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Power Sector Managing EPC Power Project ABSTRACT Engineering, procurement and construction (EPC) Contract are the most common form of Project used to undertake construction works by the Public and private sector companies for large-scale and complex Power projects. Under an EPC Project a Projector is obliged to deliver a complete facility to a developer who need only turn a key to start operating the facility, hence EPC Projects are sometimes called Turnkey Projects. Managing the Project in an ad-hoc manner is resulting in high risk and cost. It ensures that both parties meet or exceed the expectations of one another.The paper being presented attempts to provide an analysisof different Power Project contracting Options with followings 1. 2. 3. 4. 5. Power Project Contracting Options Pros and Cons of each Options EPC Vs Package Route Key Challenges in EPC Projects Overcoming Challenges Key motive here is to have a detail analysis on contracting analysis being adopted in top energy sector, the motive is to establish a process for adopting different options to reduce the risk and contribute in high demand of Power in fastest growing GDP. The study shall concludes with a brief summary of the importance of EPC route ,its pros and cons of system in energy sector ,further suggestion to do improvements . This paper analysis the major merit of EPC route ie. High degree of Stakeholder management which enforced the statement “Effective Stakeholder management make a big difference” Adopting EPC route in power sector will help to deliver projects on time, within budget and enhance “Make in India “concept run by Government of India. Content:1. 2. 3. 4. 5. 6. Introduction Power Project Contracting Options Pros and Cons of each Options EPC Vs Package Route Key Challenges in EPC Projects Overcoming Challenges Introduction: -In India, Power Sector is in very crucial stage and day by day the demand of electricity increases.It’s an important gradient in GDP growth. India has installed capacity of Electricity 255.012 GW at end Nov 2014. India's Central Electricity Authority anticipated, for 2014–15, a base load energy deficit and peaking shortage to be 5.1% and 2% respectively. India also expects all regions to face energy shortage up to a maximum of 17.4% in North Eastern region. Projected Requirement of Electricity Source: IMaCS Research Energy Requirement Peak Demand Installed Capacity Required (Billion kWh) (GW) (GW) GDP growth at 8.0% 9.0% 8.0% 9.0% 8.0% 9.0% 2003-04 633 633 89 89 131 131 2006-07 761 774 107 109 153 155 2011-12 1,097 1,167 158 168 220 233 2016-17 1,524 1,687 226 250 306 337 2021-22 2,118 2,438 323 372 425 488 2026-27 2,866 3,423 437 522 575 685 2031-32 3,880 4,806 592 733 778 960 In India, in power sector, there are Centre /state government owned companies (PSUs/Electricity board) and different contracting options being followed to construct a power plant. Power industry is the backbone for any economy . Power Project Contracting Options The options which are being adopted in India may be classify as follows Multiple Packages In this type of contracting methods, the project is broken in small packages and awarded to different vendors. The integration is being done by developer. In power sector , the no of packages close to 25 to 40. These packages may be only material supplies or may include Engineering and Supply type contract. Construction is a separate package. BTG-EPC &BoP –Multiple Packages In this type of contracting method, the power plant is divided to two parts i.e BTG (Boiler, Turbine and Generator) and BoP (Balance of Plant) Here BTG is awarded based upon EPC (Engineering Procurement and Constructions) and Again BoP is awarded in multiple packages. The integration is being done by developer. The complexity is less. BTG-EPC and BoP-EPC It is similar to above but both BTG and BoP are awarded based upon EPC concept. The integration is being done by developer and having lesser complexity than above two options. Complete EPC In this type of concept whole power plant is awarded as single package on EPC basis. The integration is being done by Contractor . It is clear from above Pic-1 that in first two cases BoP is ordered in multiple package and in last Two cases BoP is ordered on EPC basis. Pros and Cons of each Options Pros: Cost of package lesser, savings in multiple purchase and negotiations Control over several vendors Least spares cost over project life cycle Cons: Responsibility of project management between packages lies with Developer Requires extensive interface management Ordering cycle time and interface risks to managed by developer Requires huge skilled staff to handle multiple packages Technical interface and coordination among all packages vendors. Each package contractor will confirm its guarantees, interface during PG test to be sorted. This route is possible with developers who have Extensive experience in handling different packages Excellent coordination and project management staff Interface management and its engineering closures Pros: Single point Executions &coordination responsibility Execution, coordination between packages being done by EPC contractor Guarantees calculation being done by EPC contractor Better negotiation Reduce technical and managerial risks at developer end. Cons: Higher initial cost as order is released to one EPC contractor Lesser control over subvendors. EPC Vs Package Route There is different option about weather project should awarded on EPC or package route. Below is the different attributes and division of responsibilities (DOR) in different route. Attribute Package Route EPC Route Project Engineering External Consultant to be appointed. Owner bears additional Cost EPC Contractor Responsibility Interface Engineering Owner has to co-ordinate. Owner bears additional manpower and risk EPC Contractor Responsibility Probability of Timely completion of Project Low due to Multiple vendors High due to single vendor