The Big Build

Deck: 

Utility infrastructure projects face high costs, labor shortages and global competition for resources.

Fortnightly Magazine - February 2008

Global demand for raw materials and physical infrastructure in general is having a negative effect on utility construction projects in North America. Companies that build such infrastructure now are competing with production needs all over the world.

Major uncertainties exist regarding the future of fossil fuels—coal in particular. Global warming fears have resulted in recent cancellations of many proposed coal-fired power plants. At the same time, however, contractors report significant backlogs of unfilled orders. Demand for their services is being driven by increased interest in renewable technologies, a resurgence of nuclear power and natural gas-fired power plants, plus more retrofitting of plants to meet stringent environmental requirements. Other trends include project risk-sharing due to the high costs of construction and persistent and increasing labor shortages.

Such shortages and high costs appear to have an upside, however—most notably, increased physical efficiencies and innovations leading to lower lifetime plant costs. And creative methods of educating and retaining skilled employees, such as ABB’s building of a training facility at a university campus in Mexico, are another direct benefit of the need to get these projects done on time and on budget.

To learn where utility infrastructure construction stands in the United States today, Public Utilities Fortnightly interviewed executives at several major turnkey contractors, including ABB, Black & Veatch, Shaw Group, Siemens and WorleyParsons.

ABB: Next Generation Power

Fortnightly: What market trends do you see evolving in construction of utility infrastructure?

Barnoski: We’re seeing growing acceptance of software intelligence in the grid, making products more interactive with utility personnel and leading to significantly lower maintenance costs over the products’ lifetime.

Fortnightly: The costs of building utility infrastructure projects are increasing. As a contractor, what’s ABB’s role in keeping those costs under control?

Barnoski: To the extent the products we supply are highly reliable and incur lower maintenance costs, ABB contributes to keeping costs down over the lifetime of the installation. For example, we developed a circuit breaker design that uses a magnetic actuator instead of a spring. There is only one moving part—versus dozens in traditional spring designs—and it is capable of performing 10,000 operations without a maintenance interval, compared to around 500 for traditional breakers.

Fortnightly: Increases in costs for skilled and craft labor are a problem and some expect a lack of skilled workers going forward. How is ABB dealing with these issues?

Barnoski: ABB is taking a number of proactive measures to ensure our own demand for skilled workers and engineering professionals is met. We’re looking to add 40,000 to 45,000 new positions over the next four years, half via acquisitions and half as new hires, so this is critical to our continued growth and success.

We have partnerships with over 70 universities worldwide. One example is the campus of the Tecnológico de Monterrey located in San Luis Potosi, Mexico. We’re building a new 300,000 square foot facility in SLP and we’re working closely with the Teq to provide training for students and professors, internship opportunities, and we’re donating a variety of robotics and other equipment to the Teq’s labs. Our hope is these steps will make ABB an attractive option for Teq grads. In fact, we’ve already hired around 25 of them to work in a temporary space we have set up near the construction site.

Fortnightly: What does the market look like for ABB? How deep is your backlog for utility infrastructure projects or projects in general?

Barnoski: Our backlog is the highest it’s been for many years. And the outlook is robust in all areas, with the possible exception of distribution substations due to the slowdown in residential construction. The Edison Electric Institute estimates transmission spending will increase from $6.9 billion in 2006 to over $10 billion in 2010.

Fortnightly: Are you seeing more interest in new utility infrastructure construction or in refurbishment of older facilities?

Barnoski: Both newer utility infrastructure projects and refurbishment of older facilities are getting attention equally. Refurbishment is driven by aging infrastructure and the needs for greater efficiency and capacity.

Fortnightly: What types of utility infrastructure projects has your company recently been awarded?

Barnoski: We have contracts for engineering, procurement and construction work for distribution and transmission substations, as well as FACTS (flexible AC transmission system) devices and HVDC converter stations, and also next-generation power and automation technology. In addition, ABB is involved in state-of-the-art development of new products and systems through initiatives like our recent AEP alliance agreement for 765-kV transmission.

