What the O&M Agreement Covers and Why It’s Tied to Your Financial Model

Solar assets need decades of upkeep, and that responsibility needs to be spelled out in the O&M agreement. Skipped infrared testing and visual inspections, excessive panel soiling, or an inverter failure without a response plan in place are just a few of the things that can erode a project’s returns over its 20-plus year life when they affect system output. 

That’s what the O&M agreement is for: it spells out who’s responsible for the asset once it’s built, what they’re required to do, and what happens when something breaks. Most of that work falls into one of two buckets: preventative maintenance, the routine inspections and testing that catch problems early, and reactive maintenance, the response plan for when equipment fails without warning. 

In this third installment of our series pulled from our interview with Keith Cronin, instructor of Inside the Solar Executive MBA Data Room, we asked him to break down what an operations and maintenance agreement covers and how it connects to the financial model investors rely on.

Here’s what he had to say.

Transcript below.

Can you explain a little more about what an operations and maintenance agreement is for folks?

An O&M agreement, quite simply, is the relationship a third party has with the investor to maintain the asset. We go over that in the financial modeling portion of the course, where O&M shows up as one of the operating expenses.

To back up for a second: an EPC can also own an asset and handle its own O&M. A developer can do the same. It depends on the kind of company involved. But an investor generally outsources O&M work to a third party, and in the course we focus specifically on what that agreement looks like when a third party is involved.

Some of the work is routine. Every year, someone goes out to the site to clean panels, run testing, and sometimes do infrared testing. Toward the end of the agreement, there are three exhibits that break this down. One covers preventative maintenance, the visual inspections, tightness checks, and photo documentation that happen every year to catch problems before they start.

Then there’s reactive maintenance, for the things you can’t predict, like an inverter failing. In the one-megawatt project you’ll work through in the financial model, you have to decide whether to install one large inverter, four smaller ones, or ten. That decision matters because if one inverter goes down and it only represents 10% of the system, illustratively speaking, you might not need an emergency truck roll within 48 hours. You might have four days, or whatever window is set in the agreement with the investor, EPC, or developer.

At its core, the O&M agreement sets the rules of the road for that relationship over time. There are companies today built entirely around O&M, offering a full suite of services across residential, commercial, C&I, or utility scale, and those agreements look very different depending on the segment. Reaction time and acceptable system downtime vary, and we go over that in the actual document along with cost ideas and benchmarks from three different vantage points: the EPC, the developer, and the investor.

Each of those parties is asking a different question in the marketplace. Is the O&M provider NABCEP certified? Have they taken HeatSpring courses to get there? How long have they been in business? Do they have assets under management? That last part matters because O&M ties directly into asset management. We want a solar farm or rooftop project with a long service life, and that shows up in the financial model too.

That’s where you model out the line items, four or five or ten of them, that need to sit in the operating expenses so every anticipated cost is covered, including things like a debt service reserve account or a dedicated inverter reserve. You know inverters tend to fail somewhere between year 10 and year 15. The question becomes whether you set money aside every year in escrow or wait until something actually breaks. I go through that thinking in the O&M agreement section and again in the financial modeling section.

The financial model and the O&M agreement are tied together for a reason. Together they give investors, EPCs, and developers the insight to decide how they’ll manage their fleet and what happens when something goes wrong.

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Keith walks through the full O&M agreement template, along with the preventative and reactive maintenance exhibits and how they tie into the financial model’s operating expense line items, in the new Inside the Solar Executive MBA Data Room course. It also includes the EPC agreement, DSA, MIPA, PPA/SSA, a financial model, and two full case studies, so you can see how each contract fits into a real deal from origination to close.

Enroll your team in the course today!