responsibility and higher stakes Project Cost Uncertain : Default of even one vendor adversely impact project completion schedule Assured : expected Project Management High cost as large staff to be employed by Owner Minimal cost as single vendor employed Functional Guarantees Numerous : Owner to handle multiple contractors for equipment / system level performance guarantees Key Plant level performance guarantees : EPC Contractors single point responsibility Benefits of standardization optimization design and Difficult : Largely dependent on Owner’s experience / practices Easy : EPC contractors are better equipped & updated to provide value for money Selection of Reputed & reliable Contractors Difficult to maintain uniformity in contractor’s competence and capability levels Easy : Selection restricted only to performing and competent EPC contractors After sales Support Low : Small size contractor / vendors High : Reputation at stake services Minimal variations In the packages route, risks are high and owner is having responsibilities of integration.In package route, the integration in not only limited for interface issues related to construction and deciding the priorities but also integration of different technology/design. It was experienced & observed that in package route system, the interface issues starts from design phase and there are issues in technology integration also. It is perception that if the package route is less costly and it is experienced that the high skill manpower which is required at owner end needs large in number. The project completion period is also greater than EPC route. Owner/Client has more risk which started due to responsibilities of integrations Key Challenges in EPC Projects High degree of coordination requirement within the departments (Engineering, procurement & Construction by Contractor Alleviating Time and Cost Over Run Interfacing related issues between sub systems 3M Dynamics : manpower ,material and machinery Risk of scope creep Below are the challenges which impact on Time and Cost Challenges Scope Creep Impact on Time √ Impact on Cost √ Interface issues √ √ Delay in regulatory clearance √ √ Ambiguity in engineering √ design and - Access to site √ √ Passive response of supplier √ √ Shortage of Skill Man Power √ √ √ √ √ √ Lack of fund/delay payment from client Hyperinflation Detail of impact of challenges as below Scope creep increases the resource requirement and utilization which results cost overrun. Stakeholder management is key to success for EPC project. Interface issues may impact contract time line may result cost overrun. Delay in clearances may impact start date of project and impact the budgeted cost due to different time line of start Undefined or ambiguous specification may lead in conflict and delay and cost overrun Availability of site and approach or local issue may lead in delay and cost overrun Skilled manpower is key success for EPC project and now a risk also Economy trend and hyperinflation may derail the project Risks involved in different time line of project in case of EPC route to contractors are as below Risk Type Pre- Bid Stage Technical Insufficient knowledge of scope, technological requirements, results in aggressive schedule and cost. Wrong estimation results due to technical risks Financial Post-Bid Stage Execution Stage Scope creep , change Unfamiliarity requirement ,change in condition of design .resettlement rehabilitation with location and Cash flow or investment Cash flow and other issue. issues in Taxes, duties and foreign exchange Contractual/ Legal Unawareness of local DOR is undefined about DOR is undefined about rules and regulations local rules and regulations local rules and regulations Political Environmental Force Majeure Political Stability in Delay in clearances and Availability of fuel the country and type availability of land (Coal/Gas). Policy on of government. such critical part. Delay in approvals Adverse climate condition Natural calamity ,terrorism ,Political un rest Overcoming the challenges • Careful selection of Project • Conduct adequate studies to understand economic and political cycles in the country. Taken care in contracts to factor in any force majeure events. • Ensureall required approvals and availability of land are in place prior to work commencement • Adequate geo-technical surveys and climate surveys prior to construction phase planning • Clearing understanding of standard and specification prior to Bidding to avoid the risk of scope creep. • Appropriation of Scope and design change in contracts to factor • Detail studies to be done for source procurement of materials and build appropriate transport costs • Clearly defined of scope of work, and extensive use of Bottom Up approach for estimation at time of bidding. Clearly define contractual obligations on both parties for cost escalations to avoid ambiguities • • Clearly defined payment terms condition for timely payment and define interest or other penalty in case of default • Clearly understand variations from home country laws and Consult appropriate legal experts • Moving higher along the value chain and creating in house PMC and high value engineering divisions • Entering JVs to to gain access to technology and new regions • Create an in-house team of experienced project management personnel • Adopt and rely on sophisticated project management tools and techniques • Develop a tracking system for all critical activities to avoid slippages on a daily basis. • Unambiguously defined claim procedure Conclusion – Power sector is essential part of GDP growth and will play vital role in coming success story of India. To bring the projects on time and within the cost is major challenge of government and private developer of India. Every method of contracting has its pros and cons, organization to select the method of contracting based upon the criteria defined and risk taking capacity. In our view, to avoid larger risk, EPC route is the better options.