Just this past December, ABB commissioned the world’s largest SVC (Static Var Compensator) for Allegheny Power at its Black Oak Substation in western Maryland. The Black Oak SVC turnkey project was completed in just 14 months, a world record given its size, complexity and scope.

In November 2007, we commissioned a back-to-back HVDC station for Sharyland Utilities. ABB was selected in 2005 by Sharyland Utilities to design and build a new high-voltage direct current (HVDC) intertie between the United States and Mexico. The system connects the Texas utility with Mexico’s CFE, enabling both transmission grids to share reserves and ultimately facilitate cross-border trading.

Black & Veatch: Global Leverage

Fortnightly: What market trends does Black & Veatch see evolving in construction of utility infrastructure?

Smith: The current market trends are being driven to an increasing extent by environmental issues and agendas. Other factors are escalating costs, resource limitations, manufacturing over-capacity and the inevitable impacts on schedule, price and quality. The global demand for raw materials such as copper, lead, zinc, chrome and iron have dramatically increased the cost of manufactured equipment and material and placed “commodity” type material including steel, pipe, forgings and castings on the critical path to an extent we haven’t seen before. The unknown effects regarding future demand and the ability of the various industries have continued the pressure to compensate with significant escalation and contingency reserves.

Although coal has been a significant driver of new utility plants, the environmental agenda has impacted the ability to permit new units and driven the industry to short-term solutions in the resurgence of interest in combined cycle and “peaker” projects, as well as solar, wind and alternative fuels such as ethanol. While the industry is trying to develop and solve sustainable solutions, the answers are not as yet available to support the growing demand for base-load generation.

Fortnightly: The costs of building utility infrastructure projects are increasing. What role does Black & Veatch have in keeping those costs under control?

Smith: Black & Veatch is leveraging its global base of professionals along with its established relationships with proven partners around the world to address the labor issues, while also expanding the level of performance and partnering more actively with suppliers at an earlier stage. Where viable, we look for new approaches and opportunities to implement cross-functional promotions and increase training but to a more individualized need.

No system or process is a substitute for experience and making timely, cost effective decisions. Active and timely communications also are a key factor to implementation and marshalling resources globally to function as a united entity. Common tools and information technology are certainly key contributors to solving the issues, but effective communication and comprehension are the most important elements.

Fortnightly: Increases in costs for skilled and craft labor are a problem and some expect a lack of skilled workers going forward. How is Black & Veatch dealing with these issues?

Smith: We believe we understand the magnitude of the problem. Black & Veatch works closely with the international unions, various contractor and industry councils and draws upon our global experience to understand the issue of construction labor. In the United States, we chair the Building Trades Midwest Manpower Committee and have jointly developed a Midwest Manpower Demand Survey along with the building trades and McGraw-Hill.

That particular survey reflects the demand by craft for the coming five years by state. We also use the SE Study developed by the building trades and construction users for that region. We share information and data with our joint venture partners as well. What this tells us is that there will be a million-worker shortfall over the next five years. This is particularly relevant to skilled labor for power plants—boilermakers, pipe fitters, tube welders, pipe welders, electricians and carpenters. These shortages occur in the union and non-union sectors alike.

The U.S. Congress needs to help address this by way of immigration issues. Guest worker programs being proposed do not address skilled labor. The current laws on the books restrict technical, highly skilled labor to inadequate H1B levels, and more visas could help solve many demands. (See Sidebar, “Help Wanted: Construction Labor Shortages.”)

 

Fortnightly: How deep is Black & Veatch’s backlog of utility infrastructure projects or construction contracts in general?

Smith: Our current backlog varies but extends through 2012 for some current projects. While we have a mix of short (six months) and longer term projects (18 to 60 months), the mix is reflective of the high demands in all of our markets. While coal cancellations and postponements have occurred, combined cycle and early nuclear work are on the upswing as are infrastructure projects in the water and telecommunications industries.

