By Russell Ray, Managing Editor, and Rick Flaspohler, Contributing Editor
Editor’s Note: Power Engineering magazine commissioned a study of power generating companies to measure the level of construction activity planned in the next few years and to gauge the performance of EPC firms serving the power generation industry. The results of that study, which was performed by the Flaspöhler Group, are summarized in the following report.
Business for engineering, procurement and construction firms serving the power sector promises to be very active in the next five years, but many EPC firms also face meaningful challenges as they struggle to satisfy their clients and risk losing new opportunities for lucrative contracts, based on interviews with more than 250 power generators.
The study, which began in 2010, was performed by the Flaspöhler Group of Kansas City, which offers RFP expertise to power generators. The interviews generated some surprising and eye-opening results that shed new light on the true quality of work by EPC firms and how they are perceived by power generators.
The mission of this study was threefold:
- To quantify the amount of significant new work that power generators (coal and gas) would initiate over the next three years, specifically in the areas of retrofit and new plant activity;
- To determine what criteria would be used by power generators in their evaluation and selection of the EPC firms they would engage to complete this anticipated work;
- To identify the strengths and weaknesses of the 32 EPC firms most capable of meeting the important needs of power generators who plan to initiate retrofit or new plant activity.
To accomplish these goals, Flaspöhler worked with power generators (including investor and municipal owned utilities, independent power producers, and federal government power facilities), EPC firms, federal agencies and industry analysts.
Power Engineering provided important insight about industry trends and issues and provided direct access to key industry decision-makers. The study did not include utilities whose primary power sources are hydro, nuclear or wind. Three-hundred-and-eighty individuals representing more than 250 power generators completed this audit.
Where specific percentages are noted, these results are based on comprehensive interviews with utility company decision makers and key influencers. All interviews were completed with power generators who currently use coal and/or gas as a primary fuel source.
Retrofit and Plant Expansion Expected to Take Off
Almost 70 percent of power generators indicate they plan to initiate work toward the retrofit of an existing plant in the next three years.
This bullishness is especially strong among large generators (more than 10,000 MW), where 86 percent are ‘likely’ to initiate work, as well as medium generators (1500-10,000 MW), where 71 percent are “likely’ to initiate work toward the retrofit of an existing plant.
While 71 percent of power generators will add equipment as a response to anticipated emission reduction requirements as part of their retrofit/expansion plans, at least seven additional specific power-generator needs will be addressed during this active period of retrofit/expansion activity.
- 1. 60 percent will replace existing equipment with more efficient equipment
- 2. 31 percent will add capacity (generators)
- 3. 26 percent will add carbon capture systems
- 4. 24 percent will add combined cycle plant capabilities
- 5. 22 percent will enhance cooling systems
- 6. 19 percent will change fuel type
- 7. 15 percent will add new fuel capabilities (i.e. duel fuel)
A Boom in New Development
Fifty percent of power generators say they will begin work on development of a new power plant in the next five years.
While the larger generators (more than 10,000 MW) are most likely to be planning new power plants (61 percent), 48 percent of medium generators (1500 to <10,000 MW) and 42 percent of small generators (<1500 MW) tell us they will be planning new plants within the five-year horizon.
The bulk of the planned work is for large plants, with almost 74 percent of power generators indicating the new plants will have a total capacity of more than 251 MW, and 30 percent are planning new plants with capacity of 1,000 or more MW. Power generators will be considering a wide array of fuel sources for these new plants.
Tension Between A&E Firms and Power Generators
Given the anticipated surge of activity expected over the next five years in the power generation sector, it is somewhat ominous that most power generators are less than fully satisfied with how well the EPC firms they currently use are performing.
In most professional service markets served by Flaspöhler, between 40 and 60 percent of clients report they are “Very Satisfied.” Surprisingly, only 26 percent of power generators tell us they are very satisfied with their EPC firms. Furthermore, this number is likely to drop with increased work because of a significant ‘gap’ Flaspöhler uncovered when talking to power generators.
Right now, executives who recommend/approve the A&E firms their company will engage are 60 percent more likely to be fully satisfied with those firms than the power generator executives who actually work with those firms. This is a significant gap.
Because many EPC firms pared back human resources over the last decade, existing relationships between power generators and EPC firms have suffered. As the workload increases at EPC firms to meet new demand for services in retrofit, expansion and new plant construction, already strained relationships will be further challenged.
According to the study, as activity increases and more work is in progress, the influence of the executives at power generators who work with EPC firms will carry increasingly more weight with the executives who make the EPC hiring decisions.
As one executive told us, “The majority of the A&Es no longer have the strong engineering and design staff that they did in the past. They generally use their ‘A’ team when going through the bid process but use a lesser group to actually do the work – a big drop-off in intellect.”
