aimpowerconsulting.com)

craig.nicholson@aimpowerconsuting.com
(mailto:craig.nicholson@aimpowerconsuting.com)

https://www.aimpowerconsulting.com
(https://www.aimpowerconsulting.com)


 Connect via Linkedin

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(https://www.linkedin.com/in/williambillray/)

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(https://www.linkedin.com/in/jonathancraignicholson/)

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Long Term Service Agreements – What’s
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 YOU MIGH T AL S O L IKE

Top 10 LTSA Tips Renewables future is Long Term Service

(https://www.aimaccou here now – how do gas Agreements – What’s
ntingservices.com/ltsa- technologies cope? Under The Hood 
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  March 13, 2019 ntingservices.com/rene (https://www.aimaccou
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now-how-do-gas- ng-under-the-hood/)
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 January 22, 2020

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