Fortnightly: Are you seeing more interest in new utility infrastructure construction or in refurbishment of older facilities?

Smith: Generally projects are driven by regulation, demand, permitting, public perceptions and market conditions. The infrastructure projects we see have all these elements to them, which means new and refurbishment work are both drivers. Certainly air quality regulations have driven retrofit air quality control and water/wastewater support projects, as well as the resurgence in combustion turbine projects.

As traditional fossil fuels meet with increased public scrutiny, nuclear and renewable energy sources have pushed programs and construction of ethanol, biogas, wind and solar. Market demands for carbon sequestration and a general desired goal for “zero” pollutants have driven studies and programs to develop new, viable technologies. Utilities are becoming more aware that they need to share in the risk of construction as well as with the development of these technologies.

Fortnightly: What types of utility infrastructure projects has Black & Veatch recently been awarded?

Smith: Our recent awards include coal, AQC scrubber, SCR, baghouse and precipitator retrofits, combined cycle, simple cycle, underground and overhead transmission, substations, nuclear construction and operating licenses (ESBWR, ABWR) and wastewater cleanup projects. These projects have been in a combination of contracts and services that include complete EPC, EPC management, construction management, construction and startup and commissioning only. This is in addition to the strong interest in wind, solar and biomass projects.

The Shaw Group: Environmental Design

Fortnightly: What market trends does The Shaw Group see evolving in construction of utility infrastructure?

Gill: In the United States and in international markets where we do business, demand for electricity continues to grow. At the same time, the cost and availability of fuel, concern about global warming and the emission of carbon dioxide and other gases from power plants is having a decided effect on the types of projects our customers are pursuing.

On the fossil side of the business, a number of states have given the green light to clean-coal projects, and we are partnering with customers in Arkansas, Colorado, Louisiana and Virginia to build new advanced coal plants and to re-power existing plants with technologies that will reduce emissions and increase energy efficiency. We also are the market leader in providing new air quality control (AQC) systems, as power plant owners implement technologies to mitigate emissions of carbon dioxide, mercury, nitrogen oxides and sulfur dioxide on existing assets. AQC work will continue to be a major focus of our business.

The fact is, the technology currently exists to build and operate coal-fired plants so their environmental impact is less than a combined-cycle or gas-fired plant, which some environmentalists now seem to favor. Regardless, Shaw is positioned to provide our customers with engineering, procurement and construction (EPC) on virtually any type of new power plant or retrofit they desire—including nuclear.

In 2006, Shaw Group acquired a 20 percent stake in Westinghouse, positioning us to participate in the next-generation AP1000 nuclear power plant deployment. To date, we are participating in the engineering, procurement and project management work on four new nuclear units in China using the AP1000 design. Just as significant, as U.S. electric utilities pursue environmentally friendly generating options, nuclear power is again becoming very attractive since it emits zero greenhouse gases. According to the U.S. Nuclear Regulatory Commission, during the next few years, it expects to receive construction and operating license applications for 33 new nuclear power plants—and of those, at least 14 are expected to use the AP1000 plant design.

Fortnightly: The costs of building utility infrastructure projects are increasing. What role does The Shaw Group have in keeping those costs under control?

Gill: Shaw works closely with our customers on the details of design and scope development, and we communicate the costs associated with a given project prior to initiating the full release for the contract. We then collaborate on the best risk profile for the contract and negotiate a fair return on the services we provide, all of which enables Shaw Power to help our customers control project costs.

We also work closely with our subcontractors and suppliers to manage costs and project schedules. Like many contractors, Shaw flows prime-contract requirements regarding penalties and damages to our subcontractors and suppliers when they fail to meet schedules or adversely impact the cost of a project.