Another executive said this: “Honesty and directness are important when dealing with end-users during all phases of work. The plant’s personnel may not seem all that important to some, but in the end, they are the ones that will have to operate what it constructed. Sometimes their input is necessary in order to ensure safe and reliable plant operation.”
Of the 32 EPC firms evaluated, nine are currently perceived much more positively by executives responsible for hiring A&E firms than they are by executives who work with the A&E firms after they are hired.
While the A&E executives responsible for hiring review EPC Firms positively, there is a noticeable and disturbing drop-off in satisfaction according to the executives who work with these firms after the contract is won. Unless these nine EPC firms figure out how to better satisfy the needs of the both key audiences, they will struggle to even remain on the RFP lists for future work.
Getting Information about A&E Firms
Power generators overwhelmingly rely on one another when searching for insight about EPC firms they might include on an RFP list.
More than 70 percent of power generator executives rely on “advice from peers in the industry” more than any other source when evaluating EPC firms.
As activity increases, it will be more important than ever for EPC firms to understand what clients are reporting about them to peers at other power generators. In an active industry with numerous chances for executives to get together and commiserate, the most successful A&E firms in 2022 will be those who commit now to measuring and managing what is communicated in the power generator peer-to-peer network.
Almost one-third of all firms offering “business-to-business” professional services will not react soon enough to the need to measure and manage their perception in the peer-to-peer network, and are very likely to quickly become irrelevant after a period of increased demand for services in their field of expertise.
How EPC firms are Judged by Power Generators
Most professional service firms believe that it is important to measure how well each EPC firm meets the important needs of its customers across each of the most critical factors important in the evaluation and selection of EPC firms.
The study identified nine critical factors used by power generators when evaluating an A&E firm.
The most important factors used by power generators when evaluating EPC firms are “Quality Products & Services” and “Responsive Services.” On a 9-point importance scale both of these items averaged 8 or higher, which indicates that the factors are extremely important.
Somewhat unexpected was the relatively low importance rating of “Local Presence,” earning an average rating of just 6.5 on a 9-point scale.
Each power generator was asked to rate only those EPC Firms that were familiar to that power generator on only those evaluation factors identified as important to that particular power generator. In other words, power generators only gave feedback about firms with whom they were familiar, and only on those factors they considered important.
This measure removes any bias towards larger EPC firms since a firm’s score is solely the result of how well that firm has served clients.
Good News and Bad News
First, the good news: Power generators are already busy making plans for expansion, retrofit and new plants.
This ‘rising tide’ will initially help all of the major EPC firms.
However, the increase in activity will inevitably result in greater and deeper peer-to-peer communication about power generators’ experiences working with EPC firms. Since peer-to-peer communication is the primary source of EPC information relied upon by executives, power generators will quickly figure out which firms offer true quality.
Within the first few years of increased activity, there will be a ‘flight to quality’ as the best power generators begin to pare the list of A&E firms who will receive RFPs, with only the best firms left to compete for the most lucrative business.
The good news for EPC firms is, unfortunately, the bad news for power generators.
Another valuable tool for evaluating EPC firms is the Client Advocate Score™ (CAS). The calculation of this score is simple:
They ask clients of an EPC firm if they would be willing to recommend the firm to a peer.
- 1. Start with the total percentage of clients who indicate they would recommend the firm.
- 2. Subtract the total percentage of clients who indicate they would not recommend the firm.
- 3. Ignore the clients who are neutral.
- 4. The CAS is the percent recommending minus the percent not recommending.
For example, assume 100 clients are asked about their propensity to recommend a particular firm to a peer. Further, assume that 80 would recommend, 15 are neutral and 5 would not recommend. The CAS = 80 – 5 = 75.
The average CAS across most industries is 5-10. However, the average CAS in this study is -12 (negative).
The study included interviews with clients of each of the 30 largest A&E firms and calculated a Client Advocate Score™ for each. These scores are only shared with Flaspöhler clients.
Still, the published results are surprising and eye-opening. They return us to what was stated at the beginning of this article: EPC firms will be put to the test over the next few years, because only eight of the 32 largest EPC firms serving the power generation market have positive scores. In other words, 24 EPC firms have negative scores – more clients warning colleagues about the weaknesses of the firm than clients recommending them to peers.
As peers speak to peers in the power generation community, some big firms will get smaller, some small firms will get bigger and some new firms will make big waves.
Power Engineering magazine will work with Flaspöhler to take a regular look at roads taken, limits exceeded and destinations reached as we start a ride of activity in the power sector that will almost certainly require safety belts and air bags.
Flaspöhler Group was founded in 1982 and works closely with senior executives at professional services organizations in 95 countries in many markets including insurance, reinsurance, accounting, pharmacy benefit management, corporate real estate, commercial banking, architecture and engineering. For more information or to download Flaspöhler’s Power Generation Outlook White Paper, visit http://www.flaspohler.com/powergen“>www.flaspohler.com/powergen.
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