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O&M Benefits: Optimising energy efficiency and costs at tower sites

October 31, 2017

Faced with continuously falling ARPUs and low profitability, telecom operators are making efforts to minimise their expenditure. A key area of focus is energy costs, which comprise approximately 25 per cent of the total operational expenditure of telecom operators. In addition, from the environmental point of view, telecom towers emit approximately 5.3 million tonnes of carbon dioxide (CO2) annually.

Efficient energy management and energy expenditure minimisation are, therefore, important considerations for telecom operators. However, since energy management is not core to their businesses, operators lack the expertise to efficiently manage their energy costs. This mismatch has in the past led to efficiency losses and increased costs for operators, which has resulted in the emergence of a new crop of stakeholders in the industry - specialised operations and maintenance (O&M) companies.

Evolution and current situation

Outsourcing began in the period 2000-05, when original equipment manufacturers started providing passive O&M services as a part of the overall managed services that included tower site build-up and roll-out. During the period 2005-11, tower companies evolved to manage passive infrastructure and O&M, and asset management began to be outsourced to local players. It was only after 2011 that professionally managed companies entered the O&M space.

The O&M energy service providers’ segment is currently undergoing consolidation, moving towards fewer, stronger and more organised players. This consolidation comes in the face of virtually stagnant service rates, despite a significant increase in minimum wages. Further, the scope of work is gradually increasing with more stringent service-level agreements being put into place. New business models require significant capital expenditure, implying that sustainability can be ensured only by financially sound companies that can be profitable by achieving efficiency in operations and economies of scale.

Key challenges and demand drivers

Low power availability, coupled with high power costs, is one of the key challenges faced by operators. Energy costs have historically been high due to a variety of factors. While operators have permeated into the rural areas of the country, grid connectivity is still poor in a majority of these areas due to which diesel generator (DG) sets have to be kept running for hours daily.

Such long hours of operation and increasing fuel costs (owing to price hikes, increasing fuel transportation costs, pilferage and theft) impose a heavy cost burden on operators. Most sources of power are carbon emitting, which contradicts the Department of Telecommunications’ (DoT) aim of reducing the carbon footprint of the sector. Exploring alternative renewable energy sources requires significant capital expenditure and is not viable in many parts of the country. Further, deploying new solutions requires high upfront capital expenditure. Field training is needed for technicians to ensure proper equipment upkeep and to prevent equipment damage. Unique site designs demand site-wise customisation and the optimal technology for a particular site. This requires technical know-how and expertise.

Fixed-cost model of operation

O&M companies in India follow a fixed-cost model for providing services at telecom tower sites. Under this model, energy costs are fixed and are shared between the telecom operator and the tower company. Usually, O&M outsourcing is done by the tower company with performance-based provisions for rewards and penalties. This model provides for long-term contracts, usually with tenors ranging from seven to ten years. The long duration of such contracts allows for the potential adoption of green energy sources. Further, the requirement of long-term contracts in this model facilitates low-cost bank financing, which is an advantage for the players.

The prime advantage of a fixed-cost model is the predictability of costs, in turn making it possible to quantify savings. This cost predictability helps in better planning of the investments to be made and the returns to be expected from the project.

The way forward

Moving forward, in an industry faced with bitter tariff wars and nosediving margins, O&M companies will have to innovate and work actively to develop new techniques to achieve operational efficiency and cost minimisation at tower sites. Meanwhile, tower companies can gradually prepare and make available capital to adopt renewable sources of energy over the long run.

 
 

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