The vertically integrated nature of The Shaw Group also helps us to manage costs. For example, Shaw’s Fabrication and Manufacturing Group is the world’s largest supplier of industrial piping, which gives us the advantage of providing our customers with the most competitive pricing and schedules utilizing Shaw controlled engineering, procurement, fabrication, project management, construction, start-up and commissioning services for their project.

Finally, Shaw Power has now executed more than 27 million consecutive work hours without a lost-time accident. We are extremely proud of the safety culture we have developed for Shaw Power employees and other people who wish to participate with us on our projects. Having such a strong safety program and record not only ensures the safety of our workforce, it also translates into significant cost savings for the projects.

Fortnightly: Increases in costs for skilled and craft labor are a problem, and some expect a lack of skilled workers going forward. How is The Shaw Group dealing with these issues?

Gill: Without a doubt, demand for engineers, designers, craftspeople and project managers throughout our industry currently exceeds the supply of skilled employees.

In some ways, that’s a good problem for our company to have, because it means we have a lot of business. Like other companies in our industry, we have responded to the shortage of skilled workers by becoming more aggressive in our recruiting on college campuses, in high schools, vocational and technical schools, and at job fairs. In addition, Shaw Power plays an active role in local education and workforce development to help ensure future job-seekers have the kinds of skills we need to be successful.

The fact we have so much work also is a recruiting tool, because we are in a better position than many companies to offer long-term employment. In our industry, craftspeople and other skilled employees move from project to project, so having a sizeable backlog provides a degree of job security that a similar job at a company with a smaller backlog might not offer.

The decision to locate the Power Group headquarters in Charlotte, N.C., is another recruiting tool we’ve been able to leverage. Charlotte is a growing, vibrant city with a moderate cost of living, and many job candidates are excited by the thought of relocating to Charlotte.

Fortnightly: How deep is Shaw’s backlog of utility infrastructure projects or construction contracts in general?

Gill: Corporate-wide, Shaw booked nearly $11 billion in new awards during fiscal year 2007 and its backlog of unfilled orders as of Aug. 31, 2007, rose to a record $14.3 billion—up 57 percent from approximately $9.1 billion the same time a year earlier.

Of that $14.3 billion backlog, Shaw’s power group accounted for $8.5 billion of the future projects, the majority contracted with regulated utilities. We expect this trend to continue during the next few years, as utilities continue moving forward with AQC projects and some new construction on coal-fired and intermediate gas plants.

In addition to these conventional projects, we’re currently involved in a geothermal project in Indonesia, and from time to time we have evaluated other projects such as wind and biomass that might leverage our EPC expertise. Finally, we’re also looking for cross-marketing opportunities that might be available because of work being done by Shaw’s fabrication and manufacturing, environmental and infrastructure, and energy and chemicals businesses.

Beyond the near term, we’re optimistic that our backlog will grow substantially as customers in the United States, China and elsewhere begin ordering nuclear power plants in large numbers. Again, as a part-owner of the AP1000 nuclear program, Shaw Power expects to be a major player in the nuclear renaissance.

Fortnightly: Do you see more interest in new utility infrastructure construction or in refurbishment of older facilities?

Gill: We are seeing interest in both. In some cases, utilities are opting to upgrade existing power plants to make them cleaner burning and more efficient, and our fossil organization has won a number of AQC and re-powering contracts. At the same time, we are executing three new greenfield coal power projects here domestically, and are engaged in discussions for several other new plant opportunities.

Our nuclear and maintenance divisions have been active in power uprates at nearly half of the 100-plus nuclear plants in the United States. The fact is, Shaw dominates the U.S. nuclear power uprate market, with 46 projects to increase a plant’s generating capacity by 2 to 20 percent through the installation of more efficient equipment and more accurate instrumentation. To date, the uprates performed by Shaw have added 2,050 MW of electricity to the U.S. grid, the equivalent of two baseload power plants.

Fortnightly: What types of utility infrastructure projects has The Shaw Group recently been awarded?

