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Turnkey Redefined

Engineering and construction firms adapt to a changing market.

Fortnightly Magazine - December 2011

Like all things in this world, the market for engineering and construction services goes through cycles. When the electric power industry enters a build-out phase, then terms and conditions in engineering, procurement, and construction (EPC) contracts become less advantageous for project owners. In that type of seller’s market, contractors call the tune. They’re less inclined to accept risks or provide services beyond their central core business— i.e., building power plants.

Today, however, it’s a buyer’s market. Utilities and independent developers are asking more of their engineers and constructors. Turnkey contracts—in which an EPC contractor builds a plant according to the owner’s specifications, and turns over the keys when it’s done—are including more demanding guarantee provisions than at any time in recent memory.

“It’s no longer about risk management,” says Dean Oskvig, president and CEO of Black & Veatch’s global energy business group. “Now it’s risk-offloading. As an EPC contractor, you have to take risk or you’re irrelevant. But you shouldn’t accept risk that you can’t reasonably manage, and that’s what’s been making its way into terms and conditions.”

“In early development stages, we might have a little skin in the game to help a renewable energy project move along and get to the point where a permit can be finalized.” – David Eppinger, Fluor Corp.

To learn where the EPC cycle is heading, Fortnightly spoke with executives at several leading firms. Two of them declined to be quoted in this story, but their comments largely agreed with those of their competitors—in short, contractors are expanding their capabilities to provide a broader range of services, so they can capture business in a highly competitive and uncertain market.

 

Fortnightly: What areas do you see heating up? What types of projects are likely to enter the pipeline in the next couple of years?

Oskvig, Black & Veatch: I’d say there are four themes to the trend: gas-fired baseload generation; renewables, particularly PV [photovoltaics]; regional transmission; and air-quality projects on the existing coal-fired power fleet.

In the air quality area, we’ve been doing a lot more scenario planning and consulting work. New rules from the Environmental Protection Agency have been expected for some time, and now some of them have come out. These new rules will lead to the shutdown of smaller, older, less-efficient coal-fired plants, and where it makes economic sense, retrofits will be made. Utilities already have started many of these projects to get into compliance, but there will be a lot more capital projects ahead.

While there has been a context for the industry to plan for the new rules, what’s surprised people is the speed of implementation, how fast they have to come into compliance. The actual standards and limits are achievable; it’s a question of how fast they can be achieved. That’s led us to ask how the different pieces could play out.

Utilities are trying to decide how to place their infrastructure bets, so that within a range of scenario outcomes, they can be fundamentally OK. We’ve crafted a set of tools and templates to do that. They’re incredibly complex in nature, but there’s always a path that emerges from it, which a

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