Operations and Maintenance Costs
Definition
Operations and maintenance (O&M) costs are the recurring costs of operating and maintaining a power project: monitoring, routine and corrective maintenance, repairs and the service contracts that provide them. Total operating expenses are wider and usually include land leases, insurance, property taxes, asset management and major maintenance such as inverter replacement or battery augmentation. Underwriting depends on which of these are fixed, which vary with output, and which arrive in lumps.
Why it matters
O&M looks small next to construction cost, but it comes before debt service and distributions every year for decades. Low early-year costs under narrow service contracts can understate later costs, and costs excluded from the O&M line can be larger than O&M itself. Investors should see the full operating budget, the contract terms behind it, escalation assumptions, and the reserve for major maintenance.
Common misconceptions
- •An O&M figure per kW is not total operating expense.
- •First-year costs under a warranty or new service contract are not a guide to year fifteen.
- •Battery projects carry an augmentation cost that solar-style O&M budgets omit.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
Cost categories
Fixed: service contracts, monitoring, land leases, insurance, property taxes, asset management.
Output-linked: some royalties and variable service fees.
Major maintenance: inverter replacement, transformer work, battery augmentation, funded from reserves.
Holding-company costs: in Pelican's Jaw's financing, the borrower's own O&M expenses are capped at $450,000 a year at the top of its waterfall.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- Which operating costs matter most in energy project underwriting?
- The ones that are large, rising or uncertain: land and property taxes, insurance, service contracts, and major maintenance such as inverter replacement and battery augmentation. SB Energy lists its project costs as 'operations and maintenance expense, land lease expense, repair and maintenance costs, insurance, property taxes and other site-level costs,' and says that under its PPAs it bears them and they 'are not separately passed through to offtakers.'
- How much does solar O&M cost?
- Berkeley Lab reports median O&M costs for utility-owned solar fell from about $40 per kWac-year, or $22 per MWh, in 2012 to about $11 per kWac-year, or $5 per MWh, in 2024. It cautions that 'these O&M costs are only one part of total operating expenses.'
- What does that figure leave out?
- Berkeley Lab's scope, following FERC Form 1, includes supervision and engineering, maintenance, rents and training, but excludes 'property taxes, insurance, land royalties, performance bonds, various administrative and other fees, and overhead.' It also notes that newer projects report much lower costs in their first three years, 'potentially due to a narrower scope of service agreements.'