Gill: In 2007, Shaw Power’s fossil division was involved in six, new-build coal-fired plant projects for U.S. utilities—half of them using supercritical technology and the rest using circulating fluidized bed technology. The fossil division also worked on 14 AQC projects—one of them in Hong Kong—and a geothermal plant construction project in Indonesia. The Nuclear division in 2007 worked on the four plants being built in China, and it opened a new office in Shanghai in support of these projects and in anticipation of future awards using the AP1000 design. Finally, Shaw’s maintenance division worked with a number of nuclear utilities on outages and power uprate projects.

Siemens: Scaling Up

Fortnightly: What market trends does Siemens see evolving in construction of utility infrastructure?

Karwoski: Most of our suppliers are based outside of the United States today. We get a lot of our equipment now from China and Germany. We are finding a lot of our suppliers including Siemens itself are fully loaded. The lead times for a lot of equipment required for building power plants are really extending. We are seeing, for example, a combined-cycle project that used to take 22 to 24 months as the industry standard, now moving out to 30 months to build. A lot of that is driven by the equipment, for example transformers, HRSG, boiler components, pumps and gas compressors. All the suppliers are fully loaded worldwide, and that is driving longer construction lead times on all projects in the United States.

Fortnightly: What role does Siemens have in keeping utility infrastructure construction costs under control?

Karwoski: That is probably the most difficult aspect. In the United States we have two main impacts. The first impact is the currency, so for U.S customers that are buying, the weak dollar has made plants much more expensive in the United States than they had been because much of that is sourced outside of the United States.

We look at it in terms of life-cycle cost, not necessarily first cost. So when Siemens constructs a gas-turbine-based plant, we’re putting the largest technology we can put in on a dollars-per-kilowatt basis. On an efficiency basis we are improving the performance of the project with our technology. It is very difficult to keep the costs of the suppliers under control. In fact, the cost of Siemens equipment is much easier to control than that of some of our sub-suppliers. We will increase the size of the unit, the efficiency of the unit and the functionality to give our customers a better solution for their specific needs.

Fortnightly: Increases in costs for skilled and craft labor are a problem and some expect a lack of skilled workers going forward. How is Siemens dealing with these issues?

Karwoski: Typically if we go to a site, we have to pay retention bonuses to retain craft labor and skilled craft labor. Safety also is a primary component. We look at contractor relationships—we have relationships with certain contractors we work with all the time. We work primarily with three or four general contractors that provide us with a key supervisory force. It is a difficult issue in certain U.S. regions. There have been jobs we have paid essentially double the national labor rate just to get the job completed, along with retention bonuses and longer schedules.

Fortnightly: How deep is Siemens’ backlog of utility infrastructure projects or contracts?

Karwoski: We have a backlog of probably 6 billion euros in infrastructure projects, roughly equivalent to $10 billion. That is happening everywhere—in the Mideast, Asia and Europe. So we have a very large backlog. Our transformer factories are fully loaded and the United States is finding out there is other demand in the world. Our industry has been so cyclical that in the last boom we almost were able to get equipment produced without interruption, and now the rest of the world has demand for the key suppliers. So it’s difficult to compete in a global market.

Fortnightly: Do you see more interest in new utility infrastructure construction or in refurbishment of older facilities?

Karwoski: In the United States there is quite a bit of interest in refurbishment of coal plants and nuclear plants. There is interest in new infrastructure, but the problem is, for example with nuclear plants, the time for permitting and the time for construction of those are years in the future. In the near term we see a balance, quite a bit of interest in refurbishing existing plants and then some small additions in new peaking plants or some very small capacity factor plants. We haven’t seen the demand in the United States pick up like it has in South America or in the rest of the rest of the world.

Fortnightly: What types of utility infrastructure projects has Siemens recently been awarded?

