By Amethyst Cavallaro
Budget controls every aspect of any construction project and return on investment is particularly important in power plant construction. In his book, Power Plant Construction Management: A Survival Guide, Peter Hessler knows it’s all about the money. He explains the unique set of management skills necessary to supervise construction or retrofitting of a power generation plant. Hessler thoroughly addresses front-end management and the planning process, paying close attention to the financial side of project management. He also follows project management through its various stages, hitting topics like safety, manpower, quality and communication. Throughout the book, every topic goes back to the main premise: cost control. This book explains the power of economics behind the industry and how to balance the company’s bottom line with complicated jobsite specifications. As Hessler says in his introduction, “The power plant business of today is about much more than just generating megawatt hours; it is about generating profits for the investor.”
Following is an excerpt from chapter 1 of Power Plant Construction Management:
PLANNING THE PROCESS
The power plant construction world in the 21st century is very different from that of the century before. Financial dictates now rule. Time is of the essence. The investor is only interested in one thing-the money. Generating megawatt hours (MWhrs) is only a means to an end, the end being the making of the money. While a new plant is being constructed or while an existing one is being revamped, the investor is not making money. He can only hope the plant gets (back) online as soon as possible so his cash flow can start again.
But what does this mean? It means that while the unit is not generating power, its downtime must be diligently managed. To diligently manage the process means it must be planned. The complete project, from inception through start-up, requires a detailed, scheduled plan, along with personnel selected and responsibilities assigned. It requires a sponsor, it requires a committed team, and it requires a clear definition of success. Once the project phase moves to the field (and in the case of an existing plant, once the unit is taken offline) everyone must hit on the ground running. It’s too late to start the planning process then.
The Project Delivery Structure
One of the first decisions to be made is how the project will be structured-under what type of contractual obligations will it be executed? During most of the 20th century, the design-bid-build delivery mode was used almost exclusively. Utilities would develop (design) the specifications and solicit bids for the work. After evaluation of the bids, the most cost-effective contractor would be awarded the job and the utility’s construction group would manage the contractors. This was a costly approach, but it gave the utility total control of the process-something many felt was required since their management mandate was to focus on reliable power generation more than on profitability. Thanks to the regulatory process, profitability for the utilities’ investors was already guaranteed.
However, as utility regulatory groups started focusing on the price of power in addition to reliability, utility management began to look for more cost-effective ways to manage construction projects. This led directly to contracting with architect/engineer (A/E) firms for the development of the specifications, the solicitation of the contractor bids and many times, for the management of the field construction activities. Since many of the A/E firms were often involved in multiple power projects at any one time, their personnel developed economies of scale that resulted in lower design and construction management costs than if the utility self-performed.
As the 20th century entered its last quarter, changes in regulations governing the generation and sale of electricity encouraged more and more cost control. This led to the creation of a new kind of power generator, the independent power producer (IPP). These IPPs were focused solely on selling electricity at a profit, with their selling prices reflecting the supply and demand of the electric power industry. Therefore, they were very focused on controlling costs and schedule, especially when building new plants, and this led to more innovative project delivery methods. Terms such as build-operate-transfer (BOT), build-own-operate (BOO), build-own-operate-transfer (BOOT), and design-build-operate-maintain (DBOM) became popular. Investors were forcing owners and contractors to become extremely cost conscious and take responsibility for not only the building of the plant but also for its output efficiency.
This, in turn, led to a major shift in the basic type of plant delivered; it led to a shift from large steam-driven turbines to smaller gas-fired turbines that could handle rapid load shifts at higher machine efficiencies. These plants could be delivered, installed, and commissioned much sooner than their predecessors. However, many of these new machines were designed at the cutting edge of technology. With no historical operational basis for the owner/IPP and investor to feel secure that these machines would operate within the parameters that they were sold, a new kind of warranty emerged-the long-term service agreement (LTSA).
These new agreements were actually after-market engineer-procure-construct (EPC) contracts that required the original equipment manufacturer (OEM) to inspect, repair/replace, and sometimes upgrade these cutting-edge gas turbines over a period of 10-15 years, hence the phrase long-term. But these agreements were beneficial to all parties concerned. As discussed during one of the roundtable discussions at the Power-Gen Europe 2003 conference held in Düsseldorf, Germany in May 2003, with financiers (Credit Lyonnais), owners (RWE Power), insurers (AIG), and OEMs (Alstom and Mitsubishi), all saw benefits to this new arrangement.
The financiers’ benefits:
• Certainty of margins (revenues and costs)
• Builds shareholder confidence knowing OEM is contractually bound to support the technology long term for the life of the asset = security value
The owners’ benefits:
• Long-term support for purchased technology
• Technical expertise and spare parts readily available
• Long-term cash flow management = predictability
• Plant reliability and efficiency
• Consistency of performance
• Builds shareholder confidence knowing OEM is contractually bound to support the technology long term
• Security in obtaining spares
• Price of replacement parts defined
• Owner is up-to-date with latest service bulletins
The insurers’ benefits:
• Comfort through shared risk = reduced exposure
The OEMs’ benefits:
• An operating machine to use for validation of technologies
• An opportunity for long-term relationship building with the owner
So after a very long period of “business as usual” in the regulated power industry, a shift from focusing solely on reliability to focusing on profitability forced a shift in the delivery of power plant construction projects. Not any one of the methods of delivering a power plant construction project is better than the other all of the time. A risk analysis needs to be performed before a final decision can be made as to which delivery system is the best for a particular project, and it is beyond the scope of this book to delve into that. However, some method-either one of the ones stated previously or some variation on them-will have to be chosen before the planning process for the actual construction work can begin.
For more information about Power Plant Construction Management: A Survival Guide visit http://store.yahoo.com/pennwell.