Download Power Sector Managing EPC Power Project ABSTRACT

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.