Karwoski: We are doing high-voltage DC cable and just finished a project putting an undersea cable in from New Jersey to Long Island to transmit about 600 MW of power. We are building a coal project as a consortium lead in West Virginia with state-of-the-art pollution-control systems, and we have gas-turbine combined-cycle projects we are constructing.

Siemens is probably unique in that we do anything from wind turbines and renewable energy all the way to nuclear power plants. We really have a full portfolio that we pursue globally. We just finished a plant in Madison, Iowa, to increase our manufacturing capacity for wind turbines. We have been active in wind, and in renewables we have a 100 percent share in solar turbines in the U.S.—concentrated solar energy.

In the U.S we are starting to see some natural gas projects. We just finished the Lakeside power project in Utah. We are working on one in Long Island for Caithness Energy, which is about a 350-MW project that is on budget and ahead of schedule. It’s looking good right now but we have some strong partners—F&S and Fresh Meadow. We are building a gas plant in Idaho as a turnkey and we have some natural gas equipment orders in the northeast and Midwest.

WorleyParsons: Managing Risks

Fortnightly: What market trends does WorleyParsons see evolving in construction of utility infrastructure?

Martin: We are seeing a more equitable allocation of project risk to parties most responsible and capable of managing the risk, that is, equipment vendors covering risk for delivery and performance of their equipment. Also, as many owners identify the true costs of this risk avoidance, they are electing to accept and manage the risk themselves. This is all set against a backdrop of uncertainty regarding upcoming carbon legislation, which seems imminent as the socio-political climate changes.

Fortnightly: What role does WorleyParsons have in keeping utility infrastructure construction costs under control?

Martin: We believe our primary role is assisting owners in identifying and managing the risks inherent in investment decisions and through experienced and effective project implementation. This includes extensive “real world” experience, industry knowledge and best practices, and services and techniques such as strategic planning, financial analysis, total project delivery, and plant operations.

It also means collaboratively building quality and value engineering into equipment specifications, effective management of the global supply chain, schedule management and contingency planning, and constructability and modularization, all underpinned with a culture of zero harm in health, safety and environmental matters tailored to meet our customers’ business needs.

Fortnightly: Increases in costs for skilled and craft labor are a problem and some expect a lack of skilled workers going forward. How is WorleyParsons dealing with these issues?

Martin: WorleyParsons is continually expanding our resource base around the country and around the world. Working with the most advanced systems and tools in the industry, WorleyParsons is able to “work share” between office locations. Instead of moving people, we bring the work to them, thereby improving the quality of services to our customer and employee satisfaction while lowering costs.

Fortnightly: How deep is WorleyParsons’ backlog of utility infrastructure projects or projects in general?

Martin: All of our customer sector groups, including hydrocarbons, minerals and metals, infrastructure and power are experiencing an increase in business, which we expect will continue for several more years.

Fortnightly: Are you seeing more interest in new utility infrastructure construction or in refurbishment of older facilities?

Martin: In a carbon-constrained economy, we believe it will be more important for utilities to “get more with less.” By aggressively pursuing air quality retrofits, efficiency improvement programs, power uprates, forced outage reduction programs, etc., utilities are able to maximize generation returns on their capital investment.

In new generation trends, we see pulverized coal projects in the advanced stages of development being completed, an increased emphasis on demand reduction and demand management, quality renewable energy projects, and a return to gas, via simple- and combined-cycle projects.

We also anticipate a renaissance of the U.S. nuclear industry as one of the only carbon-free baseload power generation options, and more focus on renewable solutions.

Fortnightly: What types of utility infrastructure projects has WorleyParsons recently been awarded?

Martin: WorleyParsons is involved with the entire range of utility projects. We are currently working on new nuclear, modern supercritical coal, advanced coal gasification, natural gas, renewable energy projects, including solar, wind, hydro, geothermal and biomass, as well as transmission and substation projects. In addition, a substantial percentage of our efforts remain in emissions reduction and efficiency improvement projects.